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Long DOL Rule Delay Hints at Revisions: Lawyers

August 11, 2017

The Department of Labor’s further 18-month delay in enforcing major components of its fiduciary rule hints that the agency is planning substantial changes to the regulation, industry lawyers say.

On Wednesday the DOL filed a notice of the pending delay in a lawsuit it is fighting brought by Thrivent Financial. Earlier that day, the agency filed proposed amendments with the Office of Management and Budget, court documents indicate, affecting the applicability dates of the Best Interest Contract Exemption and other exemptions that accompany the department’s fiduciary rule.

The contract requirements of the BIC exemption, which would apply to commission-based financial professionals serving IRA clients, were originally set to become effective in April, though the DOL pushed that date to Jan. 1, 2018, at the behest of President Donald Trump. The new delay pushes the applicability date much further out, to July 1, 2019.

“I’m a little surprised they are proposing such a long extension, but I guess they realize that it will take quite a bit of time to assess how to revise the rules, get them drafted and vetted internally and at OMB, get them published for comment, assess the comments and then finalize the new guidance,” says Bruce Ashton, partner at Drinker Biddle, in an e-mail. “Also, they may be anticipating allowing for time for the industry to make changes to accommodate the new rules once they are finalized.”

The text of the DOL’s proposed revisions was not immediately available, though the OMB noted Thursday on its site that it has received the submission. The proposal could include the same terms that the agency used in the current delay, or “transition period.” In such an instance, portions of the rule and BIC exemption, including the current impartial conduct standard, remain in effect, though specific items, such as the contract requirement, are not, said Ropes & Gray associate Josh Lichtenstein, in a statement.

“If this proposed delay takes effect then the DOL will have greater freedom to alter the requirements of the Best Interest Contract Exemption or to create new, streamlined exemptions before the new July 1, 2019 effective date,” Lichtenstein said. “This proposed delay could be seen, in part, as an attempt to avoid having financial institutions make further changes to their practices before the DOL makes final decisions on what the rule and the related exemptions will look like.”

Many in the financial services industry are likely relieved by the delay, Ashton notes.

“They’ll keep doing what they are doing to come into compliance, but I think they will relax a bit and feel like they have been given a bit of a reprieve to do things thoughtfully and thoroughly without the rush,” he says.

The proposed delay follows the agency’s deadline for comment Monday regarding numerous questions it posed regarding the rule and its exemptions.

Several fund providers, recordkeepers and broker-dealers submitted comments, many of which echoed prior letters sent to the DOL that were critical of major provisions of the rule.

Among those commenting was Raymond James CEO Paul Reilly, who noted that “operational and IT changes to comply with the BIC and other exemptions as written are estimated to take at least two and a half years to complete, and cost tens of millions of dollars in addition to the millions that have already been spent.”

In an earnings call in June 2016, Reilly expressed optimism that the company would be able to comply with the rule’s provision, and had “plenty of time” to meet the original April 2017 deadline, though he also said at the time that it was unclear how the firm would do so, in part because of a lack of DOL guidance.

Like others, Reilly said there seems to be early evidence that small-balance IRA investors and small businesses have seen reduced access to retirement advice.

However, Reilly noted that hints in recent DOL guidance that suggested a preference for clean shares as an alternative to T shares could have unfavorable consequences.

“By citing products that may qualify for a streamlined exemption, the department will potentially usurp judgment of clients and their advisors to choose products that best fit client needs,” he stated in the letter. “We see client choices being more limited with additional costs being added.”

The letter went on to express skepticism about manufacturers’ interest in developing such products and indicates Raymond James is not interested in using them.

In another letter, Empower Retirement president Edmund Murphy proposed eliminating the contract requirement, or the “C” of BIC exemption.

“The effect of this provision is to support and encourage private litigation as an enforcement mechanism,” Murphy wrote. “A recent study suggests there are significant negative impacts of increased Erisa litigation settlements on fiduciary decision making.” The study referred to is Cerulli’s U.S. Retirement Markets 2016.

Further, the DOL should consider changes to the definition of advice, some of which has added confusion to the recordkeeping business, he wrote.

“Under this definition, casual suggestions regarding investments or distributions that are clearly not intended to be relied upon as advice could be deemed a fiduciary act,” he wrote. “We have hundreds of employees engaged in these communications. It is very difficult under the current definition to provide meaningful help without risking fiduciary status, even with extensive scripting, training and monitoring.”

Another firm, MFS, also provided answers to the DOL’s list of questions, though it began its letter noting that “the best course of action is rescission of the rule.”

In a separate letter, Voya was critical of the DOL's “largely relying on the court system to define the contours of the standard through litigation, and, by prohibiting waivers of class actions in the BIC contract, invites enterprising private law firms to bring costly lawsuits against providers of retirement advice.”

Vanguard emphasized points it has repeatedly made to the DOL in prior letters, though the firm noted that it supports the current impartial conduct standard that the agency has implemented during the transition period. However, advice should not include recommendations to increase retirement savings or to modify an investor’s “extreme allocations,” the firm noted.

Like many others, Vanguard encouraged the DOL to coordinate changes to the rule with the SEC. The latter agency has begun collecting public comments on a potential rule of its own, though it is unclear when and whether it will craft one.

Writing in support of the DOL’s rule was William Galvin, the top securities regulator for Massachusetts. Galvin dedicated his letter to criticism of “erroneous and dangerous assertions about the fiduciary rule” made by SEC commissioner Michael Piwowar, who has long been critical of the DOL’s efforts.

“The adoption of the fiduciary rule represents a clear victory for retail investors and retirement savers,” Galvin wrote. “In view of the protections the rule will provide, it is shocking and sad that an SEC commissioner would use the platform of his office to oppose it.”

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