What Happening With The DOL’s Fiduciary Rule?

Jason C. Roberts, Esq., AIFA, is chief executive officer with Pension Resource Institute.

Immediately following the inauguration, White House Chief of Staff Reince Priebus issued a memorandum instructing all executive departments and agencies to place a moratorium on new and pending regulations. Regulations that have yet to be finalized will be withdrawn, and those published but not yet “effective” will be delayed for 60-days so they can be reviewed by the new administration.

While this move was widely anticipated, the Priebus Memo freezes not only executive-agency rule-making but also the issuance of any “guidance document[s]” by an executive agency. In October of last year, the Department of Labor vowed to issue three rounds of FAQs clarifying various aspects of the Fiduciary Rule and related prohibited transaction exemptions (i.e., the Best Interest Contract Exemption or BICE).

The first FAQ, which related primarily to the exemptions, was published on October 27, 2016; and the second FAQ (along with an unexpected consumer-focused version of FAQs) was published on January 13, 2017 and dealt primarily with the definition of fiduciary and exceptions not considered “investment advice” under the new rule. As a result of the directive in the Priebus memo, it is unclear as to whether or not the third round of FAQs will be published anytime soon or at all.

It is also uncertain as to what impact, if any, the Priebus memo will have on the Fiduciary Rule itself. On the one hand, the memo instructs agencies, “as permitted by applicable law” to “temporarily postpone their effective date for 60 days” “regulations that have been published in the [Federal Register] but have not taken effect.”

The Fiduciary Rule became effective in June of 2016, but it will not take effect or become “applicable” until April 10, 2017. Consequently, supporters of the rule argue that the memo should have no impact other than prohibiting the DOL from issuing any additional “guidance documents” that would operate to clarify the rule (i.e., the Third Round of FAQs).

Our sources, however, suggest that there will be a separate document issued by the new administration specifically directing the DOL to review the Fiduciary Rule along with instruction from the Director or Acting Director of the Office of Management and Budget (OMB) to identify the objectives that should guide the regulatory review process. From there, it is anticipated that the DOL will exercise its “power to delay the rule in light of the ongoing litigation” for six months.

It is further anticipated that the DOL will separately propose to delay the fiduciary rule for up to one year, subject to notice and a 14-day comment period. This delay would run concurrently with the above-referenced six-month delay. This proposal could come as early as the week of January 23rd.

Because the Fiduciary Rule is already effective, absent Congressional action, the Administrative Procedures Act (APA) prohibits the DOL from delaying the rule indefinitely, and it would need to separately propose to withdraw the rule subject to notice and comment on the withdrawal and on possible replacement rules.

During this time of uncertainty, it is important to recognize that the fiduciary standard of care was never proposed to be changed nor were the prohibited transaction rules under ERISA or the Tax Code that apply to fiduciaries by way of exercising discretion over plan or IRA assets of by providing “investment advice.” The Fiduciary Rule merely redefines the term investment advice in a way that subjects more activities (and in turn more advisors) to a fiduciary standard of care.

The prohibited transaction rules forbid ERISA and IRA fiduciaries from, among other things, providing investment advice (or exercising discretion) in a way that affects their compensation (or that of an affiliate) or results in the receipt of third party payments (e.g., commissions, 12b-1 and trail fees, solicitor payments, etc.).

While it is true that only the Department of Treasury has the authority to enforce the prohibited transactions contained in the Tax Code, ERISA provides broad civil remedies for plans and participants. Given the focus and debate surrounding the Fiduciary Rule, we anticipate that the plaintiffs’ bar and other regulators (i.e., SEC and FINRA) will be paying particular attention to conflicts of interest in IRAs generally.

For these reasons and because the fiduciary rule still has an applicability date of April 10th we recommend proceeding with efforts to identify and remediate conflicts in ERISA-covered and IRA accounts.

Time is of the essence in the event that the rule ends up not being delayed, and we believe it is likely that any replacement rule will look substantially similar to the Fiduciary Rule – albeit with perhaps less onerous disclosure and reporting requirements and/or a lessening of class action exposure.

Putting in place procedural safeguards, such as those required under the Fiduciary Regulation, will significantly mitigate legal and regulatory risks by setting the bar above-and-beyond what the SEC or FINRA require in terms of managing conflicts of interest. Indeed, we have already heard from a number of PRI member firms that they intend to train and, in some cases, supervise to an ERISA/IRA fiduciary standard of care irrespective of when, and in what form, the Fiduciary Rule becomes applicable. Some have even indicated their desire to leverage their compliance with the best interest standard as a competitive advantage with clients and to enhance advisor recruiting. To be clear, we do not recommend firms contract for fiduciary status where it would not otherwise be required under the current laws and regulations.


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