Sign of Future Changes? DOL Proposes 18-Month Extension of Transition Period for Compliance With ERISA “Fiduciary Investment Advice” Rule

On August 9, the US Department of Labor (DOL) announced in a court filing that it has proposed an 18-month extension of the full implementation of the Best Interest Contract Exemption (the “BIC Exemption”) under the ERISA fiduciary investment advice rule. The Proposed Extension would also apply to the Principal Transaction Exemption and Prohibited Transaction Exemption 84-24 (together with the BIC Exemption, the “Exemptions”). In April of this year, the DOL extended the effective date of the Rule until June 9 and limited the requirements of the Exemptions to only require compliance with the “impartial conduct standards” (ICS) through December 31 (the “Transition Period”). If the Proposed Extension is approved, full compliance with the Exemptions will not be required until July 1, 2019.

As described in our earlier advisory, “Compliance With the ERISA Fiduciary Advice Rule for Private Investment Fund Managers and Sponsors and Managed Account Advisers: Beginning June 9, 2017,” compliance with the ICS generally requires that an investment advice fiduciary (1) act in the “best interest” of plan participants and IRA owners; (2) receive no more than “reasonable compensation” (as defined under ERISA and the Internal Revenue Code); and (3) make no materially misleading statements about recommended transactions, fees, compensation and conflicts of interest.

The Proposed Extension was submitted to the Office of Management and Budget (OMB) in the form of an amendment to each of the Exemptions.

This post was written by Henry Bregstein Wendy E. Cohen David Y. Dickstein Jack P. Governale Christian B. Hennion and Gary W. Howell of Katten Muchin Rosenman LLP
For more legal analysis visit the National Law Review.

Chairman Clayton Outlines His “Guiding Principles” for SEC

In remarks to the Economic Club of New York on July 12, 2017, SEC Chairman Jay Clayton outlined eight guiding principles for his chairmanship and identified certain areas in which such principles could be put into practice.  Chairman Clayton’s remarks – his first public speech as SEC Chairman – indicated his interest in, among other things, creating a Fixed Income Market Structure Advisory Committee to give advice to the SEC on regulatory issues impacting fixed income markets and coordinating with the U.S. Department of Labor (DoL) to bring “clarity and consistency” to the issue of standards of conduct for investment professionals, noting the DoL’s Fiduciary Rule is now partially in effect.

Guiding Principles

Clayton stated that the following principles will guide his SEC chairmanship:

• Principle 1: “The SEC’s mission is our touchstone.” Chairman Clayton stated that each tenet of the SEC’s three-part mission – (1) to protect investors, (2) to maintain fair, orderly, and efficient markets, and (3) to facilitate capital formation – is critical.

• Principle 2: “Our analysis starts and ends with the long-term interests of the Main Street investor.”  According to the Chairman, an assessment of whether the SEC is abiding by its threepart mission must focus on the impact of its actions on “Mr. and Ms. 401(k)” and whether the SEC’s actions further the long-term interests of such investors.

• Principle 3: “The SEC’s historic approach to regulation is sound.” The SEC’s regulatory approach, focusing on disclosure and materiality, and using the SEC’s “extensive enforcement capabilities” as a “back-stop” to disclosure rules and oversight systems, is sound. In expressing his support for disclosure-based rules, Clayton asserted that informed decision-making by investors supports more accurate valuations of securities and more efficient allocation of capital.  As to the “back-stop,” the anti-fraud regime established by Congress and the SEC, Clayton noted the government’s “extensive enforcement capabilities on those who try to circumvent established investor protections or otherwise engage in deceptive or manipulative acts in the markets.”  Taking the foregoing into account, Chairman Clayton maintained that “wholesale changes” to the SEC’s fundamental regulatory approach would “not make sense.”

• Principle 4: “Regulatory actions drive change, and change can have lasting effects.”  Although Chairman Clayton endorsed the disclosure-based regime of the SEC, he cautioned that the incremental impact of regulatory changes to this regime has included a significantly expanded scope of required disclosures “beyond the core concept of materiality.”  He cited increased disclosure as among the factors that may make alternatives for raising capital increasingly attractive for small and medium-sized companies.  Chairman Clayton added that fewer small and mediumsized public companies may mean less liquid trading markets for those that remain public and, to the extent companies are not raising capital in public markets,  “the vast majority of Main Street investors will be unable to participate in their growth.”

• Principle 5: “As markets evolve, so must the SEC.”  Noting that technology and innovation are changing the way markets work and investors transact, Chairman Clayton stated that the SEC must take this “dynamic atmosphere” into account and “strive to ensure that our rules and operations reflect the realities of our capital markets.”   Further to this point, Clayton remarked that the evolution of capital markets presents opportunities for regulatory improvements and efficiencies and noted that the SEC is “adapting machine learning and artificial intelligence to new functions, such as analyzing regulatory filings.” Chairman Clayton cautioned, however, that implementing regulatory change has costs, including the “significant resources” spent by companies to build compliance systems.

• Principle 6: “Effective rulemaking does not end with rule adoption.”  Chairman Clayton stated that the SEC should review its rules “retrospectively,” and listen to investors and others as to areas in which rules are, or are not, functioning as intended.

• Principle 7: “The costs of a rule now often include the cost of demonstrating compliance.”  Chairman Clayton noted that the SEC must ensure that, at the time of adoption, the SEC has a “realistic version for how rules will be implemented,” as well as how the SEC will examine for compliance.  In this regard, according to Clayton, “[v]aguely worded rules can too easily lead to subpar compliance solutions or an overinvestment in control systems.”

