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

Securities and Insurance Law Alert

August 31, 2017

David J. Libowsky

David J. Libowsky


Related Practices
Insurance
Securities

We are issuing the latest update to our recent 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 August 30, 2017, the DOL filed a notice of proposed amendments to a number of the Prohibited Transaction Exemptions (“PTEs”) which were adopted in connection with the Fiduciary Rule, including the BIC Exemption. Among other things, the DOL is proposing to amend the BIC Exemption to extend by 18 months the current Transition Period by which financial institutions and advisors are subject to a streamlined set of conditions in order to take advantage of the Exemption. The proposed amendment would thus delay 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 January 1, 2018) 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. 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, become applicable on January 1, 2018.

The DOL is proposing 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 a review of the Fiduciary Rule. The DOL believes that more time is needed to review the commentary that it has received in response to its March 2, 2017 request 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 and more streamlined class exemption based in large part on recent innovations in the financial services industry.” However, the DOL does not believe that either this proposal or any other changes to the Fiduciary Rule and BIC Exemption could be implemented by January 1, 2018. Third, the DOL believes that the current January 1, 2018 Applicability Date does not provide it with sufficient time to coordinate with the Securities and Exchange Commission (“SEC”) in the development of this proposal or any such changes. Fourth, 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 or replaced and may avoid attendant investor confusion.

Significantly, the proposed amendment to the BIC Exemption has no effect on the Impartial Conduct standards, which would remain in effect during the extended Transition Period. Thus, financial institutions and advisors would 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.

The DOL is requesting comments on the proposed amendments to the BIC Exemptions and other PTEs, on an expedited basis, within 15 days of the date of publication of the Notice in the Federal Register. As the Notice was published in the Federal Register on August 31, 2017, the deadline for submitting comments is September 15, 2017. Clarity as to whether the written contract and adoption of conflict mitigation policies and procedures conditions of the BIC Exemption are going to be delayed beyond the current January 1, 2018 Applicability Date should be forthcoming as comments are submitted and the DOL responds. 2

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1 The Notice filed by the DOL can be found at the following link: https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-18520.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: