Since its original release as a proposed rule in April 2015 and as a final rule a year later, the Department of Labor’s (DOL's) so-called fiduciary rule — which expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA) — has endured a turbulent year.
After receiving considerable criticism from the financial services industry and a promise to repeal from President Donald Trump, the rule finally came into partial effect on June 9, 2017, albeit with an additional transition relief period stretching until Jan. 1, 2018, to allow for further study and possible changes. On Aug. 31, the DOL proposed an 18-month extension for the transition period for the best interest contract exemption and other prohibited transaction exemptions from Jan. 1, 2018, to July 1, 2019, in effect delaying the implementation of significant elements of the rule. This delay was submitted to the White House Office of Management and Budget on Nov. 1 and adopted as a final rule on Nov. 29, 2017.
For private funds, the main effect of the fiduciary rule is that behavior previously considered basic marketing without any fiduciary implications could now be considered investment advice with potential liability under ERISA’s high standard of care and conflict prohibitions for fiduciaries. Covered investment advice under the new fiduciary rule is defined as a recommendation to a plan, plan fiduciary, plan participant (including a beneficiary), IRA or IRA owner for a fee or other direct or indirect compensation. A “recommendation” is a communication that, based on the surrounding facts and circumstances, a reasonable person would consider to be a suggestion that the recipient engage in or refrain from taking a particular course of action relating to investing, whether buying, holding or selling a particular investment or managing investments or investment accounts.
Moreover, the more tailored the communication is to a particular investor or investors, the more likely the communication will be considered a recommendation. Although general communications in newsletters, widely attended conferences, media reports, general market data and general marketing materials may fall outside the new fiduciary rule, it may not take much targeting to land on the wrong side of the line dividing general communications from fiduciary advice. More information in our previous update regarding the fiduciary rule is available here.
Recent Developments
In the wake of further delays in the implementation of the DOL’s rule, the Securities and Exchange Commission (SEC) announced it was drafting its own version of the rule. The SEC has been collecting public comments on a possible rule, with Chairman Jay Clayton stating that the next step would be the release of a proposed rule, which he indicated is currently being drafted. In recent testimony to the Senate Banking Committee, Clayton said an SEC rule would seek to preserve investors’ choice to use a broker or investment adviser, be understandable to investors and be applied uniformly across all kinds of investment accounts. Clayton also expressed a desire for a rule produced out of cooperation between the SEC and the DOL. However, no timeline has been made public for the release of a potential SEC-DOL replacement rule.
The Department of the Treasury (Treasury) also recently released a report in which it supported the DOL’s efforts to re-examine the rule, stating that a “delay in full implementation of the Fiduciary Rule is appropriate until the relevant issues are evaluated and addressed to best serve retirement investors.” In addition, the Treasury offered its support of the SEC’s “engagement on the topic,” and encouraged the financial markets regulator and the DOL to “work with the states to evaluate the impacts of a fiduciary rule across markets.” Although general in its comments regarding the fiduciary rule, the Treasury’s report offered further evidence of the Trump administration’s desire to identify an alternative to the current rule, be it via amendments to the DOL rule or by the repeal and replacement of the rule with a regulation of its own.
At present, it remains unclear exactly what 2018 will bring for the fiduciary rule. However, the investment management industry should remain alert for future developments in order to ensure compliance with any amendments or replacement rules that may emerge, while remaining in compliance with the transition period requirements that did go into effect in 2017.