After multiple applicability delays and a federal court ruling, the Department of Labor’s (DOL) rule requiring financial professionals who offer retirement investment advice to abide by a fiduciary standard recently encountered possibly its most significant setback yet. This prompted the DOL to publish a temporary enforcement policy defining who is considered to be a “fiduciary.”
Among other things, the temporary policy states that the DOL will not pursue claims against financial professionals who offer investment advice provided they act in good faith to abide by impartiality standards.
The temporary policy was issued shortly after the May 7 deadline came and went for the Department of Justice (DOJ), acting on the DOL’s behalf, to appeal the Fifth Circuit Court of Appeals’ 2-1 decision vacating the DOL’s fiduciary rule in March. The rule stipulated that any financial professional who provided retirement investment advice to clients was acting as a fiduciary and, therefore, must act in the best interests of their clients regarding their retirement accounts.
AARP and the attorneys general from California, New York and Oregon petitioned the Fifth Circuit Court for permission to intervene as defendants, and for an en banc rehearing of the case. They argued that rule offers consumers protection for their retirement accounts from investment advice that may not serve their best interests. The states asserted the rule’s absence would cost them $52 million in tax revenue over the next 10 years because of reduced retirement account growth.
The court refused the states’ motion to intervene, prompting a 24-page filing by the AGs and AARP urging the panel to reconsider.
“The federal government is no longer pursuing this appeal,” the AGs wrote. “Given that posture, the exceptional importance of the issues, and the grave harm the states will suffer as a result of the panel opinion — billions of dollars in lost retirement income to their residents and tens of millions of dollars in lost tax revenue — the states respectfully request that the court reconsider its decision.”
Meanwhile, the court’s ruling has come as welcome news to many in the financial industry who long have opposed the DOL’s authority to create such a complex rule regulating the financial industry.
“Banks have a long history of helping customers save and prepare for retirement through IRAs, 401(k)s and other important products and services,” American Bankers Association President and CEO Rob Nichols said in a statement after the rule was finalized in 2016. “For months, we have presented the DOL with ways to revise the rule to preserve the value of IRAs and 401(k)s for bank customers. We recognize the efforts that the DOL has made to address our concerns that the rule could make it harder for customers to continue to use these important bank services.”
In a DOL Field Assistance Bulletin announcing the temporary policy, the agency indicated that its issuance is intended to address its concerns that financial institutions, advisers and retirement investors may have questions regarding the investment advice fiduciary definition and related exemptive relief following the court’s decision vacating the fiduciary rule.
Specifically, the policy is designed to provide guidance regarding the definition of a “fiduciary” under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. It addresses associated prohibited transaction exemptions, including the best interest contract (BIC) exemption, the class exemption for principal transactions in certain assets between investment advice fiduciaries and employee benefit plans and individual retirement accounts (IRAs), as well as certain amended prohibited transaction exemptions (PTEs).
“The department intends to provide appropriate guidance in the future,” the DOL stated. “At this point, however, the department 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. 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 DOL continued, “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.”
The DOL further stated that it will not pursue claims against financial professionals who offer investment advice, as long as they are making good faith efforts to comply with the impartial conduct standards for transactions that would have been exempted in the BIC exemption and PTEs for the period from June 9, 2017, until after the issuance of other applicable regulations, exemptions or administrative guidance.
“Of course, investment advice fiduciaries may also choose to rely upon other available exemptions to the extent applicable after the Fifth Circuit’s decision,” the DOL stated, “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.”
The DOL noted that 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, and will consider applications for additional relief.
The agency also noted that the temporary policy is “an expression of the department’s temporary enforcement policy, and it does not address the rights or obligations of other parties.”
The fiduciary rule, entitled “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule – Retirement Investment Advice” in the Federal Register, contains some provisions that became applicable June 9, 2017 – particularly those regarding the BIC exemption and PTEs, and the amendments to existing PTEs. The DOL delayed the applicability date of certain other provisions pertaining to PTEs to offer financial professionals a longer transition period, extended through July 1, 2019, as the agency considered possible alterations to the fiduciary rule and PTEs.