US Department of Labor

When:  Thursday, September 14, 2017    8:00 a.m. – 4:30 p.m.

Where:  New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Immigration
  • Global Executive Compensation
  • Artificial Intelligence
  • Internal Cyber Threats
  • Pay Equity
  • People Analytics in Hiring
  • Gig Economy
  • Wage and Hour
  • Paid and Unpaid Leave
  • Trade Secret Misappropriation
  • Ethics

We will start the day with two morning Plenary Sessions. The first session is kicked off with Philip A. Miscimarra, Chairman of the National Labor Relations Board (NLRB).

We are thrilled to welcome back speakers from the U.S. Chamber of Commerce.  Marc Freedman and Katie Mahoney will speak on the latest policy developments in Washington, D.C., that impact employers nationwide during the second plenary session.

Morning and afternoon breakout workshop sessions are being led by attorneys at Epstein Becker Green – including some contributors to this blog! Commissioner of the Equal Employment Opportunity Commission, Chai R. Feldblum, will be making remarks in the afternoon before attendees break into their afternoon workshops. We are also looking forward to hearing from our keynote speaker, Bret Baier, Chief Political Anchor of FOX News Channel and Anchor of Special Report with Bret Baier

View the full briefing agenda and workshop descriptions here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions.  Seating is limited.

Featured on Employment Law This Week: The Department of Labor’s Fiduciary Rule will go into effect on June 9th.

The controversial rule will require financial professionals who advise clients on retirement accounts to promote suitable products and act in the best interests of their clients. Secretary of Labor Alexander Acosta announced in a Wall Street Journal op-ed that there is “no principled legal basis” to delay the rule, although full enforcement won’t begin until 2018. The department intends to issue a Request for Information to seek public opinion on revisions and related exemptions.

Watch the segment below and read our recent post.

The Department of Labor (“DOL”) previously announced the applicability date for the DOL’s fiduciary rule (the “Fiduciary Rule”) will be June 9, 2017.  On May 22, 2017, in an opinion piece for the Wall Street Journal, Labor Secretary Alexander Acosta disclosed that, despite the Administration’s agenda of deregulation, the regulators are required to following existing law and must enforce the Fiduciary Rule.  On the same date, the DOL announced, in Field Assistance Bulletin 2017-02 (“FAB 2017-2”), that during a transition period from June 9, 2017 until January 1, 2018, the DOL will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the Fiduciary Rule and related exemptions or treat those fiduciaries as being in violation of the Fiduciary Rule and related exemptions.  The DOL explained that its general approach to implementation will emphasize assisting plans, plan fiduciaries, and financial institutions with compliance, rather than citing violations and imposing penalties on these parties.

Under FAB 2017-2, during the transition period, financial institutions and advisors are still required to comply with the “impartial conduct standards” in dealing with consumers, which require advisors to follow fiduciary norms and basic standards of fair dealing, which is described in more detail here.

The DOL further stated in FAB 2017-2 that it may still make additional changes to the Fiduciary Rule and the related exemptions. Any such changes would be based on the DOL’s on-going analysis of the issues raised in President Trump’s February 3, 2017 memorandum related to the effect of the Fiduciary Rule on the ability of Americans to gain access to retirement information and financial advice.  The DOL stated that it intends to issue a Request for Information (“RFI”) seeking additional public input on possible changes to the Fiduciary Rule and related exemptions.

