ERISA's Fiduciary Rule – Not Dead Yet, Not Dead . . . Ever?

May 26, 2017

It has been a long and winding road for the amended fiduciary regulation (the "Regulation") of the U.S. Department of Labor (the "DOL") under the Employee Retirement Income Security Act of 1974 ("ERISA"). The highly controversial Regulation, which defines non-discretionary “investment advice” for ERISA purposes, was criticized by several senior officials within President Trump's administration (as well as by the President himself), and eventually was the subject of a February 3, 2017 Presidential Memorandum that was viewed by some as laying the groundwork for the substantial scaling back or even demise of the Regulation. The DOL has now made clear this week that the Regulation will be going into effect in part on June 9, as discussed below. 


The Regulation had initially been scheduled to become applicable as of April 10, 2017. After the issuance of the Presidential Memorandum (and a related DOL press release raising the possibility of a delay in the application of the Regulation), the DOL proposed to delay the general applicability date of the Regulation to June 9, 2017, and also to delay until January 1, 2018 the application of a number of conditions in related new and amended prohibited transaction exemptions ("PTEs"), thereby raising questions about the Regulation's future. One particular PTE, the Best Interest Contract ("BIC") exemption, is particularly controversial, and includes, among other provisions, a contract-related requirement that would generally confer upon individual retirement accounts ("IRAs") and their owners a private right of action for a range of quasi-ERISA claims, even though most IRAs are not subject to ERISA. 

‎On April 7, 2017, the DOL issued a final rule that, in finalizing the delay in the Regulation's applicability date to June 9, contained clear indications that the DOL would not be further extending the applicability date. Dechert has published a series of OnPoints regarding the Regulation and the related PTEs (collectively, the "Fiduciary Rule"), and the path of the Fiduciary Rule up to April 7, which are listed for your reference and ease of retrieval here

The DOL's April 7 rulemaking also finalized a transition period that will run from June 9, 2017 until January 1, 2018 (the “Transition Period”), during which the PTEs related to the Regulation will be available, but during which the only new conditions under the PTEs that will be effective will be those requiring compliance with the Fiduciary Rule's new "impartial conduct standards." Under the April 7 rulemaking, compliance with the remaining new conditions, including the remaining conditions of the BIC exemption, and including certain of the changes to PTE 84-24, which applies to payment of sales commissions in connection with a plan’s purchase of insurance and annuity contracts, will not be required until January 1, 2018. 

‎No Further Extensions, at Least for Now 

After the DOL's April 7 action, which was taken before the eventual confirmation of Alexander Acosta as the Secretary of Labor, questions proliferated in the market as to whether the Regulation would be further delayed or otherwise scaled back, particularly after reports that Secretary Acosta also had made comments critical of the Regulation. Notwithstanding the expectations and hopes of some, those questions were answered earlier this week in the negative, when Secretary Acosta, in an op-ed published in The Wall Street Journal, confirmed that the June 9 applicability date was real and would indeed not be extended. Thus, the aspects of the Fiduciary Rule noted above will become applicable on June 9. Full implementation of the Fiduciary Rule is presently scheduled to occur as of January 1, 2018, but that additional implementation is subject to potential change in DOL policy based on the DOL’s continuing review of the record. There remains the further possibility that Congress could act to change or repeal the Fiduciary Rule; for example, the Financial CHOICE Act introduced in the House, if enacted as proposed, would repeal the Fiduciary Rule. 


In addition, on May 22, the DOL released “Conflict of Interest FAQs (Transition Period)”, which expressly confirm that the DOL’s review of the Fiduciary Rule remains ongoing, as directed by the February 3 Presidential Memorandum. The FAQs note that the DOL intends to issue a Request for Information (an "RFI") in the "near future” for additional public input on specific ideas for possible new exemptions or regulatory changes based on recent public comments and market developments. The DOL stated that it is aware that firms have begun to develop “new business models and innovative market products,” including the use of “clean shares” in the mutual fund market, and that the DOL recognizes that these models and products are likely to take significantly more time to implement than had been previously envisioned. According to the DOL, 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 DOL’s final decisions regarding these matters. 

The FAQs address several specific situations that may arise during the Transition Period. Q&A 6 clarifies that, if individual advisers have conflicts of interest with respect to particular investment recommendations during the Transition Period because, for example, the firm has not yet completed its plans to create a new compensation system to insulate its advisers from conflicts, the BIC exemption is still available because, during the Transition Period, the BIC exemption requires only that fiduciary advisers’ recommendations meet the impartial conduct standards. 

Q&A 13 addresses the reasonable belief requirements of the independent fiduciary exception. Under the "independent fiduciary" (or "sophisticated investor") exception under the Regulation, a party transacting business with an independent fiduciary of a covered retirement investor in an arm’s length transaction is not considered to be a fiduciary, even if making a recommendation, if certain disclosure and fee requirements are met and the party reasonably believes that the independent fiduciary of the plan or IRA is a bank, insurance carrier, or registered broker-dealer or investment adviser, or is any other independent fiduciary who manages or controls at least US$50 million. In the DOL’s view, negative consent to a written representation (for example, by including standardized representations in the disclosures that require the independent fiduciary affirmatively to disclaim or modify the representation) can be a written representation for purposes of the reasonable belief requirement. 

