Labor Secretary Alexander Acosta told House lawmakers Wednesday that the best-interest standard under the Labor Department’s fiduciary rule is “in effect,” and that as long as firms are “proceeding to implement” those standards, Labor is in a “compliance assistance” mode. However, if firms are committing “willful violations,” Labor will use its enforcement authority.
Rep. Robert Scott, D-Va., ranking member on the House Education and Workforce Committee, told Acosta during his Wednesday testimony before the committee that while the best-interest standard, also known as the Impartial Conduct Standards, are “now in effect,” as of June 9, “other parts of the rule are not.”
He asked Acosta: “What would happen when a retiree has best interest violated — is essentially ripped off? What are the remedies?”
Acosta replied: “If companies are not proceeding in good faith [with the best-interest standard] we still have enforcement authority. So if there are willful violations, we do have enforcement authority.”
Scott probed further: “Does the individual have any individual remedy?”
“The enforcement authority within ERISA is a federal enforcement authority, not an individual enforcement authority,” Acosta responded.
Fred Reish, partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group in Los Angeles, told ThinkAdvisor on Wednesday that Labor has enforcement authority “over fiduciary compliance for recommendations to plans and participants, but not to IRAs.”
Acosta’s testimony means “that recommendations to plans and participants fall into three categories when viewed from an enforcement perspective,” Reish said.
First, “while the nonenforcement policy is in effect, if the financial institution, e.g. broker-dealer or RIA firm, is making diligent and good-faith efforts to comply, the DOL will not institute proceedings for minor breaches.”
However, the second area is “if the DOL determines that the financial institution has not made diligent and good-faith efforts to comply, it will enforce violations of the fiduciary rule and the exemptions.”
The third area, Reish continued, “is the most difficult. It is the grey area where a financial institution has taken some steps, but perhaps not enough. In that case the DOL will review the efforts and determine whether they were diligent and in good faith.”
To perform that evaluation, the DOL “will probably look at the financial institution’s policies and procedures, supervision and training of employees and advisors,” Reish said. “If there is a material breach, though, that could, in and of itself, raise the issue of whether the efforts were adequate. There are a number of high-risk areas in this regard. For example, one such area is the recommendation to participants to take plan distributions and roll them over to IRAs.”
Added Reish: “I am concerned that the distribution and roll over practices of some financial institutions fall below the diligent and good-faith standard.”
Steve Hall, legal director and securities specialist for Better Markets, a consumer advocacy group, added that Labor “should be fully enforcing whatever is on the books, including the core rule provisions and the impartial conduct standards. And actually, they’re not even doing that, since they remain in compliance assistance mode.”
Where the Rule Stands Now
Rep. Phil Roe, R-Tenn., asked Acosta to comment on where the fiduciary rulemaking “is right now.”
Acosta responded: “The best-interest standard went into effect in June; the other part of that rule, which had to do with many of the remedies, the remedy options that are available, are the subject of a notice of proposed rulemaking that is pending at OMB. The title of that notice would make clear that there is an 18-month extension if that notice goes forward.”
Labor filed with the Office of Management and Budget the official 18-month delay of its fiduciary rule on Nov. 2. Acosta told a federal court on Nov. 6 that he anticipated OMB approval within three weeks of the filing. Industry officials see a quicker two-week turnaround.
Rep. Drew Ferguson, R-Ga., asked Acosta if Labor is now “reviewing and considering next steps” regarding the fiduciary rule since the request for information soliciting feedback on the rule expired in August.
“Yes. That is correct,” Acosta responded.
“Have there been next steps with the SEC regarding the fiduciary regulation?” Ferguson probed further.
Acosta referred to a Wall Street Journal op-ed that was published in May, in which he said he “very publicly suggested that the SEC should be a partner in this effort. The SEC declined to be a full partner in the past administration. I do believe they have an important role to play.”
The SEC, he continued in his Wednesday response, is an “important part of the regulatory structure of this industry, and should be a partner. And, therefore, yes, we have had discussions.”
— Check out DOL Rule Delay Will Likely Be Final in 3 Weeks: Acosta on ThinkAdvisor.