In conjunction with FAB 2017-2, the DOL also issued a set of 15 FAQs that cover a variety of topics, including:  implementation of the Fiduciary Rule and related exemptions during the transition period from June 9, 2017 to January 1, 2018; possible future changes to the Fiduciary Rule; robo-advice providers; communications that are not subject to the Fiduciary Rule; and the seller’s carve-out.  A summary of certain of the more significant FAQs follows:

  • The phased implementation schedule applies to the Best Interest Contract Exemption (requiring customers be protected through contractual provisions that advisors will act in the best interests of the customer) and the Principal Transaction Exemption (imposing standards for advice regarding transactions between employer retirement plans and IRAs) during the transition period. Absent further action from the DOL, the transition period ends on January 1, 2018 and full compliance with all of the conditions of these exemptions will be required for financial institutions and advisers.
  • Parties subject to the Fiduciary Rule need not come into compliance until 11:59 PM local time on June 9, 2017 and will not be treated as fiduciaries under the Fiduciary Rule before then.
  • The RFI to be issued by the DOL will ask for comment on whether an additional delay in the January 1, 2018 applicability date would allow for more effective retirement investor assistance and help avoid excessive expense. The DOL notes that, by granting additional time, it may be possible for firms to create a compliance mechanism that is less costly and more effective than the interim measures that that they might otherwise use. By way of example, the DOL mentions that the possible use of “clean shares” in the mutual fund market to mitigate conflicts of interest is likely not going to be ready for implementation by January 1 2018. “Clean shares” sold by the broker would not include any form of distribution-related payment to the broker. Instead, the financial institution could set its own commission levels uniformly across the different mutual funds that advisers may recommend. As long as the compensation is reasonable, the DOL states that this approach would be an optimal means of reducing conflicts of interest with respect to mutual fund recommendations.
  • During the transition period, financial advisers subject to the BIC Exemption will satisfy its requirements by complying with the impartial conduct standards, even if the adviser recommends proprietary products or investments that generate commissions or other payments that vary with the investment recommended. The DOL, however, expects financial institutions to adopt the policies and procedures that they reasonably conclude are necessary to ensure that the advisers comply with the impartial conduct standards during the transition period.

Take-Aways

Financial advisers and institutions that provide investment advice must be in compliance with the Fiduciary Rule as of 11:59 PM on June 9, 2017. For the BIC Exemption, Principal Transaction Exemption and the prohibited transaction exemptions amended by the DOL in connection with the Fiduciary Rule, implementation will be phased, beginning on June 9, 2017 with full compliance on January 1, 2018, subject to further action by the DOL. During the transition period, financial institutions and advisors must work diligently and in good faith to comply with the impartial conduct standards of the Fiduciary Rule.

Advisers and financial institutions that provide fiduciary investment advice have an additional 60 days before having to comply with the final regulations defining who is a fiduciary under the Employee Retirement Income Security Act of 1974, as amended (the “Fiduciary Rule”).  On April 4, 2017, the Department of Labor (“DOL”) issued a final rule (the “Final Rule”), which delays the applicability date of the Fiduciary Rule until June 9, 2017 and also extends for 60 days the applicability dates of the Best Interest Contract Exemption (the “BIC Exemption”) and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRA (the “Principal Transaction Exemption” and collectively, the “Exemptions”).  Advisers and financial institutions relying on the Exemptions as of June 9 need only comply with the impartial conduct standards (as explained below), as the remaining conditions of the Exemptions will not become effective until January 1, 2018, if not withdrawn or revised.  The 60-day delay was proposed by the DOL on March 2, 2017, in response to a directive from President Trump to review the Fiduciary Rule (the “President’s Memorandum”), as explained in this article.

In the Final Rule, the DOL explains that, while its review of the Fiduciary Rule is likely to take more than 60 days, a delay in the application of the Fiduciary Rule and impartial conduct standards for an extended period would not be appropriate, given the DOL’s previous findings of ongoing injury to retirement investors. The impartial conduct standards require advisers and financial institutions to:

  • Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components – prudence and loyalty;
  • Charge no more than reasonable compensation; and
  • Make no misleading statements about investment transactions, compensation, and conflicts of interest.

For this reason, the DOL concludes that it can best protect the interests of retirement investors in receiving sound advice, provide greater certainty to the public and minimize the risk of unnecessary disruption by extending the applicability date to June 9, 2017 for the Fiduciary Rule and the impartial conduct standards in the Exemptions. Compliance with the other conditions of the Exemptions, such as requirements to make specific disclosures and representations of fiduciary compliance in written communications with investors is not required until January 1, 2018, by which time the DOL intends to complete the examination directed by the Presidential Memorandum.

