I. INTRODUCTION
In April of 2016, the Department of Labor (DOL) issued regulations to expand the definition of “fiduciary” under ERISA and the Internal Revenue Code as applied to those who render investment advice for a fee or other compensation with regard to the assets of a qualified retirement plan or an IRA. At the same time, the DOL published two new exemptions from the prohibited transaction rules, namely, the Best Interest Contract (BIC) Exemption and the Principal Transactions Exemptions, as well as amendments to several existing prohibited transaction exemptions.
These regulations and prohibited transaction exemptions were originally scheduled to take effect April 10, 2017, but were delayed until June 9, 2017. In conjunction with the delay, the new and amended exemptions were modified to provide transitional relief through January 1, 2018, at which time, the fiduciary rules and exemptions were to become fully applicable. During this transition period, Impartial Conduct Standards apply (act in best interest of the plan participant or IRA owner, receive reasonable compensation; and not make any materially misleading statements).
II. EXTENSION OF TRANSITION PERIOD FOR EXEMPTIONS
The DOL proposal to extend the transition period through July 1, 2019, and delaying, from January 1, 2018, to July 1, 2019, the full applicability dates for those exemptions has now been finalized by the DOL.
The DOL has also confirmed that it will extend its current temporary enforcement policy on the exemptions. The DOL previously stated that it would not take action against financial service providers for failing to comply with the exemptions as long as they were “working diligently and in good faith to comply with the fiduciary rule and meet the conditions of the exemptions” during the transition period. The DOL action leaves in place the Fiduciary Rule (which became effective on June 9, 2017), including the revised definitions of fiduciary “investment advice” that apply to IRAs and similar accounts. The DOL’s action continues the current status for Exemptions. Financial service providers can rely on the BIC Exemption and the Principal Transactions Exemption as long as they satisfy the Impartial Conduct Standards.
The DOL further indicates that as it reviews compliance efforts during the Transition Period, it will focus on the “affirmative steps” that firms have taken to comply with the Impartial Conduct Standards and reduce the scope and severity of conflicts that could lead to violations. The DOL noted that although there is some flexibility in how to safeguard compliance with the Impartial Conduct Standards, financial services providers may look to the specific provisions of the Exemptions for compliance guidance. The DOL specifically noted that limitations on an advisor’s investment recommendations to proprietary products or investments that generate third-party payments could be structured to comply with the Impartial Conduct Standards under the BIC Exemption. Accordingly, reliance on compliance principals set forth or implied in the Exemptions should be able to be utilized to demonstrate compliance with the Impartial Conduct Standards during the transition period ending on July 1, 2019.