Department Of Labor Approves 18 Month Delay Of The Effective Date For The Best Interest Contract Exemption

Securities and Insurance Law Alert

November 28, 2017

David J. Libowsky

David J. Libowsky


Related Practices
Insurance
Securities

We are issuing the latest update to our series of Alerts regarding the final rules issued by the Department of Labor (“DOL”) with respect to fiduciaries under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the DOL’s Best Interest Contract Exemption (“BIC Exemption”) from ERISA’s prohibited transactions provisions. On November 27, 2017, the DOL adopted without change its previously filed proposed amendments to a number of the Prohibited Transaction Exemptions (“PTEs”) which were promulgated in connection with the Fiduciary Rule, including the BIC Exemption. Among other things, the DOL has amended the BIC Exemption to extend by 18 months the current Transition Period by which financial institutions and advisors are required to adhere to certain conditions in order to take advantage of the BIC Exemption. The amendment as adopted delays the BIC Exemption’s Applicability Date, meaning the date by which financial institutions and advisors would have to comply with all of the conditions of the BIC Exemption, from January 1, 2018 to July 1, 2019.[1]

During the current Transition Period (June 9, 2017 through December 31, 2017), financial institutions and advisors that seek to rely on the BIC Exemption need only comply with the exemption’s Impartial Conduct Standards. In other words, financial institutions and advisors must give prudent advice that is in the best interest of retirement investors, charge no more than reasonable compensation, and not make misleading statements. Those requirements will remain in effect for the duration of the extended Transition Period. The remaining conditions of the BIC Exemption, including but not limited to the requirement with respect to Individual Retirement Account (“IRA”) owners that the financial institution enter into a written contract with the retirement investor and the adoption of conflict mitigation policies and procedures, which were to have gone into effect on January 1, 2018, will now go into effect on July 1, 2019 absent any revision, repeal or replacement of these provisions during the extended Transition Period.

The DOL approved the 18-month extension of the Transition Period for a number of reasons. First, the DOL has not yet completed its reexamination of the Fiduciary Rule, BIC Exemption, and associated PTEs as required by President Trump’s February 3, 2017 Memorandum directing the Secretary of the DOL to undertake the required re-examinations. The DOL believes that more time is needed to “carefully and thoughtfully review the substantial commentary” that it has received in response to its various requests for comments and to honor the Memorandum’s directive to take a “hard look at any potential undue burden.” Second, the DOL plans to propose in the near future “a new streamlined class exemption.” However, the DOL does not believe that either this proposal or any other changes to the Fiduciary Rule and BIC Exemption could realistically have been implemented by January 1, 2018. Third, the DOL believes that the January 1, 2018 Applicability Date does not provide it with sufficient time to coordinate with the Securities and Exchange Commission and other regulators such as the Financial Industry Regulatory Authority and the National Association of Insurance Commissioners in the development of this proposal or any such changes. Fourth, the DOL believes that delaying the Applicability Date to July 1, 2019  means that financial services providers will not incur costs to comply with BIC Exemption conditions that may ultimately be revised, repealed or replaced and may avoid attendant  investor confusion. 

As noted above, the implementation delay for the BIC Exemption has no effect on the Impartial Conduct Standards, which will remain in effect during the extended Transition Period. Thus, financial institutions and advisors will have to continue to give prudent advice that is in the best interest of the retirement investor, charge no more than reasonable compensation, and not make misleading statements, as has been the case since June 9, 2017.  

Now that the DOL has approved the extension of the Transition Period through July 1, 2019, the focus of attention shifts to whether and to what extent the DOL would propose any changes to the Fiduciary Rule and the BIC Exemption. In light of the DOL’s reasons for adopting the 18-month extension of the Transition Period discussed above, there will probably not be any clarity as to whether the DOL will seek to make changes to the Fiduciary Rule’s Impartial Conduct Standards or the BIC Exemption’s written contract and adoption of conflict mitigation policies and procedures conditions, including outright repeal and replacement, until we near the revised July 1, 2019 Applicability Date.[2]



[1]The amendment to the BIC Exemption as adopted by the DOL can be found at the following link: https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-25760.pdf.

[2]Relevant prior Alerts concerning the subject of delays in the implementation of the effective dates of the Fiduciary Rule and BIC Exemption can be found at the following links: 

Department of Labor Proposes 18-Month Delay of the Effective Date for the Best Interest Contract Exemption

Department of Labor Proposes an 18 Month Delay of the January 1, 2018 Applicability Date of the Best Interest Contract Exemption


DOL Proposes a 60-Day Delay of the April 10, 2017 Applicability Date of the Fiduciary Rule and Best Interest Contract Exemption


Department of Labor Seeks Delay of the Fiduciary Rule's Applicability Date