The Labor Department’s decision to delay the fiduciary rule’s original April 10 implementation date by 60 days gives the financial services industry considerable short-term relief, according to industry insiders.

Beginning June 9, 2017, industry will have to comply with the rule’s impartial conduct standards, which requires that advice must be in retirement investors’ best interest, compensation must be reasonable, and prohibits institutions and advisors from giving misleading statements to investors.

That much was required under the rule’s original April 10 implementation date.

But beyond delaying the impartial conduct standards by 60 days, Labor’s rule also delays the requirement that financial institutions and advisors provide written acknowledgment of their fiduciary status. That requirement was also scheduled for April 10 implementation, but is now pushed off until January 1, 2018.

“That is a major departure from the original April 10 requirements,” said Jason Roberts, CEO of the Pension Resource Institute.

Under the original implementation date, firms that opted to sell investments under the fiduciary rule’s Best Interest Contract Exemption -- or any of the other prohibited contract exemptions the rule created or amended -- would have had to acknowledge their fiduciary status in writing, along with a written description of material conflicts of interest.

The decision to delay the requirement for those two written acknowledgments until 2018 are the biggest surprises in the Labor’s delay, and “substantially alter the rule,” said Roberts.

The impartial conduct standards that industry will be required to meet by June 9 represent a sea change for how the industry advises on 401(k) rollovers and the compensation charged on investments in IRAs. That much has not changed, said Roberts.

But in delaying the requirement to acknowledge fiduciary status in writing, the Labor Department has ameliorated industry’s potential liability, at least until the beginning of next year.

“The paradigm on investment advice has substantially changed, but not nearly as much as it would have the original disclosure requirements,” said Roberts.

The fiduciary rule’s original implementation schedule gave broad relief for complying with the rule’s BIC Exemption until the beginning of 2018.

But that relief did not extend to all transactions, including situations where advisors have discretionary authority over investment decisions, explained Erin Sweeney, an attorney with Miller & Chevalier.

Under the delay, that has changed. “The final regulation makes clear that no entity – whether subject to the original transition relief or not -- is required to comply with the disclosures and other conditions of the BIC Exemption until January 1, 2018,” said Sweeney.

The private right of action in the BIC Exemption would not have been available to retirement investors until January 1, 2018 under the original implementation schedule.

But industry nonetheless faced liability for not complying with the impartial conduct standards during the transition period.

The fact that industry does not have to acknowledge its fiduciary status in writing on June 9 provides firms some cover against potential complaints for failure to comply with the impartial conduct standards.

“Individual claims can still be brought if an advisor’s activities don’t meet the impartial standards conduct requirement, but they would have been more difficult to defend prior to the relief in the delay,” said Roberts.

Labor says it took a balanced approach

The delay also extends the applicability date of Prohibited Transaction Exemption 84-24 to January 1, 2018. The fiduciary rule moved the sale of Fixed Indexed Annuities from PTE 84-24 to the BIC Exemption. Recommendations on annuities will still be subject to the impartial conducts standard on June 9.

The Department described its approach in issuing its delay as “balanced.”

By retaining the impartial standards requirement, retirement investors’ best interests can be protected. And in granting industry an extended transition period for disclosure requirements, the risk of disruption in the marketplace and investor confusion is minimized, the Department said.

The delay also buys the Department more time to execute a full review of the fiduciary rule ordered by President Trump. That will enable regulators enough time to “consider possible changes” to the rule, regulators said.

That review will take longer than the 60-day delay, the Department said, but it expects to complete the analysis before the January 1, 2018 full implementation date.

The Labor Department changed its tune on the potential cost of a delay to individual retirement investors. In proposing the delay, regulators estimated that a 60-day delay would inflict some losses on investors due to a continued potential for conflicted advice.

But in issuing the delay, the Department said investor losses would be relatively small.

“Because many firms have already taken steps toward honoring fiduciary standards, some investor gains from the Fiduciary Rule are already being realized and are likely to continue,” explained regulators in issuing the delay.

“On the other hand, because many other firms are not immediately prepared to satisfy new requirements beginning April 10, and need additional time to comply, the 60-day delay is unlikely to deprive investors of additional gains,” the rule said.

Reactions to delay

The Labor Department will continue to receive comments regarding its new analysis of the fiduciary rule until April 17.

In delaying the implementation date for the rule, the Department seemed to acknowledge the significant undertaking of its new analysis.

If Labor finds that changes to the rule are required after its review, or that it needs more time to complete the review before the beginning of 2018, then the implementation date may be further delayed, regulators said.

“The DOL is clearly leaving the door open for an additional delay as it sifts through the substantive comments,” said Erin Sweeney.

Disappointment with the delay was expressed among the fiduciary rule’s strongest proponents.

Seth Rosenbloom, associate general counsel for Betterment for Business, said in a statement that while the delay of the rule comes as no surprise, it is nonetheless extremely disappointing.

“The bottom lines of big institutions have won again at the expense of retail investors,” said Rosenbloom. “Public comments opposing a delay outnumbered those supporting a delay by more than ten to one. The DOL should keep this in mind, as well as its own extensive analysis of the harm associated with conflicted advice, as it moves forward.”

Supporters of the delay also expressed dissatisfaction with Labor’s ruling.

The Insured Retirement Institute, which represents the interests of insurance companies and broker-dealers, said it is disappointed that the Labor Department did not delay all the provisions of the rule.

“We are hopeful that a delay to at least January 1, 2018, of all the provisions will be granted expeditiously following the closing of the comment period on April 17, 2017,” said Cathy Weatherford, IRI’s CEO.

“Without a delay of the additional provisions of the rule set to take effect on June 9, 2017, the Department will not be able to properly assess the harm caused to the retirement savers and the financial services firms that serve them,” said Weatherford in a statement, referencing the analysis of the rule ordered by President Trump.

Instant Insights /

Fiduciary rule delay offers industry substantial short-term relief

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