By Steven W. Rabitz, partner in the Employee Benefits and Executive Compensation Practice Group of Stroock&Stroock&Lavan LLP.  

DOL FABulously Pledges to “Mind the Gap” on Enforcement

On Friday, March 10, the Department of Labor (“DOL” or “Department”) issued Field Advice Bulletin 2017-01 (“FAB 2017-01”) to address concerns in the financial services and employee benefits community about the timing of the Department’s proposed 60-day delay of its “fiduciary” rule and its related exemptions. Without any delay, the rule is scheduled to become applicable (in part) beginning April 10, 2017.

As described in our Stroock Special Bulletin “It’s About Time! DOL Proposes Delay of Fiduciary Rule,”1 because of the March 2 timing of the proposal for delay and the March 17 scheduled end of the comment period, many market participants had cause for confusion. In this regard, FAB 2017-01 notes that:

Although the Department intends to issue a decision on the March 2 proposal in advance of the April 10 applicability date, financial services institutions have expressed concern about investor confusion and other marketplace disruption based on uncertainty about whether a final rule implementing any delay will be published before April 10, whether there may be a “gap” period during which the fiduciary duty rule becomes applicable before a delay is published after April 10, or whether the Department may decide either before or after April 10 not to issue a delay based on its evaluation of the public comments.

The FAB continues:

For example, the Department understands that many financial services firms and advisers are concerned that, if the Department decides not to issue a delay, there may not be sufficient time to provide retirement investors before the April 10 applicability date with disclosures or other documents intended to comply with the transition period relief in the BIC Exemption, the independent fiduciary exception in the rule, or other disclosure provisions of the rule or the {Prohibited Transaction Exemptions} PTEs.

The Department notes further:

Moreover, we understand that in order to comply with the BIC Exemption in the unlikely event of a “gap” period or if the Department decides not to issue a delay, some financial services firms and advisers are considering distributing communications to existing retirement investor clients and potential plan and IRA customers that, among other things, include language regarding an uncertain applicability date and conditional acknowledgements of fiduciary status, i.e., that the firm will be a fiduciary but only if the rule becomes applicable. Although such conditional communications would represent significant steps towards compliance with the BIC Exemption, they are very likely to create significant confusion among retirement investors.

The proposed delay came with the backdrop of a Memorandum by the President to the Secretary of Labor dated February 3, 2017,2 which directed the Department to examine whether the fiduciary duty rule may adversely affect the ability of Americans to gain access to retirement information and financial advice and to prepare an updated economic and legal analysis concerning the likely impact of the rule as part of that examination.

Temporary Enforcement Relief

The FAB notes that even though DOL “believes” it will issue a decision before the April 10 date, “the Department has determined that temporary enforcement relief is appropriate to protect against investor confusion and related marketplace disruptions attributable to uncertainty regarding the timing of the Department’s decision on whether to delay the applicability date of the fiduciary duty rule and related PTEs.” To this end, the Department notes:
A.  In the event the Department issues a final rule after April 10 implementing a delay in the applicability date of the fiduciary duty rule and related PTEs, the Department will not initiate an enforcement action because an adviser or financial institution did not satisfy conditions of the rule or the PTEs during the “gap” period in which the rule becomes applicable before a delay is implemented, including a failure to provide retirement investors with disclosures or other documents intended to comply with provisions of the rule or the related PTEs.

B.  In the event the Department decides not to issue a delay in the fiduciary duty rule and related PTEs, the Department will not initiate an enforcement action because an adviser or financial institution, as of the April 10 applicability date of the rule, failed to satisfy conditions of the rule or the PTEs, provided that the adviser or financial institution satisfies the applicable conditions of the rule or PTEs, including sending out required disclosures or other documents to retirement investors, within a reasonable period after the publication of a decision not to delay the April 10 applicability date. The Department will also treat the 30-day cure period under the BIC Exemption and the Principal Transactions Exemption as available to financial institutions that, as of the April 10 applicability date, did not provide to retirement investors the disclosures or other documents described in the relevant portions of the BIC Exemption and the Principal Transactions Exemption.

C.  To the extent that circumstances surrounding the decision on the proposed delay of the April 10 applicability date give rise to the need for other temporary relief, including prohibited transaction relief, the Department will consider taking such additional steps as necessary.

Open Items

The FAB should be welcome news to most market participants scrambling to make sense of the flurry of recent events. No doubt, the questions posed by the President’s Memorandum contemplate some significant response time, and as many have already begun to submit comments on the proposal, there are many who worry not only about having the work done in time to comply with what is definitively a market moving event, but also that changes that may be occasioned by the review of the President’s Memorandum may result in trying to hit moving targets. A new Labor Secretary has not been confirmed and there are many substantive comments that have been asked by the Department in the wake of the President’s Memorandum.

That all said, the FAB does not address whether the Department will in fact issue the delay. It does not even commit to a date so that market participants may know how far in advance of April 10 the decision will be made. Finally, the FAB does not technically preclude private plaintiffs’ actions during any “gap” period, although we would like to believe that no court would be sympathetic to any plaintiff opportunistically seeking to capitalize on factors that are merely the byproduct of both market participants’ and the Department’s good faith efforts to tackle these new events as best as possible in light of the circumstances. Moreover, we would hope that a court in that case would defer to the Department’s own enforcement timeout occasioned by the FAB.

Finally, we would also think that the Department, under a new administration, would have every reason to wish to make this as easy as possible for all involved and therefore would have no incentive for undue delay. The “belief” articulated by the Department about its ability to deliver a final answer should be read not as a guarantee, but, we would think, a strong desire to work to calm market participants whose products and services ultimately impact the plans they seek to protect. And, although we are aware of no Federal regulatory agency that has recently sought delay of an effective regulation pursuant to notice and comment only to decide not to go through with the delay, common sense would also indicate that the issues at stake and the questions posed by the President provide further reason for caution and measure.

Until then, as they say in the FAB and in the London Tube, we can only “mind the gap.” The release may be accessed at the following link: https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2017-01.