For over two years, employers and financial institutions (specifically broker-dealers) that managed investments for retirement plans have been dealing with compliance and administration of the Department of Labor (DOL) Fiduciary Rule (the “Fiduciary Rule”), which primarily expanded the definition of “fiduciary” and created new prohibited transaction exemptions under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (IRC). A more in-depth review of the mechanics of the Fiduciary Rule can be found here and here. The Fiduciary Rule received much criticism, and there was general concern for compliance given the lack of regulations and guidance by the DOL. In response, the DOL provided temporary enforcement relief and stated that it would not pursue any claims against fiduciaries who were working in good faith to comply with the Fiduciary Rule until either regulations or modifications were published.
However, a recent decision in the U.S. Court of Appeals for the 5th Circuit overturned a lower district court and ordered the DOL Fiduciary Rule to be vacated in toto. In its opinion, the court held that the Fiduciary Rule was arbitrary, capricious and unlawful under the Administrative Procedure Act and conflicted with the definition of “fiduciary” under ERISA and the IRC. The 5th Circuit’s opinion vacating the Fiduciary Rule removes the Fiduciary Rule from the Code of Federal Regulations. Therefore, the 5th Circuit’s opinion has nationwide effect. As a result, the DOL has issued Field Assistance Bulletin 2018-02 stating that employers and retirement plan investment advisors can continue to rely on its original enforcement relief policy even though the Fiduciary Rule has been vacated. This guidance allows employers and financial institutions that have spent time, money, and energy over the past two years updating contracts and policies to comply with the Fiduciary Rule to continue operating as they were before the 5th Circuit decision.
Interestingly, the 5th Circuit has yet to issue a mandate effectuating its opinion vacating the Fiduciary Rule, despite the fact that the court intended to do so. Therefore, the Fiduciary Rule is technically still in effect, even though it is not being enforced.
Even though the Fiduciary Rule appears to be officially dead, the “best interest” standard for investment advice by financial institutions may be revived in a different application by the U.S. Securities and Exchange Commission (SEC). On April 18, 2018, the SEC issued proposed regulations, including Regulation Best Interest, which would require broker-dealers to act in a retail customer’s best interest in recommending securities transactions. This regulation is similar to the DOL’s Best Interest Contract exemption under the Fiduciary Rule. The SEC rule, though, has a different regulatory focus. While the Fiduciary Rule included retirement plan sponsors, the SEC rule will only extend to broker-dealers covered under U.S. securities laws.
While retirement plan sponsors are relieved from compliance with the Fiduciary Rule, investment advisors and broker-dealers should be aware that they may still face further regulation and scrutiny under this developing “best interest” standard regarding recommendations involving security transactions and related investments.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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