On June 9, 2017, the Department of Labor’s (“DOL”) expanded definition of who is a fiduciary became applicable. The new DOL Fiduciary Rule will affect vendor or record-keeper actions regarding investment lineups, distributions, and rollovers. As such, any investment advice for the plan or to a participant may very likely now be considered a fiduciary act. The definition of investment advice has been broadened to account for distributions from plans and recommendations to transfer IRAs. Additionally, a single act is now enough to now confer fiduciary status.
As a result, there may be situations where advice is provided that normally would be a conflict of interest and a “prohibited transaction” under ERISA. In such situations, entities can take advantage of the Best Interest Contract Exemption (also known as BICE) which would allow them to provide investment advice considered conflicted by the DOL, but only under certain conditions. Finally, while the rule is technically in effect as of June 9, 2017 some of the compliance standards are being deferred until the end of a “transitory period” on January 1st 2018.
The new compliance standards are much more stringent than prior regulations overseeing the financial industry. However until January 1, 2017 the DOL indicated it will offer a grace period where it will not file claims against those “who are working diligently and in good faith” with meeting the updated standards. In the “transitory period,” those offering investment advice only need to adhere to the Impartial Conduct Standards. Those standards require that firms act in the “best interest,” charge only reasonable compensation, and avoid misleading statements.
While the full implementation of the fiduciary rule is expected to take place in 2018, things could change. The DOL has already indicated that it may intend to make modifications to the rule. One such action is a public request for information (RFI) which solicits comments regarding additional delays. However, this is a time consuming process because unlike the informal rulemaking process by which the Fiduciary Rule was put in place with notice and comment periods, the formal rulemaking process is trial-like with notice of the proceedings and hearings that will be on the record. We would note that since the revised DOL Fiduciary Rule took six years to implement, this issue may be with us for the extended future. Additionally, both the SEC and individual states have indicated that they will be reviewing fiduciary standards so we could (in a worst case scenario) end up with a “hodge-podge” of conflicting standards. However the SEC and several industry groups have expressed the need for a unified standard across the financial industry. Several parties have sued the DOL over the Fiduciary Rule and oral arguments are currently scheduled to take place on July 31.
Finally, while the DOL has indicated that it will allow for good-faith compliance during the transitory period no such offering has been made by the legal community. Since engaging a fiduciary is itself a fiduciary act it is quite possible that legal challenges will soon be filed against both record-keepers and Plan Sponsors for non-compliance with the rule.