The Unpredictable Fate of the DOL’s Fiduciary Rule

by Nelson Mullins Riley & Scarborough LLP

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.

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