Q&A 14 clarifies that there is no investment advice for a fee or other compensation, and thus, no fiduciary status, in a situation where a registered investment adviser (in this context, acting as a model developer) (i) provides a model portfolio that is not client specific to an unaffiliated registered investment adviser, bank or broker dealer, (ii) does not individualize the model to the needs of any specific plan or IRA client of the fiduciary, (iii) does not contract with the end client, (iv) does not execute trades in the end-client’s portfolio, (v) does not agree with the financial intermediary to assume fiduciary status, (vi) does not have control over whether its model is used in managing any specific client account and (vii) does not receive any fee or compensation directly from end clients who are plans or IRAs for use of the model. The DOL states that its conclusion would not change even if the investment adviser pays a fee out of its own general assets to the model developer and then is separately reimbursed by a plan, plan participant or IRA (e.g., the investment adviser’s invoice to the plan, participant or IRA includes a separate line item for model portfolio service fee). 

Other Q&As address "robo-advice," grandfathering of certain compensation structures and PTE 84-24, and address whether certain general communications to plan participants about increasing contributions will be considered investment advice. 

Temporary Enforcement Policy 

Also on May 22, the DOL released Field Assistance Bulletin 2017-02 (the "FAB") in which it announced a temporary enforcement policy under which, “during the phased implementation period ending on January 1, 2018, the [DOL] 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 the exemptions.” The DOL emphasized that "its general approach to implementation will be marked by an emphasis on assisting (rather than citing violations and imposing penalties on) plans, plan fiduciaries, financial institutions, and others who are working diligently and in good faith to understand and come into compliance with the fiduciary duty rule and exemptions." 

Next Steps 

In light of this week's DOL activity, affected institutions and other parties should plan for June 9 by assessing whether their activities with respect to retirement investors may result in their becoming fiduciaries. Those with concerns in this regard may want to explore (i) possible steps to avoid being a fiduciary, whether by virtue of (A) avoiding the making of a recommendation or (B) satisfying an exception (e.g., the independent fiduciary exception), or (ii) steps to satisfy the conditions of a PTE (such as the BIC exemption). 

In this regard, it does not seem as though compliance with the Fiduciary Rule is a "one size fits all" matter, and differences from situation to situation could have an impact on the possible ways forward. For example: 

  • The type and nature of any given provider and its products and services should be taken into account in analyzing the applicable risks and the possible ways forward. An approach that might be an optimal solution for a large public bank may or may not be optimal for a small private broker; an approach that might be optimal for a provider dealing with intermediaries may or may not be the right one for a provider dealing directly with retirement investors; and so on. 
  • It should not be forgotten that, if there is no recommendation to a retirement investor or to a fiduciary to a retirement investor, there will not be any fiduciary status under the Regulation. Thus, if a particular provider believes that it can reasonably take the position that it is not making a recommendation at all, then a compliance approach could be to bolster the likelihood that no recommendations are being made. Consideration in certain cases should be given to the use of disclaimers seeking to confirm the absence of any recommendations and to the possibility of adopting enhanced, more robust compliance processes and procedures to ensure that the provider’s agents and other representatives are not making any recommendations. 
  • In situations in which there is sufficient concern that a provider is making a recommendation, it may be appropriate to consider whether it can satisfy the conditions of an applicable exception. Where the independent fiduciary exception potentially applies and coverage by the exception is sought, the provider might review such matters as (i) whether there is already a no-advice disclaimer and, if there is, how closely it aligns with the applicable requirement under the independent fiduciary exception, and (ii) how confident the provider is that certain of the requirements of the exception are met without the need to procure additional representations. The market seems to be evolving already with varying approaches to these matters, depending on the applicable facts and circumstances. 
  • For those providers that are dealing with the investment of the assets of non-ERISA IRAs, and who take the position that they are not providing covered recommendations, it should be understood, in analyzing the applicable risks, that the IRA (and its owner) will have no claim against the provider under the Fiduciary Rule (whether or not the provider would ultimately be determined to have made a recommendation). This result arises because (i) the IRA is not subject to ERISA and therefore there can be no claim under ERISA (although this discussion does not apply to information provided in connection with rollovers from ERISA plans to IRAs, which may well be information that is covered by ERISA), and (ii) the contract contemplated by the BIC exemption will not be offered to customers (because the provider would be taking the position that no recommendation has been made (and that, therefore, fiduciary status does not attach)) and thus they can have no contractual claim under a contract that does not exist. (Note that, during the Transition Period, this result applies even where there is a recommendation and fiduciary status is conceded, and where coverage by the BIC exemption is sought, because during the Transition Period the provider does not have to enter into a contract under the exemption.) The foregoing does not mean that there are no risks in dealing with the investments of an IRA. In this regard, among the risks are that the Internal Revenue Service could pursue claims for excise taxes (if the provider would be held to be a fiduciary that has engaged in a non-exempt prohibited transaction), and that a state-court judge could conclude that the provider is a fiduciary with liability under applicable state law (although such a state-law claim would theoretically have been a risk long before the adoption of the Fiduciary Rule). 

While the final chapter in this seemingly NeverEnding Story has surely not been written, it appears at this juncture that the Regulation will become generally applicable on June 9, 2017. If you would like to discuss any aspect of the Fiduciary Rule, please contact any of the Dechert attorneys listed below or any Dechert attorney with whom you regularly work.

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