On May 22, 2017, Secretary of Labor Acosta published an Op-Ed in the Wall Street Journal discussing the Department of Labor’s process for reviewing its 2016 fiduciary rule. At the same time, DOL published Field Assistance Bulletin 2017-02, “Temporary Enforcement Policy on Fiduciary Duty Rule,” and a set of Frequently Asked Questions on how the rule will apply during the period from June 9, 2017 to January 1, 2018.
Bottom line: DOL will not (at this time, at least) further delay, beyond June 9, 2017, the applicability of the fiduciary rule on the terms it outlined in its April 7, 2017 regulation. It announced a “non-enforcement” policy with respect to “fiduciaries who are working diligently and in good faith” to comply with the new rule. And it intends to issue an RFI “seeking additional public input on specific ideas for possible new exemptions or regulatory changes based on recent public comments and market developments.”
These three actions by Secretary Acosta and the DOL are reviewed in more detail below. We begin, however, with a brief discussion of why the fiduciary rule matters to plan sponsors.
Relevance to plan sponsors
As we have discussed in prior articles, the fiduciary rule and related exemptions directly affect providers – they are the primary target of the new legal standards it articulates. But the new rule also imposes significant new obligations on plan sponsors.
Briefly and over-simplifying, sponsor-fiduciaries, and sponsor officials who are fiduciaries, are affected by the rule in two ways: First, in some cases sponsor officials will themselves be fiduciaries covered by the new rule. For instance, as further discussed below, it appears that sponsor officials advising participants about contributions, investments or distributions (e.g., an official who counsels a participant that “you should contribute enough to get the full company match” or “you shouldn’t put assets in more than one target date fund”) will (or at least may) be conflicted fiduciaries under the new rule.
And, second, a sponsor-fiduciary will have an obligation to monitor compliance with the new rule. Thus, e.g., if provider-call center operators make distribution recommendations, a sponsor-fiduciary will have an obligation to monitor the provider’s compliance with the Best Interest Contract Exemption.
Now let’s consider the three pieces that came out yesterday, beginning with Secretary Acosta’s Op-Ed.
The Acosta Op-Ed carries the sub-heading “As the Labor Department acts to revise the Fiduciary Rule and others, the process requires patience.” In it he explains why DOL rejected the idea of further extending (as many have requested) the applicability date of the fiduciary 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. [Emphasis added.]
While Secretary Acosta voiced “[t]rust in Americans’ ability to decide what is best for them and their families” and a hope that “the SEC will be a full participant” in the process of reviewing the regulation, for the most part his editorial reads like a (hedged) endorsement of the approach DOL laid out in its April 7, 2017, regulation.
That regulation delayed application of the new rule only 60 days, to June 9, 2017, while acknowledging that DOL will not, by that date, have completed the review of the rule directed by President Trump. Thus, beginning June 9, 2017, key elements of the new rule will begin to apply – including the expansion of the definition of fiduciary advice to cover one-time “recommendations,” advice concerning distributions and advice to IRA holders.
Enforcement policy FAB
Under the April 7, 2017, regulation, for the period from June 9, 2017, to January 1, 2018, the new rule will, however, apply only to a limited extent:
Beginning on June 9, 2017, advisers will be subject to the prohibited transaction rules and will generally be required to (1) make recommendations that are in their client’s best interest (i.e., IRA recommendations that are prudent and loyal), (2) avoid misleading statements, and (3) charge no more than reasonable compensation for their services.
Significant pieces of, e.g., the Best Interest Contract Exemption, including the written contract and website requirements, will not apply until January 1, 2018.
FAB 2017-02, published May 22, 2017, announces an “enforcement policy” with respect to this June 9, 2017-January 1, 2018 “transition period.” During the transition period:
[T]he Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.
Two observations about (the limited extent of) the relief provided by this enforcement policy: First (and obviously), to get the benefit of it the fiduciary must be “diligently and in good faith” working to comply with the new rule. DOL will still be enforcing the rule against fiduciaries who are not at least trying to comply with it. And second, this relief does not affect the rights private individuals (e.g., participants) have to sue a fiduciary. As the FAB states: “This Bulletin is an expression of EBSA’s temporary enforcement policy; and it does not address the rights or obligations of other parties.”
The FAQs published May 22, 2017, describe what advice-fiduciaries must do to comply with the rules applicable to them during the June 9, 2017-January 1, 2018 transition period:
Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm;
Charge no more than reasonable compensation; and
Make no misleading statements about investment transactions, compensation, and conflicts of interest.
This description more or less reiterates the one provided in the April 7, 2017, regulation.
Several commenters have raised questions with DOL about whether, e.g., sponsor officials may encourage plan savings without triggering fiduciary status. In the new FAQs, DOL gives three examples of the sorts of communications that would not be considered fiduciary advice:
An email communication sent to a plan participant telling him his current contribution rate, explaining that if he increased his contribution rate his projected retirement savings could increase and inviting him to contact a call center for assistance if he wants to increase his contribution rate.
A computer tool that generates a retirement savings check-up, including an illustration (“such as a green, yellow or red light”) telling the participant how well she is doing towards meeting her retirement goals, with tools and links she can use to adjust her contribution rate and investment allocation.
A call center employee telling a participant that, to take full advantage of the employer match, she would need to increase her contribution.
DOL is simply illustrating here the difference between information (which generally doesn’t trigger fiduciary status) and recommendations (which could trigger fiduciary status). Obviously missing from any of these communications are words like “you should” or “it would be better if” or “we recommend.”
In new FAB, DOL states that, in addition to “actively engaging in a careful analysis of the issues raised in the President’s Memorandum” it “intends to issue a Request for Information (RFI) in the near future seeking additional public input on specific ideas for possible new exemptions or regulatory changes based on recent public comments and market developments.”
In the FAQs, DOL discusses this RFI, and approaches to the review of the fiduciary rule that it is considering, in more detail:
The Department is also aware that after the Fiduciary Rule was issued firms have begun to develop new business models and innovative market products. Many of the most promising responses to the Fiduciary Rule, such as brokers’ possible use of “clean shares” in the mutual fund market to mitigate conflicts of interest, are likely to take significantly more time to implement than what the Department envisioned when it set January 1, 2018, as the applicability date for full compliance with all of the exemptions’ conditions. By granting additional time, and perhaps creating a new streamlined exemption based upon the use of clean shares and other innovations for example, it may be possible for firms to create a compliance mechanism that is less costly and more effective than the sorts of interim measures that they might otherwise use. The RFI will specifically ask for public comment on whether an additional delay in the January 1, 2018 applicability date would allow for more effective retirement investor assistance and help avoid needless or excessive expense as firms build systems and compliance structures that may ultimately be unnecessary or mismatched with the Department’s final decisions on the issues raised by the Presidential Memorandum.
We will continue to follow this issue.