DOL Announces Fiduciary Rule Enforcement Policy
May 8, 2018 by Melanie Waddell
The Labor Department announced Monday that financial institutions should be allowed to continue to rely upon the temporary enforcement policy set out in its fiduciary rule, pending the department’s issuance of additional guidance, which it plans to issue “in the future.”
The Department states in its Field Assistance Bulletin No. 2018-02 that it is “convinced that this temporary enforcement relief is appropriate and in the interest of plans, plan fiduciaries, plan participants and beneficiaries, IRAs and IRA owners.”
Labor’s Employee Benefits Security Administration notes that on Monday the U.S. Court of Appeals for the 5th Circuit is expected to issue a mandate “effectuating its opinion vacating the entire fiduciary rule, the [best-interest contract] exemption, the principal transactions exemption, and related amendments to existing PTEs.”
Labor had until April 30 to appeal the 5th Circuit’s decision and did not do so.
For the period from June 9, 2017 — when the rule’s Impartial Conduct Standards took hold — until after regulations or exemptions or other administrative guidance has been issued, Labor states that it “will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted in the BIC exemption and principal transactions exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules.”
While Labor intends to provide “appropriate guidance in the future,” it is aware that some financial institutions “may be uncertain as to the breadth of the prohibited transaction exemptions that remain available for investment advice fiduciaries following the court’s order.”
The uncertainty about fiduciary obligations and the scope of exemptive relief, Labor states, “could disrupt existing investment advice arrangements to the detriment of retirement plans, retirement investors and financial institutions.”
Labor further states that financial institutions “have devoted significant resources to comply with the BIC exemption and the principal transactions exemption and may prefer to continue to rely upon the new compliance structures.”
Barbara Roper, director of investor protection for the Consumer Federation of America, told ThinkAdvisor Monday after reviewing Labor’s bulletin that “this is just further evidence that DOL is willing to bend over backwards to accommodate the firms, and throwing retirement savers under the bus in the process.”
Fred Reish, partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group in Los Angeles, explained to ThinkAdvisor that “DOL is saying that it will not enforce prohibited transactions if fiduciary advisors comply with the transition requirements of the exemptions.”
More specifically, Reish added, “if a fiduciary advisor is working diligently and in good faith to satisfy the conditions of the transition exemptions, which are the Impartial Conduct Standards, the DOL and the IRS will not enforce the prohibited transaction rules against them.”
Steve Saxon, an attorney specializing in the Employee Retirement Income Security Act with the Groom Law Group in Washington, added that “overall, [the bulletin] is good and expands the options financial institutions have in dealing with this change in circumstances. Shortly, we would hope that the department would provide short-term exemptive relief.”
Reish sees Labor issuing ”one or more proposed and temporary exemptions, to give more formal relief.”
Labor, he adds, will likely not issue “final exemptions until they see” the Securities and Exchange Commission’s final standard of conduct rules. “Then [Labor] will incorporate compliance with those rules into the exemptions.”
The 5th Circuit had yet to issue its mandate to vacate Labor’s rule by press time Monday afternoon.
Saxon added that while Labor’s fiduciary rule is all but dead, “the fiduciary status of service providers offering advice is not. If fiduciary advice given results in the payment of compensation there is a prohibited transaction. But with the vacating of the fiduciary rule, there is no longer an exemption–hence the need for relief. The non- enforcement policy should be followed by an exemption taking the place of the BIC exemption.”
George Michael Gerstein, an ERISA attorney with Stradley Ronon in Washington, told ThinkAdvisor on Monday that “financial services firms should comb through their compliance approach to the DOL rule over the past couple of years and identify and address specific compliance requirements that may no longer be technically required.”
The focus, Gerstein said, “is on good faith compliance with the impartial conduct standards, predicated on flexibility. Flexibility is key here. It is imperative to avoid foot faults, which can be used against them by state regulators, as happened against Scottrade.”
