The DOL Fiduciary Rule (the “Rule”) that will require all advisors to act as fiduciaries with their ERISA clients is rule that was constructed over the course of more than six years by the Obama Administration. Since the Rule was proposed in April 2015, it has been vehemently opposed by many Republicans who believe it will ultimately harm the retirement advice industry and retirees by increasing litigation and reducing access to certain retirement saving offerings and products.
Two weeks into President Trump’s term in office, the President made it a high priority to stop the Rule before its April 10 applicability date by issuing a memorandum to the Department of Labor (the “DOL”) to conduct an updated economic and legal analysis to determine if the Rule will adversely affect investors or retirees. Currently, the DOL is seeking to delay the applicability date to give its agency time to conduct the economic and legal analysis.
On March 2, 2017, the DOL published a proposal in the Federal Register to delay the Rule’s April 10 applicability date by 60 days. The purpose of the delay would be to give the agency time to conduct the updated economic and legal analysis as directed by the White House in its February 3 memorandum. The proposal invited public comments for 15 days (on or before March 17, 2017) on the potential impact of the 60-day delay.
By the afternoon of Friday, March 17, 565 comment letters, many of which were written by individuals, had been posted on the DOL’s website. Many commenters argued that the delay itself would harm investors and firms that had already spent millions of dollars to comply with the regulation. Others expressed concerns that the DOL’s stated reason for the delay was pretext and that the agency was actually being driven into the delay by industry opponents with political power.
“It is unacceptable that now – roughly a month before implementation of the final rule is scheduled to begin – the DOL is carelessly proposing to delay it,” wrote Rep. Maxine Waters, D-Calif., and ranking member of the House Financial Services Committee, and 39 of her Democratic colleagues. “Furthermore, any argument that a delay is warranted to comply with the president’s memorandum requiring the DOL to conduct additional analysis of industry product availability, disruptions and dislocations and litigation costs is specious.”
Over the next two weeks the DOL will have a huge undertaking as it is required to read through all the comment letters and explain why they decided to make changes or not to make changes due to the comments, as well as draft a final delay rule and get it approved by the Office of Management and Budget prior to the April 10 implementation deadline.
In the Courts
While several lawsuits have been filed challenging the Rule, it has been upheld by federal courts in Kansas, the District of Columbia, and most recently, Texas. On February 8, 2017, a Texas judge rejected arguments by the U.S. Chamber of Commerce, Indexed Annuity Leadership Council, and American Council of Life Insurers, that the Rule exceeded the DOL’s authority and created conditions so burdensome that financial professionals would be unable to advise the IRA market and sell annuities to ERISA plans and IRAs. Recognizing that the Rule was well within the scope of the DOL’s regulatory authority, the Texas court included a footnote stating that the White House memorandum and the DOL’s possible delay of the applicability date did not make the case moot. The rulings are significant because they influence public perception about whether there are fundamental problems with the Rule and puts pressure on the DOL to articulate why a delay is necessary.
Temporary Non-Enforcement Policy
In the event that the DOL’s proposed delay is not finalized until after April 10, the DOL will not initiate enforcement actions based on any failure to comply with the rule between April 10 and the date the delay is implemented (DOL Temporary Non-Enforcement Policy Announcement). Furthermore, if the DOL announces that there will not be a 60-day delay, then it will not initiate enforcement actions based on noncompliance with the Rule if steps are taken to satisfy the requirements within a reasonable time period after the April 10 Applicability date.
Although this non-enforcement policy should provide some comfort to financial institutions, it does not protect institutions from enforcement by the IRS due to how the Rule impacts IRAs or from private lawsuits for failure to comply with the rule. Additionally, since firms will need to comply within a “reasonable time period” if the DOL announces there will not be a delay, firms should not stop their efforts to bring their business into compliance with the Rule.
What should you do in the interim?
Whether there will be 60-day delay for the Rule is still up in the air, but whether you should be compliant with the Rule as of April 10 is not. Even though the DOL has issued a temporary non-enforcement policy that does not stop the IRS or a client from bringing a private lawsuit against you should you choose to not comply with the Rule by its application date. With that said, it is important that firms continue to make any necessary changes to their advisory businesses to be in full compliance with the Rule as of April 10, 2017.
If you need advice from a group of compliance experts that are well versed with the requirements of the Rule, reach out to ICSGroup today. As always, we are here to help you find solutions to your compliance challenges.