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DOL Issues Request for Information Regarding Fiduciary Rule

Posted in Broker-Dealer Regulation, Investment Adviser Regulation

On June 29, 2017, the Department of Labor (“DOL”) issued a Request for Information (“RFI”) in connection with its examination of the Final Fiduciary Rule, which was published on April 8, 2016, and became applicable on June 9, 2017.  The Best Interest Contract (“BIC”) Exemption and Principal Transaction Exemption also became applicable on June 9, 2017; however, most of the compliance requirements for such exemptions were postponed.  Fiduciaries only need comply with the impartial conduct standards in order to utilize these exemptions during a transition period currently set to expire on January 1, 2018.

The RFI was issued in response to President Trump’s February 3, 2017, memorandum directing the DOL to prepare an updated analysis of the likely impact of the Fiduciary Rule on access to retirement information and financial advice.

The RFI was released in the same week that Secretary Acosta of the DOL and Chairman Clayton of the SEC pledged to work together to address the Fiduciary Rule.

The RFI poses two sets of questions.  The first set of questions asks whether an extension of the applicability date beyond January 1, 2018, for full implementation of the BIC and Principal Transaction Exemptions would reduce burdens on financial service providers and benefit retirement investors by allowing a more efficient implementation or whether such a delay would carry any risk.

The DOL has asked that comments to this set of questions be submitted on or before the date that is 15 days after the date of publication of the Request in the Federal Register.

The second set of questions is broader and focuses on the substantive issues raised in the Presidential memorandum.  These questions include the following:

(a)     What actions have already been implemented by the regulated community in order to comply with the Fiduciary Rule and related exemptions, and are there are any market innovations the DOL should consider?

(b)     Whether the Fiduciary Rule and related exemptions appropriately balance the interests of consumers while protecting them from conflicts of interest, and effectively allow a wide range of products to meet the needs of investors?

(c)      To what extent the costs of the exemption conditions exceed their benefits, and whether there are better approaches?

(d)     What are the likely implications of eliminating or substantially revising the contract and warranty requirements currently included in the BIC and Principal Transaction Exemptions?

(e)      Would mutual fund “clean” shares allow financial institutions to develop policies and procedures that avoid compensation incentives to favor one mutual fund over another? What are the legal and practical impediments financial institutions face in adding clean shares to their product offerings?

(f)      How would advisers be compensated for selling fee-based annuities?

(g)     Are there innovations other than clean shares, T-shares and fee-based annuities that hold similar potential to mitigate conflicts and increase transparency?

(h)     Should the DOL base a streamlined exemption on a model set of policies and procedures?

(i)      Could a streamlined exemption or other changes be developed for advisers who comply with any updated standards of conduct adopted by the Securities and Exchange Commission?

(j)      Whether the Principal Transaction Exemption could be improved to better serve investor interests and provide flexibility?

(k)     How could the BIC Exemption disclosures be simplified?  Should the DOL develop model disclosure provisions?

(l)      Should recommendations to make or increase contributions to a plan or IRA be expressly excluded from the definition of investment advice?

The DOL has requested a response to the second set of questions on or before the date that is 30 days after the date of publication of the Request in the Federal Register.

The U.S. Chamber of Commerce has asked the DOL for an extension of the second set of questions to 60 days following publication of the RFI in the Federal Register.

The broad range of the questions under the RFI, and the likely significant amount of industry and investor comments that will be provided, call into question whether we are truly close to having a final set of rules around which the financial industry can effectively plan.