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.

A month into the Trump presidency, there have been a number of important statements from the executive branch on the regulation of executive compensation impacting the financial services industry. On February 3, 2017, President Trump issued a statement on the core principles for regulating the U.S. financial system (“Core Principles”). The statement requires the Treasury and all heads of member agencies of the Financial Stability Oversight Council to report within 120 days (by June 3, 2017) all existing laws, treaties, guidance, regulations, etc., that promote the Core Principles, and all such laws, etc., that inhibit the Core Principles. The Core Principles provide some insight into future regulation or repeal efforts by the Trump administration impacting executive compensation.

The Core Principles

The Core Principles include empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth. This statement appears to favor a more hands-off approach to individual investment decisions. The Core Principles also require regulations that foster economic growth through more rigorous regulatory impact analysis addressing “systemic risk and market failures, such as moral hazard and information asymmetry.” This would presumably require a more extensive review of the regulatory cost of compliance favoring deregulation. However, the focus on systemic risk arising from moral hazard and information asymmetry could impact executive compensation to the extent compensation practices are seen to further individual conduct that could lead to systemic risk. The Core Principles further require regulations to enable American companies to be competitive with foreign firms in domestic and foreign markets and to advance American interests in international financial regulatory negotiations and meetings. The other Core Principles include preventing taxpayer-funded bailouts; making regulations more efficient, effective, and appropriately tailored; and restoring public accountability within federal financial regulatory agencies and rationalizing the regulatory framework, arguably all in favor of deregulation or possibly regulation by stated principles rather than by strict construction.

Potential Impact on Executive Compensation

Based on review of the Core Principles and recent regulatory statements from the Trump administration, including the reduction of two regulations for every one regulation added, the re-proposed rules under Section 956 of Dodd-Frank are not likely to be approved in their final form given the scope and breadth of the regulations. Arguably, these rules would go against the Core Principles favoring deregulation and could inhibit American competitiveness with foreign firms in domestic and foreign markets as to the recruitment and retention of talent. Also, given that the re-proposed regulations were based on international executive compensation standards (particularly, regulatory guidance promulgated in Europe), adopting the re-proposed rules might not be viewed as advancing American interests in international financial regulatory negotiations.

Presumably in furtherance of these Core Principles, on February 6, 2017, the Acting Chairman of the SEC, Michael S. Piwowar, issued a statement requesting comments from the public within the next 45 days (by March 23, 2017) on the challenges that issuers are facing with compliance with the CEO pay ratio disclosure rule under Dodd-Frank. The CEO pay ratio disclosure rule requires public companies to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO. Gathering data to prepare the calculation has been challenging for large employers with a diverse domestic and global workforce, and the ratio itself has been criticized as not providing meaningful information. Based on comments, the SEC Acting Chairman stated that SEC staff will be directed to determine whether additional relief is appropriate. As to the review of other executive compensation provisions under Dodd-Frank that are currently in effect, such as say-on-pay and clawback requirements, they likely will be subject to the overall regulatory review, but their repeal might not be first on the agenda.

The final area of interest is President Trump’s pre-election criticisms of the treatment of carried interests, which generally are tax-favored partnership interests that, when sold, frequently generate profits that are paid to private equity fund managers as compensation. However, that compensation may be taxed at a long-term capital gains rate of 20 percent or less, rather than as ordinary income. Thus far under the new presidency, there have been no official statements in this area, but the discussion of carried interests could become part of the broader tax reform agenda expected from the Trump administration.

This year, financial services organizations can expect a new direction on executive compensation to take shape.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

By Gretchen Harders and Michelle Capezza

On May 8, 2013, the Employee Benefits Security Administration of the Department of Labor (the “DOL”) issued Technical Release 2013-02 (the “Release”) providing important guidance under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act”) with regard to the requirement that employers provide notices to their employees of the existence of the Health Insurance Marketplace, generally referred to previously as the Exchange. These employee notices must be provided to existing employees no later than October 1, 2013. This deadline is intended to correspond to the open enrollment period for the Marketplace commencing October 1, 2013 for coverage through the Marketplace beginning January 1, 2014. The Release includes temporary guidance and two model employee notices of the Marketplace upon which employers may rely. The Release further provides an updated model election notice for group health plans for purposes of the continuation coverage provisions under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) to include information of the health coverage options offered to individuals through the Marketplace for comparative purposes.

Employee Notice of the Marketplace. The Affordable Care Act amended the Fair Labor Standards Act (“FLSA”) to require employers to issue employees a notice of the health coverage options available under the Marketplace. The FLSA requirement was required to have been satisfied on or before March 1, 2013; however, given the regulatory delays in establishing and approving the Marketplace, the DOL extended the deadline. The guidance under this Release is temporary through the applicability date of October 1, 2013, but may be relied upon until future guidance and regulations are issued.

Which employers are required to comply with the notice requirements?

Whether or not required to “pay or play” under the Affordable Care Act, all employers subject to the FLSA must provide the employee notice. The FLSA generally applies to employers that employ one or more employees and are engaged in or produce goods for interstate commerce. The FLSA also covers, among other things, hospitals, schools, institutions of higher education and federal, state and local government agencies. To determine whether an employer is subject to the FLSA, the DOL provides an internet assistance tool at http://www.dol.gov/elaws/esa/flsa/scope/screen24.asp.

