The various twists and turns of the Department of Labor's fiduciary rule regulations have created confusion among investment advisers, retirement plan sponsors and retirement investors as to which requirements are in effect and which have been delayed. In August, the Trump administration announced a proposed 18-month delay in certain regulations that are key to implementing the new Fiduciary Rule. That delay was finalized Nov. 27, extending the current transition period and delaying the effective date of certain provisions of the fiduciary rule until July 1, 2019.
But don't be fooled by a quick read of the headlines announcing delays. The fiduciary rule became effective on June 9, and many of its key requirements are now in force.
The portion of the rule that extends fiduciary status to many more advisers is in effect. Prior to the new rule, many advisers took the position that they were not acting as fiduciaries under the Employee Retirement Income Security Act when providing investment advice to retirement investors because they were not providing advice on a "regular basis" or the recommendation was not intended to service as the "primary basis" for the investment decision.
Those exemptions under the old 1975 test are now gone. Now, most advisers providing individualized recommendations to a retirement investor (for compensation) are subject to fiduciary standards of conduct, even for advice provided on a one-time basis. For example, when an adviser is speaking with a retirement plan participant about rolling over plan assets into an individual retirement account, that adviser will have to put the participant's interests first, avoid conflicts of interest, and charge no more than a reasonable fee. That often wasn't the case previously. Prior to the new rule's June 9 effective date, many adviser recommendations to retirement investors were subject to the more lax "suitability" standards under the Financial Industry Regulatory Authority and investment transactions could generate undisclosed sales commissions.
Also in effect is the extension of ERISA fiduciary protections to IRA investors that, for the first time, includes investment advisers working with IRA investors. Since IRA investors constitute the largest segment of U.S. retirement assets, with an estimated 42.5 million investors and $8.4 trillion of combined assets, the significance of this change to the retirement industry cannot be overstated.
The Labor Department's Nov. 27 announcement also extends the transition period and delays the implementation of the best interest contract exemption, known as BIC, and the principal transaction exemption until July 1, 2019. Until then, investment advisers are relieved of the requirement of entering into written contracts with retirement plan investors that would contain a variety of enforceable commitments and disclosures relating to the so-called impartial conduct standards.
However, even during this delay period, the impartial conduct standards remain in effect. These specify that retirement advisers that expect to make use of the best-in-contract exemption must "adhere to basic fiduciary norms and standards of fair dealing." These standards require the adviser to act in the best interest of the client, charge reasonable fees and avoid making misleading statement. In truth, these standards are somewhat vague, and financial firms may be challenged to translate them into concrete processes or controls or simple compliance checklists.
The Labor Department said the primary purpose of the 18-month delay is to give the agency time to consider possible changes to the fiduciary rule, a process that may take a while. The department has already received more than 260,000 comments on the rule this year alone. And when the 18-month delay was announced on Aug. 31, the department requested further public comment on the impact of the rule and proposed amendments. Another purpose for the delay is to give the heads of the DOL and the Securities and Exchange Commission an opportunity to better align both agencies' fiduciary standards. The SEC is working on its own standards of conduct for investment advisers and brokers and SEC Chairman Jay Clayton already has gone on record to complain that the DOL rule covers many of the same investor protections regulated by the SEC. In September, Mr. Clayton told lawmakers he was committed to working together with the DOL on a harmonized fiduciary rule. Such cooperation is long overdue.
Democrats and investor advocates are not the only ones clashing with the Trump administration on further efforts to delay or dilute the fiduciary rule. State legislatures may also be entering the mix. For example, in July, Nevada passed its own law, placing fiduciary responsibilities on broker-dealers, registered investment advisers and some financial service sales representatives. These professionals were previously exempted from the fiduciary duties that apply to financial planners. But not anymore, at least not in Nevada. The new law is subject to the Nevada secretary of state developing regulations to implement the new requirements, which are not expected until later in 2018. The Nevada lawmaker who championed the new law said he's been contacted by lawmakers in other states who are considering similar measures. Connecticut has a similar rule, albeit limited to 403(b) plans sponsored by political subdivisions in that state. Other states, including California, Missouri, South Dakota and South Carolina already have fiduciary rules on the books. However, reconsideration and expansion seems likely. Additionally, similar legislation is reportedly pending in New Jersey and New York.
If even more states follow this trend, these state fiduciary statutes could create a regulatory quagmire. It is unclear whether state fiduciary statutes could be applied to advisers working with retirement investors. Arguably, the federal law ERISA would pre-empt any state law that purported to regulate investment advisory services provided to an ERISA retirement plan or plan participant. Also, if other states follow Nevada's lead, the overlapping standards between federal regulations and state laws could create a confusing environment for both advisers and retirement investors. Hopefully, ERISA pre-emption will avoid a patchwork quilt of state regulations, at least with respect to retirement investors.
The fiduciary rule will undoubtedly remain in the headlines for many months to come. But don't let headlines citing delays or reconsideration obscure this important fact: the fiduciary rule has been in effect since June 9. The recent 18-month delay extends the transition period for the best-in-contract exemption, but it does not relieve retirement advisers from fiduciary status or the impartial conduct standards currently in effect.
Christian Hancey is a partner and Jenny Holmes an associate with Nixon Peabody LLP, Rochester, N.Y. This article represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.
