DOL temporary enforcement policy may allow advisers to maintain practices following vacatur of fiduciary rule

While the final disposition of the fiduciary conflict of rules remains in flux, the Department of Labor (DOL) has issued a temporary enforcement policy, indicating that, pending the issuance of additional guidance, it will not pursue prohibited transactions claims against investment advice fiduciaries who are “working diligently and in good faith” to comply with the rules. The temporary enforcement policy will effectively allow financial advisers to maintain practices that have been implemented in anticipation of the rules being in effect.

Vacatur of fiduciary conflict of interest rules

The fiduciary conflict of interest rules became applicable on June 9, 2017. However, the DOL delayed the applicability date of certain provisions in the attendant Prohibited Transaction Exemptions to provide an extended transition period through July 1, 2019, to consider possible changes or modifications to the rules. The DOL also, in May 2017, adopted a temporary enforcement policy under which 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, or treat those fiduciaries as being in violation of the fiduciary rule and PTEs.
On the judicial front, the U.S. Chamber of Commerce, the Indexed Annuity Leadership Council, and the American Council of Life Insurers had brought suit challenging the fiduciary rule of ERISA Reg. 2510.3-21, the Best Interest Contract (BIC) Exemption, and the amendment to PTE 84-24, essentially alleging that the scope and terms of the rule structure exceeded DOL authority. In March 2018, the Fifth Circuit Court of Appeals agreed, uprooting the DOL’s incremental implementation strategy, and vacating the entire fiduciary conflict of interest rules structure (Chamber of Commerce of the United States of America, et al. v. The United States Department of Labor, CA-5, No. 17-10238, March 15, 2018).

Continued reliance on temporary enforcement policy

The DOL did not appeal the decision of the appellate panel to the full Fifth Circuit and while an appeal to the United States Supreme Court remains possible, it is unlikely. However, the Department has acknowledged that many financial institutions have created and implemented compliance structures designed to ensure satisfaction of the impartial conduct standards and that the “uncertainty about fiduciary obligations and the scope of the exemptive relief could disrupt existing investment advice arrangements to the detriment of retirement plans, retirement investors, and financial institutions.” The new enforcement policy is, thus, an attempt to minimize the foreseeable disruption by effectively allowing financial advisers to maintain practices that have been implemented in anticipation of the rules being in effect.
Specifically, under the new temporary enforcement policy, during the period from June 9, 2017 until after regulations or exemptions or other administrative guidance has been issued, the 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. Investment advice fiduciaries are advised that they may also rely upon other available exemptions to the extent applicable after the Fifth Circuit’s decision. However, the DOL 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 the enforcement policy.

Source: DOL Field Assistance Bulletin 2018-02, May 7, 2018.
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