A prominent fiduciary expert is predicting that the January 1, 2018 scheduled compliance date for the Labor Department’s fiduciary rule’s prohibited transaction exemptions will be delayed for up to a year.
Writing in a blog post, Fred Reish, chair of the financial services ERISA Team at Drinker Biddle & Reath, said the extent of the review of the rule being undertaken by the Labor Department and the requirements of the Administrative Procedures Act make it highly unlikely that a revised regulation will be finalized before the beginning of next year.
Labor is expected to formally publish a request for information for input on the rule’s impact on industry and what changes may be needed. Specifically, Labor is looking for feedback on two of the rule’s primary prohibited transaction exemptions: the Best Interest Contract Exemption, and Prohibited Transaction Exemption 84-24, both slated for implementation on January 1 of next year.
Labor is also seeking input from the Securities and Exchange Commission, which has issued its own request for information on how the agency should commence with rulemaking addressing broker-dealer conflicts of interest.
“My view is that it will be virtually impossible for the DOL and SEC to collaborate on the development of a common, or at least compatible, definition of fiduciary advice and standard of care before December 31,” writes Reish.
Under the APA, a revised regulation would have to be published in the Federal Register by early November, meaning its proposed form would have to be made public by early to mid-September, according to Reish.
Meeting those deadlines “seems almost impossible,” thinks Reish, given the call for coordination between Labor and SEC, and the fact that the SEC has not previously proposed guidance on a new industry-wide fiduciary standard.
Currently, advisors on IRAs and defined contribution assets are required to abide by the rule’s impartial conduct standards, per the expanded definition of fiduciary investment advice that went into effect on June 9.
As the current rule was finalized, industry was afforded a transition period until January 1, 2018, before it was required to comply with the BIC Exemption and PTE 84-24. Compliance with those exemptions is expected to dramatically reshape how mutual funds, variable annuities, and fixed indexed annuities are sold to individuals holding qualified retirement accounts.
Impartial conduct standards likely here to stay
A potential extension of the transition period would undoubtedly be welcomed by much of industry, as compliance with the BIC Exemption and amended PTE 84-24 is expected to be painstaking for a large swath of the regulated community. Reish expects that “significant changes” to the exemptions will emerge from Labor’s analysis of the rule.
But he also suggests that the rule’s most ardent opponents should brace for the reality that the expanded definition of fiduciary advice, and the impartial conduct standards industry is now beholden to, are here to stay.
“By a year from now, financial services companies will be in compliance with the fiduciary standard and fiduciary advice will become the standard course of business,” writes Reish. “The fiduciary standard will have become the norm.”
And that will make it much more difficult for Labor to revise the rule’s fiduciary definition and standard of care requirements under the impartial conduct standards, says Reish.
Reish predicts Labor will announce an extension of the transition period by September.