Despite being on the losing end of a legal challenge and amid a presidentially demanded review, the Department of Labor says it will extend temporary enforcement policies related to its fiduciary rule for retirement-focused investing advice.
The new guidance, in the form of a “Field Assistance Bulletin,” comes as the Securities and Exchange Commission is undergoing a public comment period for its own variation of the rule.
In April 2016, the Labor Department finalized a rule that creates a fiduciary duty for brokers and registered investment advisers who offer retirement advice. The rule expanded the “investment advice fiduciary” definition under the Employee Retirement Income Security Act. In general, fiduciaries are prohibited from receiving commissions, which are considered to present a conflict of interest. The new rule also created a Best Interest Contract Exemption for fixed index annuities and variable annuities. It allows fiduciaries to receive commissions only if they adhere to certain conditions, including signing a written contract with the consumer that contains enumerated provisions intended to protect their interests.
In February 2017, President Trump ended his second full week in office by ordering the Labor Department to review the rule and “determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” As part of this examination, the Department was directed to prepare an updated economic and legal analysis. If it concludes that the rule is “inconsistent” with administration priorities, it was instructed to rescind or revise the rule as appropriate.
The rule became applicable on June 9, 2017, but the Department delayed the applicability date of certain provisions in the prohibited transaction exemptions through July 1, 2019, to consider possible changes or modifications to the fiduciary rule and PTEs.
The rule’s fate is also in limbo while federal judges debate its constitutionality.
A coalition of business groups tried to kill the rule by combining their forces for a lawsuit, Chamber of Commerce of the USA, et al. v. U.S. Department of Labor, et al. In March 2017, the U.S. Court of Appeals for the Fifth Circuit vacated the rule. An en banc review of all the court’s judges has yet to be issued. A last-minute appeal by senior advocacy group AARP and three states for an en banc hearing of all the court's judges was rejected. Any day now, however, the U.S. Court of Appeals for the Fifth Circuit is expected to issue a mandate effectuating its opinion vacating the entire fiduciary rule, the BIC Exemption, the Principal Transactions Exemption, and related amendments to existing PTEs.
As detailed in the staff bulletin, the Labor Department, amid this uncertainty, had adopted a temporary enforcement policy stating that it would not pursue claims against fiduciaries who were working in good faith to comply with the fiduciary rule and applicable provisions of the PTEs.
While the Labor Department intends to provide appropriate guidance in the future, “at this point, however, 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 “could disrupt existing investment advice arrangements to the detriment of retirement plans, retirement investors, and financial institutions,” the bulletin adds. “Further, some 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.”
Based upon these concerns, the Department “has concluded that financial institutions should be permitted to continue to rely upon the temporary enforcement policy, pending the Department’s issuance of additional guidance.”
“The Department 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,” it adds.
For the period from June 9, 2017, until after regulations or exemptions or other administrative guidance has been issued, the Labor Department 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.”
“Of course, investment advice fiduciaries may also choose to rely upon other available exemptions to the extent applicable after the Fifth Circuit’s decision, but the Department will not treat an adviser’s failure to rely upon such other exemptions as resulting in a violation of the prohibited transaction rules if the adviser meets the terms of this enforcement policy,” it adds.
The Labor Department says it is evaluating the need for other temporary or permanent prohibited transaction relief for investment advice fiduciaries, including possible prospective and retroactive prohibited transaction relief.
The new Field Assistance Bulletin (FAB) makes it clear that the Labor Department is aware of the level of uncertainty and potential disruption that could result in the financial industry in the wake of the Fifth Circuit’s mandate to vacate the fiduciary rule and the related exemptions,” says Ropes & Gray tax & benefits partner Josh Lichtenstein.
“The FAB provides for important transition relief pending additional guidance, however it also raises new questions by referring to the desire of some financial institutions to continue to rely on the new compliance structures that they created to comply with the BIC exemption,” he says. “Financial institutions will need to wait for further guidance to determine how the Fifth Circuit’s expected actions will impact their businesses, and to determine what, if any, additional changes they must make to comply with their fiduciary duties under ERISA.”