What the delay of the final Fiduciary Rule means for retirement plan sponsors

The Department of Labor (DOL) announced April. 4, 2017 that the proposed rule implementing a 60-day delay of the Fiduciary Rule which defines investment advice to qualified plans and IRAs, the Best Interest Contract Exemption (BICE), and other related exemptions has been finalized and will be published in the Federal Register on Friday, April 7, 2017. The 60-day delay will take effect on Monday, April 10, 2017. This delay to the DOL’s Fiduciary Rule and its related exemptions was initiated by a Presidential Memorandum on February 3, 2017 which directed the DOL to study the impact of the Fiduciary Rule and its related exemptions, which had been previously finalized on April 8, 2016.

Below is a summary of key components of the Fiduciary Rule and the 60-day delay and what it means for retirement plan sponsors.

Who is an investment fiduciary? Under the new Fiduciary Rule, a person is a fiduciary if the person receives compensation for providing investment advice with the understanding that the advice is based on the particular needs of the person or entity being advised or that the advice is directed to a specific plan sponsor, plan participant or beneficiary, or individual retirement arrangement/annuity (IRA) owner. Individuals who provide investment advice to retirement plans, plan sponsors, plan participants and beneficiaries, and IRA owners must act in the best interests of their clients and must either avoid payments that create conflicts of interest or comply with the strict requirements of new DOL exemptions.

What constitutes fiduciary investment advice? Under the new Fiduciary Rule, “investment advice” is defined as recommendation to a plan, plan fiduciary, plan participant and beneficiary, or IRA owner for a fee or other compensation as to the advisability of buying, holding, selling or exchanging securities or other investment property, including recommendations regarding investment portfolios, management, and strategy. Moreover, investment advice includes recommendations regarding rollovers, transfers, or distributions from a plan or IRA, including whether such rollover/transfer should be made and how these assets should be invested after they are rolled over or distributed from a plan or IRA. Per the new rule, a “recommendation” is any communication, based on its content, context, presentation, and audience, which would be reasonably viewed as a suggestion that the recipient of the advice engage in or refrain from a particular course of action.

What is the new applicability date for the Fiduciary Rule? The new applicability date for the Fiduciary Rule is extended for 60 days, from April 10, 2017 to June 9, 2017.

What is the new applicability date for the BICE and other related new exemptions? The new applicability date for the BICE, the new Class Exemption for Principal Transactions, and the new Prohibited Transaction Exemption 84-24 is extended for 60 days, from April 10, 2017 to June 9, 2017.

What impact does the delay have on transition period between the applicability date (now June 9, 2017) and the effective date (January 1, 2018) for the BICE and other related new exemptions? Between the new applicability date of June 9, 2017 and the effective date of January 1, 2018, anyone who will be using the BICE, the Principal Transaction Class Exemption, or the Prohibited Transaction Exemption 84-24 must only comply with the new Fiduciary Rule’s Impartial Conduct standards of adhering to a best interest standard of care, receiving only reasonable compensation, and not making any materially misleading statements. Full compliance with all other conditions of these exemptions, including written disclosures and representations, is not required until January 1, 2018.

Are any other pre-existing class exemptions which were amended by the Fiduciary Rule affected by this delay? As part of the new Fiduciary Rule, the DOL had made changes to certain pre-existing class exemptions, namely Prohibited Transaction Exemptions 75-1, 77-4, 80-83, 83-1, and 86-128. The amendments to these exemptions will now be applicable and in full effect on June 9, 2017.

When will the DOL complete its mandated study of the Fiduciary Rule and its related exemptions? The DOL will complete its mandated study of the impacts of the Fiduciary Rule and will recommend any changes no later than January 1, 2018.

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