The DOL cites the following advantage of the approach set forth in the Final Rule:

  • With the June 9,2017 applicability date for the impartial conduct standards, provides retirement investors with the protection of basic fiduciary norms and standards of fair dealing, while honoring the directive in the President’s Memorandum to review any potential undue burdens.
  • By delaying implementation of the other conditions of the Exemptions until January 1, 2018, eliminates or mitigates the risk of litigation in the IRA marketplace, which was one one of the chief concerns expressed by the financial services industry in connection with the Fiduciary Rule and the Exemptions.
  • Addresses concerns of the financial services industry about uncertainty over whether they need to immediately comply with all of the requirements of the Exemptions.

The DOL leaves open the possibility that it may further extend the January 1, 2018 applicability dates or to grant additional interim relief. The DOL states that the Final Rule does not foreclose the DOL from considering and making changes to the Fiduciary Rule and the Exemptions, based on new evidence or analyses developed pursuant to the President’s Memorandum.

Takeaways for Advisers and Financial Institutions

Effective June 9, 2017, advisers and financial institutions that provide fiduciary investment advice to retirement plan investors will have to comply with the Fiduciary Rule and the impartial conduct standards in the Exemptions. Since, in the view of the DOL, these provisions are generally the least controversial aspects of the DOL’s changes to the rules related to fiduciary investment advice, compliance with the June deadline most likely will not be difficult, especially in light of the 60-day delay.

However, advisers and financial institutions should also look past June 9 to the January 1, 2018 deadline and determine if they will delay or adjust their implementation schedule to meet that deadline. Those advisers and institutions that assume the Fiduciary Rule and Exemptions will be significantly revised or rescinded may want to consider significantly delaying the implementation process pending additional guidance from the DOL.  Alternatively, some of these advisers and institutions may want to consider whether they will incorporate all or portions of the Fiduciary Rule and Exemptions into their business practices, even if rescinded by the DOL.

Sharon L.  LippettThe Department of Labor (“DOL”) has issued a proposed rule (the “Proposed Rule”) that would delay for 60 days (the “60-Day Delay”) the April 10, 2017 applicability date of the DOL’s new fiduciary rule (the “Fiduciary Rule”). Given the potential change in the applicability date, financial services institutions will need to determine if they will continue their work toward implementation of the Fiduciary Rule or if they will delay their efforts.

The Proposed Rule provides for a 15-day comment period on the proposed 60-Day Delay and then a 45-day comment period regarding the examination to be conducted by the DOL, as described below.  The 60-Day Delay would become effective on the date that the final version of the Proposed Rule is published in the Federal Register.  Therefore, at this time, the date on which the 60-Day Delay would end is uncertain.

The 60-Day Delay is in response to President Trump’s February 3, 2017 directive to the DOL to examine whether the Fiduciary Rule “may adversely affect the ability of Americans to gain access to retirement information”. The President further directed the DOL to examine whether:

  • The Fiduciary Rule has harmed investors due to a reduction in the availability of retirement savings offerings or financial advice;
  • The anticipated April 10 applicability date has caused disruptions in the retirement services industry that may adversely affect investors or retirees; and
  • The Fiduciary Rule is likely to cause an increase in litigation and in the prices that investors must pay to gain access to retirement services.

Based on the outcome of the examination, the DOL may have to rescind or revise the Fiduciary Rule. If the DOL concludes that the Fiduciary Rule will harm investors in one of the ways described above or is inconsistent with the priority of the Administration to empower Americans to make their own financial decisions, to save for retirement and to withstand unexpected financial emergencies, the Administration has directed the DOL to either rescind or revise the Fiduciary Rule.

