DOL Secretary Acosta Allows Partial Applicability as of June 9

Issue: DOL Fiduciary Rule

Date: May 30, 2017

Action Taken: DOL Secretary Announces Partial Applicability in Wall Street Journal; FAQs; Bulletin

Background: The Department of Labor released FAQs and a temporary enforcement bulletin regarding the fiduciary rule/PTE transition period from June 9, 2017—when the rule and limited parts of the PTEs become applicable—until January 1, 2018—when the remaining parts of the PTEs are scheduled to take effect, absent further action by the Department.  Additionally, Labor Secretary Acosta authored an Op-Ed in the Wall Street Journal, which states that the Department will not further delay the June 9 partial applicability date because, according to the Secretary, there is “no principled legal basis” to do so.

At midnight on June 9, therefore, the new definition of investment advice fiduciary will be in place and fiduciary advisors who wish to receive commissions and/or other conflicted compensation will have to satisfy the limited PTE conditions discussed below.

With respect to PTE 84-24, the old version of the PTE applies with the addition of the impartial conduct standards finalized by the Department last year.  During the transition period, PTE 84-24 covers all annuity/insurance product sales (including indexed and variable annuities) to both ERISA plans and IRAs.  To receive compensation relief under 84-24 during the transition period, fiduciary advisors must:

(1)  Give investment advice in the “best interest” of their clients;
(2)  Avoid making materially misleading statements to their clients with respect to investment advice given;
(3) Receive only reasonable compensation;
(4) Effect the transaction in the ordinary course of business;
(5) Offer transaction terms at least as favorable to the plan/IRA as an arm’s length transaction; and
(6) Disclose to an independent plan/IRA fiduciary:

1. the advisor’s relationship with the insurance company,
2. the commissions he/she will receive (including for renewal years), and
3. a description of any charges, fees, discounts, penalties or adjustments which may be imposed under the recommended contract.

Fiduciary advisors relying on the Best Interest Contract (“BIC”) exemption for prohibited compensation relief during the transition must:

(1)  Give investment advice in the “best interest” of their clients;
(2)  Avoid making materially misleading statements to their clients with respect to investment advice given; and
(3) Receive only reasonable compensation.

The FAQ document released by the Department provides some additional detail regarding these transition period requirements and some examples regarding what does and does not constitute fiduciary investment advice.  Notably, the Department urges financial institutions and advisors offering proprietary products and/or products that generate third-party compensation to be “candid” with their clients regarding these arrangements.  More generally, the FAQs state that financial institutions have leeway to determine how best to comply with the transition period requirements in the absence (for now) of the other PTE obligations (e.g., warranties regarding compensation arrangements, disclosures, contracts, etc.).

Both the FAQ document and the Secretary’s Op-Ed emphasize that the Department is still conducting its analysis of the fiduciary rule and related PTEs pursuant to the President’s memorandum released earlier this year.  Accordingly, all aspects of the rule and PTEs are subject to change in the future.  The pieces also note that the Department will consider further delays to the January 1, 2018 applicability date to prevent “mismatches” between companies’ and advisors’ compliance efforts and potential changes to the requirements by the Department at the conclusion of its study.

Finally, the Department released an enforcement policy bulletin, which states that it and the IRS will not pursue claims against fiduciary advisors who are working in good faith to comply with the rule’s and PTEs’ requirements during this transition period.

Next Step: NAIFA Staff will meet with the Department of Labor for a “listening” session and then will work with Congress and the DOL to either have the rule rescinded, further delayed and/or substantially revised.  As always, we urge you to understand the requirements of any financial institutions you work with; maintain excellent records; document reasons for making recommendations you make; and stay aware of changes that may occur.  NAIFA will continue to work with the Department, lawmakers, and the White House to revise/rescind the rule.

NAIFA Staff Contact: Judi Carsrud, Director – Government Relations.