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Update: The Fiduciary Rule Will Go Into Effect Though Without Enforcement By The Department Of Labor (“Dol”)

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  • Posted on: Jun 5 2017

The Fiduciary Rule (the “Rule”) is designed to protect investors receiving investment advice about qualified retirement plans and individual retirement accounts (“IRAs”) by requiring all registered brokers, financial advisers, and other investment professionals (collectively, “Financial Advisors”) to act in the best interest of their clients and to disclose any potential conflicts of interest when providing retirement advice. The Rule also requires Financial Advisors who earn a commission for making recommendations (i.e., compensation not paid directly by the client) to disclose information about the compensation s/he receives for the recommendation.

The DOL proposed the Rule to close loopholes within the Employee Retirement Income Security Act of 1974 (“ERISA”) concerning investments recommended by pension fund managers. Under ERISA, pension managers are required to act in the best interest of pensioned employees. However, since 1974, self-directed retirement accounts like 401(k)s, IRAs and health savings accounts have largely replaced managed pension funds. By the Rule, the DOL sought to expand ERISA’s fiduciary protection to these types of accounts.

The DOL first proposed the Rule in April 2016, with different parts to be phased into effect beginning on April 10, 2017. Full enforcement of the Rule is scheduled for January 1, 2018. On February 3, 2017, President Trump signed a memorandum directing the DOL to determine whether the Rule should be revised or rescinded. (Discussed here.) The memorandum directed the DOL to delay the implementation date of the Rule by 180 days. Pursuant to that direction, on March 10, 2017, the DOL filed a notice proposing to delay the start of the Rule from April 10, 2017 to June 9, 2017. (Here.) After a 15-day public comment period, the DOL sent its delay notice to the Office of Management and Budget for review.

Following the OMB’s review, the DOL publicly released an official 60-day delay to the effective date of the Rule. (Here.)

On May 22, 2017, Alexander Acosta, the new Secretary of Labor, confirmed that the first phase of the Rule will go into effect on June 9, 2017, as scheduled. Secretary Acosta announced his determination in an Op Ed commentary published in the Wall Street Journal [subscription required]:

The Labor Department has concluded that it is necessary to seek additional public input on the entire Fiduciary Rule, and we will do so. We recognize that the rule goes into partial effect on June 9, with full implementation on Jan. 1, 2018. Some have called for a complete delay of the rule. We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input. Respect for the rule of law leads us to the conclusion that this date cannot be postponed. Trust in Americans’ ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule.

Notably, despite its decision to begin implementation of the Rule on June 9, the DOL will not enforce the Rule until full implementation on January 1, 2018; instead it will provide “assistance” to those “who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions.” And, notwithstanding the decision to begin implementation, the DOL remains intent on issuing a Request for Information for additional public input concerning “possible new exemptions or regulatory changes”, including whether to delay full implementation in January 2018. (The DOL temporary enforcement policy can be found here.)

Takeaway

While implementation of the Rule will begin on June 9, its fate remains uncertain. In addition to the numerous lawsuits challenging the Rule (discussed here and here), passage of the CHOICE Act 2.0 could also undo implementation – the act requires the DOL to issue a fiduciary rule that is “substantially similar” to a fiduciary rule issued by SEC, which as of today has not been proposed. (Here.)

Notwithstanding the uncertainty, a fiduciary standard of care remains a best practice for the industry. As many Financial Advisors and advocates have stated clarity and transparency around compensation builds faith and credibility with investors and retirees. (Here.) Implementation of the Rule will ensure that these best practices are achieved.

This Blog will continue to monitor any developments surrounding the Rule.

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