The DOL states that it is proposing the 60-Day Delay because the time remaining until April 10 may not be sufficient for the DOL to complete the examination required by the President’s directive. The DOL further explains that, if the Fiduciary Rule is rescinded or revised, the 60-Day Delay would  mitigate disruption for retirement investors and financial advisers, as they would have to face one, rather than two, major changes in the regulatory environment.

Considerations for Financial Institutions

The 60-Day Delay requires financial institutions to decide if they are going to continue to work toward implementation of the changes necessary to comply with the Fiduciary Rule or if they will delay their efforts, pending the outcome of the DOL’s examination. Either approach carries some risks.  Financial institutions that continue work related to implementation may have to revise some of the changes that they have implemented if the DOL revises the Fiduciary Rule.  Financial institutions that delay work on implementing the Fiduciary Rule may find themselves scrambling to meet the new applicability date once it is known.  With either approach, if the DOL rescinds the Fiduciary Rule, financial institutions will need to determine the extent to which they will maintain the changes that they have implemented or are in the process of implementing.

Sharon L. LippettBased on recent guidance from the Department of Labor (the “DOL”), many sponsors of employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA Plans”) should have additional comfort regarding the impact of the conflict of interest rule released by the DOL in April 2016 (the “Rule”) on their plans. Even though it is widely expected that the Trump administration will delay implementation of the Rule, in mid-January 2017, the DOL released its “Conflict of Interest FAQs (Part II – Rule)”, which addresses topics relevant to ERISA Plan sponsors.  As explained below, these FAQs indicate that the Rule, as currently designed, should not require a large number of significant changes in the administration of most ERISA Plans.

Covered Fiduciary Investment Advice Clarified

The FAQs indicate that most of the communications between ERISA Plan sponsors and their employees and plan participants will not be considered fiduciary investment advice covered by the Rule. Under the Rule, a “recommendation” is defined as a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient (for example, an ERISA Plan participant) engage in or refrain from taking a particular investment-related course of action.  An investment-related course of action includes recommendations on transfers, distributions and rollovers from a plan or IRA.  This distinction between recommendations and other types of communication is important because, if the person making the recommendation receives a fee or other compensation (direct or indirect), then the recommendation is fiduciary investment advice that is covered by the Rule.

For example, the DOL confirms that a recommendation to an ERISA Plan participant from the plan sponsor to increase plan contributions is not investment advice, as long as the plan sponsor does not receive a fee or other compensation for the recommendation. The DOL further states that, when employees of an ERISA Plan sponsor develop reports, recommendations and other deliverables for their employer, those employees are not providing fiduciary investment advice that is covered by the Rule.

Several of the FAQs explain why information frequently provided by ERISA Plan sponsors or their delegates to plan participants can be considered investment education, which is non-fiduciary advice and not covered by the Rule.  The DOL provides the following information:

  • Product Feature Information. Information on product features, investor rights and obligations, fee and expense information, risk and return characteristics or historical return provided by representatives in the call center for a 401(k) plan (a type of ERISA Plan) is not investment advice, as long as the call center representatives do not address the appropriateness of the product for a particular ERISA Plan participant. The DOL indicates that this type of information is considered “plan information”, which is a type of investment education.
  • Increasing Contributions. Information provided to an ERISA Plan participant by a call center representative about the benefits of increasing contributions to a 401(k) plan to maximize the plan match is investment education and not investment advice.
  • Certain Interactive Investment Tools. Interactive investment tools that help ERISA Plan participants estimate future retirement needs and assess the impact of different asset allocations on retirement income may be treated as investment education, if the tools satisfy the conditions outlined in the Rule. These conditions include a requirement that the materials be based on generally accepted investment theories that take into account the historic returns of different asset classes.
  • An Asset Allocation Model. An asset allocation model offered by an ERISA Plan that is limited to the plan’s 15 designated core investments is investment education, even if the plan also has a brokerage window that offers an additional 2000 investment options. However, the model must provide information required by the Rule on the plan’s other designated investment alternatives with similar risk and return characteristics. The required information includes a statement identifying where information on these investment alternatives may be obtained.

