Court ruling aside, for now DOL will rely on fiduciary rule to govern investment advice

Agency says advisers must make good-faith compliance efforts to rely on exemptions

May 7, 2018 @ 2:07 pm

By Mark Schoeff Jr.

Despite a court decision to vacate the Department of Labor's fiduciary rule, the DOL said it will continue to rely on the regulation for now to govern advice in retirement accounts.

The 5th Circuit Court of Appeals was expected to issue a mandate on Monday that would put into effect its March 15 split decision striking down the regulation, which requires brokers to act in the best interests of their clients when giving retirement advice.

In order to shed some light about what the court's decision means for financial firms, the DOL said in a field assistance bulletin that it would maintain the temporary enforcement policy it put in place last year when the regulation went partially into effect.

The agency delayed full implementation of the rule until July 2019, while it conducts a review mandated by President Donald J. Trump that could lead to major changes.

Under the temporary enforcement policy, financial advisers could use the best-interest-contract exemption and other prohibited transaction exemptions in the fiduciary rule as long as they made a good faith effort to adhere to the regulation's impartial conduct standards.

After a three-judge panel on the 5th Circuit struck down the rule, the Department of Justice, on behalf of the DOL, did not appeal it within the circuit by the April 30 deadline. Last week, the court denied an attempt by AARP and several states to step into the case as defendants.

But the DOL fiduciary rule hasn't died yet.

The DOL guidance "recognizes the reality, which is [that] there is significant confusion," said George Michael Gerstein, a partner at Stradley Ronon Stevens & Young.

The DOL said that it is issuing the temporary enforcement guidance because of uncertainty about the rule that could disrupt existing investment-advice arrangements. The agency also acknowledged that many firms have implemented compliance programs for the fiduciary rule.

"Based upon these concerns, the department has concluded that financial institutions should be permitted to continue to rely on the temporary enforcement policy, pending the department's issuance of additional guidance," the field bulletin states. "The department is convinced that this temporary enforcement relief is appropriate and in the interest of plans, plan fiduciaries, plan participants and beneficiaries, [individual retirement accounts] and IRA owners."

For now, it looks as if brokers can continue to rely on the best-interest contract as long as they follow the impartial conduct standards — acting in the best interests of their clients, charging no more than reasonable fees and not making misleading statements.

"The safest course of action on rollovers and other advice that was not fiduciary before the rule came out is to continue to comply with the transition relief for the BIC and other exemptions," said Joshua Lichtenstein, a partner at Ropes & Gray. "Don't make changes yet. Wait until we get more guidance from the Department of Labor."

The temporary enforcement policy gives firms latitude on how they shape their compensation structures as well as other policies and procedures.

"Firms should continue to re-evaluate what they're doing," Mr. Gerstein said. "The lynchpin of this guidance is flexibility and good faith."

The DOL could continue to work on modifying regulations surrounding advice to retirement accounts, even after the fiduciary rule is taken off the books.

"There's just not an answer," Mr. Lichtenstein said.

The DOJ has until mid-June to appeal the 5th Circuit decision to the Supreme Court, a move that most observers say is not likely. Meanwhile, the focus on investment-advice reform is shifting to the Securities and Exchange Commission, which released its own proposal package in April.

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