The Unpredictable Fate of the DOL’s Fiduciary Rule

by Nelson Mullins Riley & Scarborough LLP
Contact

Nelson Mullins Riley & Scarborough LLP

It’s been a long year waiting for the full Fiduciary Rule to take effect, but will it ever truly achieve its intended impact on employer plans and their advisors? 

As we reported here, the DOL’s Fiduciary Rule was supposed to have officially taken effect on June 9, 2017.  If allowed to take full effect, the Fiduciary Rule would have changed the playing field for investment advisers, brokers and other providers (collectively, “service providers”) who serve individual retirement accounts (IRAs) and retirement plans, and for the IRAs and retirement plans themselves. The Fiduciary Rule would have (1) made more advice provided by service providers subject to ERISA fiduciary regulation, forcing most service providers to have to satisfy one of two exemptions (the “best interest contract” and the “principal transaction” exemptions) in order to avoid the increased liability risk created by the Fiduciary Rule, and (2) expanded fiduciary protections to IRAs and KEOGH plans. Many more service providers who work with IRAs and retirement plans would have qualified as “fiduciaries” and owed fiduciary duties to the IRA owner or retirement plan participants, including to act in their best interests, avoid conflicts, and avoid fee arrangements that might be considered prohibited transactions under ERISA or the Internal Revenue Code.

The Fiduciary Rule never took full effect, however. While the expanded definition of fiduciary advice became applicable on June 9, 2017 and thus more service providers became subject to the Fiduciary Rule, transition period rules were issued (later extended through July 1, 2019) to allow service providers to avoid some of the more burdensome new requirements of the Fiduciary Rule and take advantage of DOL and IRS nonenforcement policies and reliance on the two exemptions if they took certain good faith steps and adopted certain policies to avoid conflicts of interest, including certain prohibited fee arrangements. The DOL also indicated its intent to issue additional proposed changes to the Fiduciary Rule and related exemptions and to coordinate with other regulators, such as the SEC, FINRA and state insurance commissioners. All of these transition period rules, nonenforcement policies, and the original voluminous and complex nature of the rules and two exemptions themselves, resulted in a great deal of confusion among service providers and plan sponsors as to what actions they were supposed to be taking over the past year.

Meanwhile, the court battles began, culminating in split decisions in March 2018 by two U.S. Courts of Appeals as to the effectiveness of the Fiduciary Rule. First, the Tenth Circuit upheld the Fiduciary Rule. Two days later, the Fifth Circuit completely vacated the Fiduciary Rule, thus reviving the original narrower fiduciary definition. These split decisions created even more confusion among service providers and plan sponsors – do they comply with the new rule or go back to the old regulations?  Would the DOL continue to try to defend the Fiduciary Rule?

As if the waters had not been muddied enough, the Securities and Exchange Commission on April 18, 2018 issued two proposed rules which would clarify the fiduciary duties that an investment adviser owes its clients under the Investment Service providers Act of 1940.  Thus, the SEC appears to be pursuing its own strengthened regulation of investment service providers, separate and apart from the Fiduciary Rule.

And now, on May 7, 2018, the DOL has issued new guidance in the form of Field Assistance Bulletin 2018-02. In this latest guidance, the DOL neither restores nor gives up on its Fiduciary Rule, but appears to try to protect service providers during these uncertain times in two ways.  First, for those who have been operating in good faith under the existing transition relief, it allows them to continue to operate in the same manner by extending those same transition relief protections (both from DOL and IRS enforcement) until additional guidance is issued. Second, for those who had been seeking protection by complying with either of the two exemptions under the Fiduciary Rule (which would no longer be available due to the Fifth Circuit’s decision vacating the Fiduciary Rule), such service providers can (but are not required to) continue to rely on those exemptions so long as they work in good faith and diligently to comply with certain impartial conduct standards included within those exemptions. The guidance indicates that the DOL and IRS will not assert fiduciary violations or a prohibited transaction violation if the requirements for either of the two exemptions are met.

So where does this leave us and what can we expect next?  

  • For the most part, service providers can continue the compliance approach they have been taking since June 2017. For those service providers who have not adopted an approach, they should consult with legal counsel to figure out if they continue to qualify as a fiduciary now that the narrower fiduciary definition applies and, if so, whether they should comply with one of the two exemptions described above or find a different, existing exemption.
  • For plan sponsors, you are likely still in a wait-and-see approach, taking much of your cues from the service providers with whom you work.  If, however, you or your investment committee has modified the policies or procedures for your plan(s) based on the Fiduciary Rule, you may want to revisit these documents with your legal counsel to determine what, if any, changes are advisable.
  • Going forward, it is expected that the DOL will issue formal guidance.  However, it would not be surprising to see the DOL to wait to find out how the SEC’s proposed rules take shape.  Thus, it could be a while before the true fate of the fiduciary rules relating to investment advice is ultimately known.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Nelson Mullins Riley & Scarborough LLP | Attorney Advertising

Written by:

Nelson Mullins Riley & Scarborough LLP
Contact
more
less

Nelson Mullins Riley & Scarborough LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.