Next Steps for Plan Sponsors

Based on these FAQs, many ERISA Plan sponsors will be able to conclude that most of their current plan administration policies and procedures will not run afoul of the Rule. Even if the DOL under the Trump administration modifies the Rule, it is unlikely that such modifications will impose significant additional restrictions or obligations on ERISA Plan sponsors.

The new episode of Employment Law This Week offers a year-end roundup of the biggest employment, workforce, and management issues in 2016:

  • Impact of the Defend Trade Secrets Act
  • States Called to Ban Non-Compete Agreements
  • Paid Sick Leave Laws Expand
  • Transgender Employment Law
  • Uncertainty Over the DOL’s Overtime Rule and Salary Thresholds
  • NLRB Addresses Joint Employment
  • NLRB Rules on Union Organizing

Watch the episode below and read EBG’s Take 5 newsletter, “Top Five Employment, Labor & Workforce Management Issues of 2016.”

Advisers and financial institutions that are compensated based on a fixed percentage of the value of assets under management may want to reconsider that compensation methodology as it could require compliance with a prohibited transaction exemption, such as the Best Interests Contract Exemption (the “BIC Exemption”), which is a component of the fiduciary rule issued by the Department of Labor (the “DOL”) in April 2016 (the “Final Rule”).  While stating in the recently published “Conflict of Interest FAQs” (the “FAQs”) that the ongoing receipt of a fixed percentage of the value of a customer’s assets under management, where such values are determined by readily available independent sources, typically does not require compliance with a prohibited transaction exemption, the DOL cautions that such compensation may still raise conflict of interest concerns and require that the adviser comply with a prohibited transaction exemption.  The FAQs, like the Final Rule, are generally limited to advice concerning investments in employee benefit plans covered by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), individual retirement accounts (“IRAs”) and certain other plans.

By way of example, the DOL reiterates the view set forth in the Final Rule that there is a conflict of interest when an adviser recommends that a retirement investor roll retirement savings out of a plan into a fee-based account that will generate on-going fees for the adviser that he would not otherwise receive, even if the fees do not vary based on assets recommended or invested.  The DOL guidance also states that investment advice to switch from a commission-based account to an account that charges a fixed percentage of assets under management on an on-going basis could be a prohibited transaction.  For purposes of the BIC Exemption, a retirement investor is generally a participant in a plan subject to ERISA or the owner of an IRA.   Under  the BIC Exemption:

  • an “adviser” is an individual who:
    •  is a fiduciary of a plan or an IRA by providing investment advice for a fee and an employee, independent contractor, agent, or registered representative of a financial institution; and
    • satisfies applicable federal and state regulatory and licensing requirements with respect to the covered transaction.
  • a “financial institution” is an entity that employs the adviser or retains him in another capacity and that is:
    •  registered as an investment adviser under the Investment Advisers Act of 1940, as amended;
    •  a bank or similar financial institution;
    • an insurance company that satisfies certain criteria;
    • a broker or dealer registered under the Securities Exchange Act of 1934, as amended; or
    • an entity that the DOL, in a prohibited transaction exemption granted after April 6, 2016, determines is a financial institution.

Because the types of prohibited transactions described above are relatively discrete and the adviser’s provision of subsequent advice generally does not involve a prohibited transaction, the DOL states in the FAQs that advisers and financial institutions need only comply with the streamlined conditions in the BIC Exemption to cover the discrete advice that requires the exemption.  Per question 13 of the FAQs, the streamlined conditions applicable to level-fee fiduciaries include:

  • a requirement that the financial institution provide a written acknowledgement of its and its advisers’ fiduciary status to the retirement investor; and
  • satisfaction by the financial institution and its advisers of the impartial conduct standards with documentation showing the reasons why the advice was considered to be in the best interest of the retirement investor.  The impartial conduct standards require fiduciaries to act in the best interest of their clients, charge no more than reasonable compensation and make no misleading statements.

