DOL Fiduciary Rule Update

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May 25 2017

By: Steven E. Saltzman

Feels like Groundhog Day

By now, I suspect everyone who has an interest in the Fiduciary Rule has seen or read a summary of the WSJ Op-ed article penned by Department of Labor Secretary Alexander Acosta on the evening of May 22nd.  In his writing, Secretary Acosta stated that the DOL had found no principled legal basis to change the forthcoming applicability date for the Fiduciary Rule and its related exemptions (the “Rule”) and they will become effective on June 9th.

 

Essentially, Acosta’s writing indicates that the Rule (or some form of it) is here to stay.

 

While opponents of the Rule are likely disappointed, at least we now have certainty about what to expect and what we are required to do in the near term.  And, it is hard to argue that the reduced requirements for complying with the Rule between June 9th and the end of this year (the “Transition Period”) are unworkable or overly cumbersome.

 

That said, the reality laid out in Acosta’s article is that we may be in for our own Groundhog Day type experience with respect to what will happen next.

 

As referenced in both Acosta’s article and the recently issued new FAQ from the DOL, the Department is still conducting its analysis of the issues raised in the President’s Memorandum. It is possible, based on the results of the examination, that additional changes will be proposed.  The Department also stated its intent to issue a Request for Information to gather public input on specific ideas for possible new exemptions or regulatory changes to the Rule.  Presumably, the DOL will look to make changes to the more controversial elements of the Rule such as the BIC Exemption-  however the DOL indicated that it will be looking at possible changes to the Fiduciary Rule as well.

 

If you think this is starting to sound familiar, it should.  Assuming the DOL decides to propose changes, it will be required to follow the rules laid out for them to do so.

 

Enacted in 1946, the Administrative Procedures Act (the “APA”) is a federal statute that governs the way in which U.S. federal agencies may propose and establish regulations.   Used to make new regulations or to deregulate, the APA provides a framework process that ensures that all Americans —workers, small businesses, corporations, communities— have an opportunity to express their concerns before any rule is written or changed.  Acosta and the DOL have a legal obligation to follow the process laid out by the APA (involving proposals, public comment periods, etc.) when making any changes to the Rule.

 

While it is frustrating that we may have to endure this process once again, it is of critical importance that the APA makes it hard to make changes.  Imagine if new Presidential Administrations or regulatory heads could just causally throw out or change regulation(s) at their whim.  Operating under that type of environment would be disastrous for business and would prevent many from making investments in those businesses, restricting their ability to grow and prosper.

 

Acosta acknowledged the importance of the APA in his article by saying, "Some who call for immediate action on the Obama administration's regulations are frustrated with the slow process of public notice and comment. But this process is not red tape. It is what ensures that agency heads do not act on whims, but rather only after considering the views of all Americans."

 

Concurrently with Acosta’s article, the Labor Department issued a new FAQ (which can be found here) regarding operating under the Rule during the Transition Period, which runs from June 9th until January 1, 2018.

 

Of note, there is some interesting stuff in the new FAQ related to Advisor compensation systems during the Transition Period- highlighting that the implementation of compensation plan changes to avoid conflicts is not necessarily required as of June 9th.  Take a look at Q#6 of the FAQ for more detail.

 

Also, for those who will be responsible for “throwing the switch” to become compliant by June 9th, the DOL has provided you with a little relief in Q#11 of the FAQ by pushing out the time to require compliance to 11:59pm local time on June 9th (which is a Friday- effectively meaning that you will have the weekend to work out any bugs).

 

The DOL has also released additional guidance under Field Assistance Bulletin No. 2017-02 (the “FAB”), which can be found here, that reiterates that during the Transition Period the DOL is going to focus on compliance assistance as opposed to citing violations or imposing penalties.  Specifically, during the period of June 9, 2017 to January 1, 2018 the DOL will:

 

  • will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and its exemptions;
  • will not treat those fiduciaries as being in violation of the rule and exemptions; and
  • has confirmed that the Internal Revenue Service (IRS) has extended the prohibited transaction excise tax relief provided by the IRS in Announcement 2017-4 to any transactions or agreements to which the FAB applies.

 

Outlook

 

We are likely in for another long round of proposed rules, comments, hearings and the like.  This process will most likely require more time that is currently envisioned with the current January 1, 2018 effective date for full compliance with the BIC Exemption, The Principal Transaction Exemption and the 2016 amended version of PTE 84-24.  Most are expecting that if the DOL is going to propose changes to the Rule, we will see a delay of the January 1, 2018 date sometime over the summer as the DOL draws a bead on what changes it will propose.

 

It is possible that this next round will be a blessing in disguise, allowing the industry to improve the workability of the Rule while maintaining necessary protections for investors.  We will all have to remain engaged and contribute our best constructive ideas as to how to accomplish both.

 

Personally, I am still hopeful that this protracted effort will ultimately be of benefit for those of us who work in our industry and for those we ultimately serve as clients.

 

Murray’s character in Groundhog Day finally triumphs by learning that no matter your situation, staying positive, constantly learning and making the most of a tough situation will get you to where you really want to be.   I am hopeful that the eventual outcome for our industry and the clients we serve will be the same as for Murray’s character.

We hope that these postings are helpful.  We will continue to provide updates when relevant as important information related to this topic becomes available.

 

Contact Steve Saltzman with questions or comments at steve.saltzman@saltzmanassociates.com.

 

 

 

 

 

 

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