As anticipated, the Department of Labor has extended until further notice its temporary enforcement policy relating to its rule defining who is a fiduciary and the associated prohibited transaction exemptions.
In Field Assistance Bulletin 2018-02, the DOL advised that based on questions regarding fiduciary obligations in the aftermath of the March 15 ruling by the U.S. Court of Appeals for the 5th Circuit, it has concluded that financial institutions should be permitted to continue relying on its temporary enforcement policy, pending the issuance of additional guidance. Specifically, that neither the DOL nor IRS will pursue prohibited transaction actions 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 Best Interest Contract (BIC) and Principal Transactions Exemptions, nor will they treat such fiduciaries as violating the applicable prohibited transaction rules.
While the 5th Circuit’s decision has the effect of eliminating the requirements of the fiduciary rule, it also does away with the BIC exemption, which provided a means for advisors to provide advice as an ERISA fiduciary and still receive commissions, also known as “conflicted” advice, in that it varied based on the advisor’s recommendation.
“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,” the DOL states. “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.”
The FAB further notes that the 5th Circuit is expected to issue a mandate effectuating its opinion vacating the entire fiduciary rule, the BIC Exemption, the Principal Transactions Exemption and related amendments to existing PTEs.
The DOL’s temporary enforcement policy was first announced in FAB 2017-01 and subsequently extended in FAB 2017-02 and again in November 2017 as part of the 18-month extension in the transition period for the PTE amendments.
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The new FAB 2018-02 further advises that investment advice fiduciaries may rely on other available exemptions to the extent applicable after the 5th Circuit’s decision, such that 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 this enforcement policy.
“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 agency states.
In the meantime, DOL notes 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.
On April 26, just prior to the April 30 deadline for the DOL to appeal the 5th Circuit’s decision, AARP and three states – California, New York and Oregon – separately attempted to intervene, but those motions were dismissed May 2.
While the DOL did not seek a review of the 5th Circuit ruling by the deadline, the agency has until June 13 to appeal to the U.S. Supreme Court – although the issuance of this guidance suggests that’s unlikely.