Which employees must receive the notice?

Employers must provide the employee notice to each employee whether or not the employee has part-time or full-time status. It does not matter whether the employee is enrolled or eligible to enroll in a group health plan. A separate notice is not required to dependents or other individuals who may become eligible for coverage under the plan, but are not employees.

What information must the notice provide?

The employee notice must contain the following information:

  • The existence of the Marketplace;
  • The contact information and description of services offered on the Marketplace;
  • A statement that the individual may be eligible for a premium tax credit if the employee purchases a qualified plan on the Marketplace; and
  • A statement that if the employee purchases a qualified plan on the Marketplace, the employee may lose the employer contribution to any health benefit plan offered by the employer and all or a portion of employer contributions may be excluded from federal income.

What are the DOL model notice(s)?

The DOL has provided two model employee notices available on its website, one for employers who do not offer a health plan and one for employers who offer a health plan to some or all employees. The Release provides that employers may use the model notice(s) provided the notice(s) include the information described above.

The model employee notice for employers who do not offer health coverage includes the information described above, as well as an explanation of the impact of the availability of employer health coverage on the employee’s eligibility for subsidies on the Marketplace. The model employee notice does not require the employer to provide specific contact information for the Marketplace in the state where the employee resides, but rather refers the employee to the http://www.healthcare.gov website for contact information for the Marketplace in the employee’s area. This model employee notice requires the employer to provide contact information for the employer, including the employer’s EIN. This is the information an employee will need to include in an application for a premium subsidy on a Marketplace.

The model employee notice for employers who do offer health coverage generally includes the same information as the model employee notice for employers who do not offer health coverage. This model employee notice does, however, require the employer to provide contact information to obtain more information about the employer’s health care coverage. The disclosure requires the employer to state whether the health care coverage is offered to all employees and, if not to all employees, a description of those employees eligible for health care coverage. It also requires the employer to state whether it offers dependent coverage and which dependents are eligible. Finally, the employer is required to disclose whether the health care coverage offered meets the minimum value standard and that the cost of coverage is intended to be affordable. The Department of Treasury and Internal Revenue Service recently issued proposed guidance to assist employees in assessing whether the coverage offered provides minimum value. See our prior blog post New Proposed guidance for Determining Whether Employer-Sponsored Health Plan Provides Minimum Value.

The model employee notice includes optional information that an employer may provide to the employee based on the Marketplace Employer Coverage Tool to better understand their coverage choices, including whether the employee is eligible in the next three months for employer coverage, whether the employer offers a health plan that meets the minimum value standard, the premium for employee-only coverage under the lowest-cost plan that meets the minimum value standard if the employee received the maximum discount for any tobacco cessation program, and what changes the employer will make for the next plan year. Although this information is optional, it may be to an employer’s benefit to demonstrate, where appropriate, that its plan is providing minimum value and is affordable.

When must the employee notice be provided and what are the acceptable delivery methods?

Current employees before October 1, 2013 must be provided with the notice no later than October 1, 2013. Beginning October 1, 2013, the employer must provide each new employee the notice at the time of hire, which will be considered timely provided in 2014 if provided within 14 days of the employee’s start date.

The employee notice must be provided free of charge in writing in a manner calculated to be understood by the average employee. The employee notice may be provided by first class mail or electronically if in accordance with the DOL’s electronic disclosure safe harbor.

COBRA Model Notice. Under COBRA, an individual who was covered by a group health plan the day before a qualifying event occurred may be eligible to elect COBRA continuation coverage. These qualified beneficiaries must be provided with an election notice within 14 day after the plan administrator receives notice of a qualifying event. The COBRA election notice is required to include specific information.

The DOL updated its model COBRA election notice to provide information about the Marketplace for the purposes of informing qualified beneficiaries that they may also be eligible for a premium tax credit to pay for coverage offered through the Marketplace. It also includes clarification on the limit on pre-existing conditions exclusions beginning in 2014. Such information is not specifically required under the Affordable Care Act and should have no impact on whether an employer is subject to the employer responsibility penalties if in fact a former employee obtains coverage on the Marketplace.

The Release provides that the use of the model COBRA election notice completed appropriately will be considered good faith compliance with the COBRA election requirements. The model COBRA election notice does not provide a specific deadline or compliance date. Employers may wish to review their existing COBRA election notices for changes relating to the Affordable Care Act.

Employers have long been waiting for specific guidance from the DOL on the employee notice requirements. Now that it is here, compliance should be addressed well before the October 1, 2013 deadline.

On Tuesday, December 18, Epstein Becker Green attorneys Gretchen Harders, Frank C. Morris, Jr., and Adam C. Solander offered a one-hour webinar titled “What Employers Need to Know Now!” as the second webinar in a series on the New ACA Implementation Regulations: Employer Impact.

The webinar included:

  • ACA implementation timeline
  • Structure of the law and basic concepts affecting financial services employers
  • Critical employer decision making and planning for 2014
  • Alternative plan design options available to financial services employers

The webinar recording and presentation slides for “What Employers Need to Know Now!” are now available. Contact Elizabeth Gannon at 202/861-1850 or egannon@ebglaw.com, to obtain a password to download the files.