The U.S. Department of Labor (DOL) has announced there will be no further delay in the implementation of its fiduciary rule (the “Fiduciary Rule”) and its related prohibited transaction exemptions. After being delayed for 60 days from the original effective date of April 10, 2017, the Fiduciary Rule will become effective on June 9, 2017.

As discussed in the DOL’s recently released Fiduciary Rule Conflict of Interest FAQs (Transition Period) (the “FAQs”), on June 9, 2017, providers of investment advice to retirement clients will become fiduciaries and the “impartial conduct standards” will become a requirement of the prohibited transaction exemptions. In what the DOL calls a “phased implementation approach” with a “transitory period,” certain other conditions of the prohibited transaction exemptions are delayed to January 1, 2018, while the DOL conducts its ongoing examination of the Fiduciary Rule. The DOL announced that during the transition period between June 9, 2017, and January 1, 2018, it will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the Fiduciary Rule and its exemptions.

Meanwhile, the Securities Exchange Commission (SEC) issued on June 1, 2017, a request for public comment on the standards of conduct applicable to investment advisers and broker-dealers when they provide investment advice to retail investors. Chairman Jay Clayton wrote that the call for public comment was prompted by “[s]ignificant developments in the marketplace since the Commission last solicited information from the public in 2013 ... including the issuance and pending applicability of the Department of Labor’s Fiduciary Rule,” and outlined 17 categories for commenters to address. In issuing its call, the SEC potentially unleashes more uncertainty into an already confused regulatory environment for providers of investment advice created by the DOL’s approach to implementation of its Fiduciary Rule.

Phased Implementation Approach to Best Interest Contract Exemption and Principal Transactions Exemption

Beginning on June 9, 2017, the Fiduciary Rule’s amended definition of investment advice will become applicable, and the new Best Interest Contract Exemption (BICE) and Principal Transactions Exemption (PTE) will become available to fiduciary advisers. For a transition period lasting until January 1, 2018, fewer conditions will apply to financial institutions and advisers that seek to rely on the BICE and the PTE to engage in transactions that would otherwise be prohibited under ERISA and the Internal Revenue Code.

During the transition period, financial institutions and advisers must comply with the “impartial conduct standards” when relying on the BICE and PTE. Absent further action by the DOL, intermediaries and advisers utilizing the BICE or PTE must be in full compliance with all of the exemptions’ conditions on January 1, 2018. These conditions require, among other things, that intermediaries and advisers execute a contract with IRA investors with certain enforceable promises, make specified disclosures, implement policies and procedures to protect retirement investors from advice that is not in their best interest, and allow IRA investors to bring class action claims in court.

The applicability of the Fiduciary Rule and related exemptions, and the “impartial conduct standards,” are outlined below.

DOL Request for Information and SEC Call for Public Comments

In the FAQs, the DOL states its intention to issue a request for information (RFI) in the near future for additional public input on possible new exemptions or regulatory changes. The DOL notes, for example, that responses in the mutual fund marketplace to the Fiduciary Rule, such as the use of “clean shares” by fund intermediaries intended to mitigate conflicts of interest, may take more time to implement than the DOL anticipated when setting the January 1, 2018, applicability date for full compliance with all conditions of the exemptions. The RFI will specifically ask for comment on whether additional delay beyond January 1, 2018, would allow for more effective retirement investor assistance, or help avoid needless or excessive expense as funds and intermediaries build compliance structures that may ultimately be unnecessary or mismatched with the DOL’s final rule.

SEC Chairman Clayton outlined 17 categories of questions for commenters to address in connection with the SEC’s request for comment on standards of conduct for registered investment advisers and broker dealers, which include:

• Whether the SEC should move ahead with a disclosure- or standards of conduct-based approach;

• Whether potential conflicts of interest in the provision of investment advice to retail investors have been appropriately identified and addressed;

• Whether there are benefits or costs to having different standards of conduct for accounts subject to the Fiduciary Rule and those that are not;

• How any SEC action should be implemented and how it should comport with the Fiduciary Rule; and

• How to define “retail investor” and “investment advice.”

A web form and email box are now available for members of the public to submit their comments and make their views publicly known.

The Road Ahead—Clean Shares and T Shares

The extent of changes to the Fiduciary Rule and its timing are still subject to some uncertainty. However, it appears the mutual fund industry will likely move forward with share class changes to assist fiduciaries with compliance with the existing Rule, including clean shares and T (transaction) Shares, as discussed below.

The SEC released a no-action letter on January 11, 2017, in which it permitted share class arrangements (dubbed “clean shares”) under which brokers, rather than mutual funds, would set the commission rates on fund shares for their customers so long as certain conditions are met. Clean shares are to be sold without Rule 12b-1 fees, sales loads and other distribution-related fees. This class structure assists brokers in complying with the Fiduciary Rule for their retirement accounts, because customers pay them for services, rather than third parties like mutual funds.

Transaction shares, or “T shares,” are lower commission share classes introduced by the mutual fund industry as one possible response to the Fiduciary Rule. T shares generally have a sales load that is lower than other existing share classes and, with some exceptions, charge Rule 12b-1 and servicing fees, but permit each intermediary to determine the sales load that will be charged on fund shares as long as the charges are the same for all customers.

Practice Points and Tips

Given that the Fiduciary Rule will be implemented on June 9, 2017, with full compliance expected by January 1, 2018, it is expected that mutual fund sponsors will move ahead with plans to introduce clean shares and T shares in order to assist fund intermediaries in complying with the Fiduciary Rule. Mutual fund boards of directors and fund service providers should be prepared for a year of potential share class changes and related filings.

Fund boards of directors, service providers and intermediaries should not expect action in the near future by the SEC with respect to a uniform standard of conduct, as this is not the first time the SEC has called for comments on this issue. Dodd-Frank empowered the SEC to establish a uniform standard of conduct and, in response, the SEC opened a public comment process in 2013. The SEC’s Division of Investment Management also stated its intention to issue a notice of proposed rulemaking by April, 2017. No action was taken after the SEC’s last call for public comment and no notice was issued.