These streamlined conditions apply to “level-fee fiduciaries” who will receive only a “level fee” in connection with advisory or investment management services provided to a plan or an IRA.  As discussed in the FAQs, a level fee is a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment.

The DOL also states that, after an adviser recommends a rollover to a plan participant, the receipt of level-fee compensation does not violate ERISA’s prohibited transaction rules or require compliance with an exemption.

However, the DOL warns that certain abusive practices could result in a self-dealing prohibited transaction, for which no exemption is available.  The DOL supports this position by citing the October 2013 “Report on Conflicts of Interest” of the Financial Industry Regulatory Authority, which describes various circumstances in which advisers may make inappropriate recommendations intended to promote the advisers’ compensation at the expense of the investors.  For example, recommending a fee-based account to a retirement investor with low trading activity and little need for on-going monitoring or advice would be considered abusive conduct, as such advice would be designed to enhance the adviser’s compensation at the expenses of the investor.

In summary, to mitigate the risk of having to comply with certain provisions of the BIC Exemption or of engaging in a non-exempt self-dealing prohibited transaction, advisers and financial institutions should consider designing compensation programs that are not based on the value of plan assets under management.  Alternatively, if assets under management is key component of an adviser’s compensation plan, then the adviser and financial institution should be certain that they comply with the streamlined conditions of the BIC Exemption.

Our colleague Jeffrey H. Ruzal, Senior Counsel at Epstein Becker Green, has a post on the Wage & Hour Defense Blog that will be of interest to many of our readers in the financial services industry: “Decision Enjoining Federal Overtime Rule Changes Will Not Affect Proposed Increases Under New York State’s Overtime Laws.”

Following is an excerpt:

As we recently reported on our Wage & Hour Defense Blog, on November 22, 2016, a federal judge in the Eastern District of Texas issued a nationwide preliminary injunction enjoining the U.S. Department of Labor from implementing its new overtime exemption rule that would have more than doubled the current salary threshold for the executive, administrative, and professional exemptions and was scheduled to take effect on December 1, 2016. To the extent employers have not already increased exempt employees’ salaries or converted them to non-exempt positions, the injunction will, at the very least, appear to allow many employers to postpone those changes—but likely not in the case of employees who work in New York State.

On October 19, 2016, the New York State Department of Labor (“NYSDOL”) announced proposed amendments to the state’s minimum wage orders (“Proposed Amendments”) to increase the salary basis threshold for executive and administrative employees under the state’s wage and hour laws (New York does not impose a minimum salary threshold for exempt “professional” employees).  The current salary threshold for the administrative and executive exemptions under New York law is $675 per week ($35,100 annually) throughout the state.  The NYSDOL has proposed the following increases to New York’s salary threshold for the executive and administrative exemptions …

Read the full post here.

Employers Under the Microscope: Is Change on the Horizon?

When:  Tuesday, October 18, 2016    8:00 a.m. – 4:00 p.m.

Where:  New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Latest Developments from the NLRB
  • Attracting and Retaining a Diverse Workforce
  • ADA Website Compliance
  • Trade Secrets and Non-Competes
  • Managing and Administering Leave Policies
  • New Overtime Rules
  • Workplace Violence and Active-Shooter Situations
  • Recordings in the Workplace
  • Instilling Corporate Ethics

This year, we welcome Marc Freedman and Jim Plunkett from the U.S. Chamber of Commerce.  Marc and Jim will speak at the first plenary session on the latest developments in Washington, D.C., that impact employers nationwide.

We are also excited to have Dr. David Weil, Administrator of the U.S. Department of Labor’s Wage and Hour Division, serve as the guest speaker at the second plenary session. David will discuss the areas on which the Wage and Hour Division is focusing, including the new overtime rules.

In addition to workshop sessions led by attorneys at Epstein Becker Green – including some contributors to this blog! – we are also looking forward to hearing from our keynote speaker, Former New York City Police Commissioner William J. Bratton.

View the full briefing agenda here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions.  Seating is limited.