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Since its original release as a proposed rule in April 2015 and
as a final rule a year later, the Department of Labor's
(DOL's) so-called fiduciary rule — which expands the
"investment advice fiduciary" definition under the
Employee Retirement Income Security Act of 1974 (ERISA) — has
endured a turbulent year.
After receiving considerable criticism from the financial
services industry and a promise to repeal from President Donald
Trump, the rule finally came into partial effect on June 9, 2017,
albeit with an additional transition relief period stretching until
Jan. 1, 2018, to allow for further study and possible changes. On
Aug. 31, the DOL proposed
an 18-month extension for the transition period for the best
interest contract exemption and other prohibited transaction
exemptions from Jan. 1, 2018, to July 1, 2019, in effect delaying
the implementation of significant elements of the rule. This delay
was submitted
to the White House Office of Management and Budget on Nov. 1 and
adopted as a final rule on Nov. 29, 2017.
For private funds, the main effect of the fiduciary rule is that
behavior previously considered basic marketing without any
fiduciary implications could now be considered investment advice
with potential liability under ERISA's high standard of care
and conflict prohibitions for fiduciaries. Covered investment
advice under the new fiduciary rule is defined as a recommendation
to a plan, plan fiduciary, plan participant (including a
beneficiary), IRA or IRA owner for a fee or other direct or
indirect compensation. A "recommendation" is a
communication that, based on the surrounding facts and
circumstances, a reasonable person would consider to be a
suggestion that the recipient engage in or refrain from taking a
particular course of action relating to investing, whether buying,
holding or selling a particular investment or managing investments
or investment accounts.
Moreover, the more tailored the communication is to a particular
investor or investors, the more likely the communication will be
considered a recommendation. Although general communications in
newsletters, widely attended conferences, media reports, general
market data and general marketing materials may fall outside the
new fiduciary rule, it may not take much targeting to land on the
wrong side of the line dividing general communications from
fiduciary advice. More information in our previous update regarding
the fiduciary rule is available
here.
Recent Developments
In the wake of further delays in the implementation of the
DOL's rule, the Securities and Exchange Commission (SEC)
announced it was drafting its own version of the rule. The SEC has
been collecting public comments on a possible rule, with Chairman
Jay Clayton stating that the next step would be the release of a
proposed rule, which he indicated is currently being drafted. In
recent testimony to the Senate Banking Committee, Clayton said an
SEC rule would seek to preserve investors' choice to use a
broker or investment adviser, be understandable to investors and be
applied uniformly across all kinds of investment accounts. Clayton
also expressed a desire for a rule produced out of cooperation
between the SEC and the DOL. However, no timeline has been made
public for the release of a potential SEC-DOL replacement rule.
The Department of the Treasury (Treasury) also recently released
a
report in which it supported the DOL's efforts to
re-examine the rule, stating that a "delay in full
implementation of the Fiduciary Rule is appropriate until the
relevant issues are evaluated and addressed to best serve
retirement investors." In addition, the Treasury offered its
support of the SEC's "engagement on the topic," and
encouraged the financial markets regulator and the DOL to
"work with the states to evaluate the impacts of a fiduciary
rule across markets." Although general in its comments
regarding the fiduciary rule, the Treasury's report offered
further evidence of the Trump administration's desire to
identify an alternative to the current rule, be it via amendments
to the DOL rule or by the repeal and replacement of the rule with a
regulation of its own.
At present, it remains unclear exactly what 2018 will bring for
the fiduciary rule. However, the investment management industry
should remain alert for future developments in order to ensure
compliance with any amendments or replacement rules that may
emerge, while remaining in compliance with the transition period
requirements that did go into effect in 2017.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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