Fiduciary Rule Exemptions Face Delay Under DOL Proposal

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By Kristen Ricaurte Knebel

The Labor Department Aug. 30 officially proposed delaying the fiduciary rule’s exemptions until mid-2019.

The proposed 18-month delay of key provisions of the best-interest-contract and principal-transactions exemptions is necessary because the DOL has yet to complete the presidentially mandated review of the rule. The DOL also anticipates proposing a new “streamlined” class exemption based around recent innovations in the financial services industry, the department said. Because any revisions or changes to the rule and the finalization of the new class exemption can’t realistically be implemented by Jan. 1, the agency believes a longer delay is appropriate.

The delay is a boon for the rule’s detractors, who have been seeking changes to it for some time. Many had hoped for a full repeal of the rule, but chipping away at the best-interest-contract exemption that was called the “heart” of the rule by former Labor Secretary Thomas Perez would be a huge win.

The agency said in court documents Aug. 9 that it would propose the 18-month delay of portions of the rule, including the best-interest-contract exemption, that were set to take effect Jan. 1.

The Obama-era fiduciary rule requires that financial advisers act in their clients’ best interest when giving retirement investment advice. The Trump administration has now delayed portions of the rule on several occasions. Parts of the rule that the DOL called the “least controversial” went into effect June 9. The rule is under review by the agency.

The Exemptions

The department also said on Aug. 30 that it won’t enforce a provision of the fiduciary rule aimed at making it easier for investors to bring class actions against financial advisers.

The provision, which prohibits class action waivers in contracts with investors, is part of the best-interest-contract exemption. If advisers and financial institutions want to rely on this exemption now, they only have to comply with the impartial conduct standards. These standards generally require advisers to give advice in their client’s best interest, receive only reasonable compensation, and avoid making misleading statements.

The Obama administration, which issued the fiduciary rule, knew there was always a possibility the exemption’s arbitration provision could go away, Erin M. Sweeney, an employee benefits attorney and of counsel with Miller & Chevalier in Washington, told Bloomberg BNA. Thus, they took steps to insulate it from the rest of the exemption so if a court found it to be unenforceable, the entire exemption wouldn’t “implode,” she said.

The rest of the best-interest-contract exemption’s provisions that could be delayed until mid-2019 include the requirement that financial institutions enter into an enforceable contract with owners of individual retirement accounts. The contract would include a written promise to adhere to the impartial conduct standards, an acknowledgment of fiduciary status, and other required disclosures.

The other exemption that could get pushed to 2019 is the principal-transactions exemption. This exemption allows fiduciaries to sell products from their own financial institution’s inventory to retirement plans and IRAs, if certain requirements are met. As with the best-interest-contract exemption, those who wish to rely on the principal-transactions exemption currently only need to comply with the impartial conduct standards. This exemption also has contract requirements that mirror those in the best-interest-contract exemption.

Holding Fire

The proposed delay isn’t a surprise. The Trump administration has been open about its intentions to delay for some time. Timothy D. Hauser, deputy assistant secretary for program operations at the DOL’s Employee Benefits Security Administration, said earlier this year that even the possibility of further changes to the rule would warrant a change in the Jan. 1 applicability date.

If these exemptions are pushed back, there isn’t a guarantee that advisers will comply “with the protections of the rule and there is no way to hold them accountable if they don’t,” Micah Hauptman, financial services counsel at the Consumer Federation of America, told Bloomberg BNA. CFA is a supporter of the rule.

Hauptman said his group is reviewing all of their options regarding the delay, including legal action, but something like that probably wouldn’t come until much later. “My initial view is that it might make sense to hold our fire until they predictably gut the rule and then challenge them on that front,” he said.

Reduced Cost?

The DOL estimates that investor losses associated with the delay will be “relatively small,” which is a change from the agency’s previous cost estimates. When the DOL proposed delaying the fiduciary rule earlier this year for 60 days, the estimate was that it would cost retirement investors $147 million.

This turnaround is “fascinating,” Sweeney said. The rule was issued because it was seen as a benefit to investors, she said.

The DOL attributes the small investor losses to the fact that the fiduciary rule and the impartial conduct standards are in effect.

This assumption is problematic because the DOL assumes “there’s going to be substantial, if not full compliance with the impartial conduct standards,” Hauptman said. Without an effective enforcement mechanism in place, such as the best-interest-contract exemption, there’s no way to ensure compliance, he said.

Those wishing to throw in their two cents this time around don’t have much time. The deadline for comments is 15 days after publication in the Aug. 31 Federal Register.

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

For More Information

Text of the proposed delay is at

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