• Principle 8: “Coordination is key.”  According to Chairman Clayton, coordination with, between, and among all of the various U.S. federal regulatory bodies, state securities regulators, selfregulatory organizations  and various other regulatory players “is essential to a well-functioning regulatory environment.”  To illustrate his point, Clayton cited the dual regulatory structure for over the-counter derivatives called for by the Dodd-Frank Act and working with the CFTC in this respect.  Chairman Clayton noted that cybersecurity is also an area where coordination is critical, adding that the SEC is working with “fellow financial regulators to improve our ability to receive critical information and alerts and react to cyber threats.”

Fixed Income Markets

In a portion of his remarks titled, “Putting Principles into Practice,” Chairman Clayton observed that the “time is right for the SEC to broaden its review of market structure to include specifically the efficiency, transparency, and effectiveness of our fixed income markets.”  The SEC, according to Clayton, must explore whether fixed income markets “are as efficient and resilient as we expect them to be, scrutinize our regulatory approach, and identify opportunities for improvement.”  In this connection, Chairman Clayton stated that he has asked the SEC staff to develop a plan for creating a Fixed Income Market Structure Advisory Committee.

Fiduciary Rule

Chairman Clayton also touched upon the DoL’s Fiduciary Rule, noting that he recently issued a statement seeking public input on standards of conduct for investment advisers and broker-dealers.  Chairman Clayton expressed hope that the SEC can “act in concert with our colleagues at the [DoL] in a way that best serves the long-term interests of Mr. and Ms. 401(k).”  He also noted that “any action will need to be carefully constructed, so that it provides appropriate and meaningful protections but does not result in Main Street investors being deprived of affordable investment advice or products.”

The transcript of Chairman Clayton’s remarks is available at:

Read more SEC news at the National Law Review.

This post was by the Investment Services Group of Vedder Price

The ERISA Fiduciary Advice Rule: What Happens on June 9?

This is an update on the upcoming effective date of the “fiduciary rule” or “fiduciary advice rule” (the “Rule”) that was issued under the US Employee Retirement Income Security Act of 1974 (ERISA). The Rule was published by the US Department of Labor (DOL) in April, 2016. The purpose of the Rule is to cause a person or entity to become a “fiduciary” under ERISA and the US Internal Revenue Code of 1986 (the “Code”) as a result of giving of certain types of advice involving investment of assets of employee benefit plans, such as 401(k) or pension plans, or of individual retirement accounts (IRAs) and receiving compensation for that advice.

calendar hundred daysThe Rule was originally intended to become effective April 10, but in April the DOL extended (the “Extension Notice”) the effective date of the Rule for 60 days (until June 9), and provided for reduced compliance obligations under the Rule from that date through the end of 2017 (the “Transition Period”). The effective date for Prohibited Transaction Exemptions (PTEs), both new and amended, that are related to the Rule also was extended until June 9, and further transitional relief was provided with respect to certain of those PTEs.

In a May 23 Op Ed in the Wall Street Journal, Labor Secretary Acosta announced that the Rule would go into effect on June 9, as provided for in the Extension Notice, and that the DOL would seek additional public comment on possible revisions to the Rule.  He indicated that the DOL “found no principled legal basis to change the June 9 date while we seek public input.”  The DOL also published, on May 23, FAQs on implementation of the Rule and an update of its previously-issued enforcement policy for the Transition Period. Therefore, it is important to review the rules that will go into effect on June 9.

Under the Rule, fiduciary status is triggered by investment “recommendations.” It provides, in general, that if a person (1) provides certain types of recommendations to a plan or its participants and/or beneficiaries, or to an IRA owner (collectively, “Protected Investors”); and (2) as a result, receives a fee or other compensation (direct or indirect), then that person is providing “investment advice for a fee” and therefore, in giving such advice, is a fiduciary to the Protected Investor. Receipt of compensation tied to such recommendations by a person or entity that is a fiduciary could result in prohibited transactions under ERISA and the Code. Under the Extension Notice, the DOL provided simplified compliance requirements under the Rule for the Transition Period.

This post was written by Gary W. HowellAustin S. LillingGabriel S. MarinaroRichard D. MarshallAndrew R. SkowronskiRobert A. Stone of Katten Muchin Rosenman LLP.

Trump Directs Reexamination of the Fiduciary Rule Changes

DOL Fiduciary RulePresident Donald Trump issued a memorandum late last week directing the Department of Labor to reexamine the anticipated changes to the fiduciary rule applying to most retirement plans and individual retirement arrangements. The changes are set to go into effect on April 10, 2017; however, the memorandum directs the Department of Labor to conduct a full review to determine whether to rescind or revise the rule. Initial reports indicated that implementation of the rule was being delayed, but the memorandum ultimately issued by the President did not include a delay. The Department of Labor released a statement following the issuance of the memorandum indicating it would consider its legal options to delay implementation. It is not clear how quickly the Department of Labor may reach a conclusion on a delay of implementation.

The anticipated changes expand the definition of fiduciary under the Employee Retirement Income Security Act of 1974 (“ERISA”) and subject more financial advisors to fiduciary standards under ERISA. The new fiduciary rule is aimed at eliminating a potential conflict of interest by subjecting retirement plan advisors to fiduciary standards under ERISA if the advisor receives variable compensation tied to the investments the advisor recommends to the plan. Advisors could avoid harsh penalties under the rule by providing specific disclosure and agreeing to abide by a “best interest” standard of conduct. We are aware that some advisors were preparing to implement significant business model changes to comply with the anticipated rule changes.

What this means for employers –

  • Employers/benefits committees should evaluate whether they will require advisors to comply with the requirements of the rule despite the memorandum.

  • Employers/benefits committees should reach out to their advisors/consultants and confirm whether they intend to proceed with implementing changes to comply with the rule.

  • Employers/benefits committees should continue to monitor developments in this area from a fiduciary risk perspective.

Copyright Holland & Hart LLP 1995-2017.