‘Full Speed Ahead’ With DOL Fiduciary Compliance Despite Delay

Based on the proposed 18-month extension, Hauptman continued, “we have serious concerns.” Labor “appears to be ignoring both its previous analysis and findings about how critical an enforcement mechanism is to ensure compliance, as well as recent evidence showing that many firms in fact are not taking seriously their compliance obligations without an enforcement mechanism. This evidence only confirms the DOL’s previous findings.”

Hauptman continued that “it’s important to note that the DOL’s and IRS’s non-enforcement policies are based on firms moving in good faith toward compliance. In many cases, we’re seeing that they aren’t.”

While Labor claims to be “delaying the rule, … in reality [the department] appears to be effectively repealing the rule’s critical components, including the rule’s enforcement mechanism,” he added. “By stripping investors of an enforcement mechanism, and by stating it won’t enforce the rule, the DOL will have rendered the rule toothless and investors will continue to be harmed by conflicted advice.”

How is Labor effectively stripping away the rule’s enforcement mechanism with the 18-month delay? ERISA attorney Reish with Drinker Biddle provided this explanation. “For fiduciary advice to plans and participants,” the Employee Retirement Income Security Act “provides a remedial system that includes claims for breach of fiduciary duty. That was true before the recent changes and will continue to be true. Only Congress can amend ERISA,” Reish explained.

However, for advice to IRAs, “there is not a fiduciary standard of care or duty of loyalty. The DOL dealt with that [in its fiduciary rule] by creating exemptions for conflicted advice to IRAs that required, among other things, the advisor adhere to the Impartial Conduct Standards, including the best-interest standard of care,” or BICE.

The enforcement mechanism under BICE, “was that the financial institutions and advisors had to enter into a contract with the retirement investor agreeing to be bound by the best interest standard. In effect, that created a breach of contract remedy for breaches of the best interest standard. That standard is, in its essence, a combination of the prudent man rule and the duty of loyalty,” Reish continued.

However, when the exemptions were delayed from June 9 until Jan. 1, “the ‘transition’ BICE did not include a contract requirement,” he said. As a result, “many people felt that there weren’t any remedies for IRA investors for breaches of the best-interest standard. The impending delay to July 1, 2019, extends the period in which there isn’t a clear remedy for imprudent and disloyal advice to IRA owners.”

Those who say they are “fearful that the extension is just a reason to ultimately get rid of the contract requirement are saying that the delay effectively gets rid of that enforcement mechanism, that is, it will be the basis for getting rid of the contract requirement. They could be right, but it’s too early to tell,” Reish added.

Court Happenings

While there have been a series of legislative proposals that would kill Labor’s fiduciary rule, Sweeney opined that none will become law, as the Democrats in both the House and Senate have vowed to filibuster them.

Action continues in the courts despite the fiduciary rule delay landing at OMB. The National Association for Fixed Annuities asked the U.S. Court of Appeals for the D.C. Circuit on Monday to delay the Dec. 8 oral arguments in NAFA’s appeal over a federal court’s denial of its bid to block the fiduciary rule.

Pam Heinrich, NAFA’s general counsel and director of government affairs, said that NAFA asked for a delay in the Dec. 8 oral arguments because, “We feel that in light of the uncertainly surrounding the proposed delay rule and the uncertainty regarding any outcome in the litigation in the other circuits, and for judicial economy we could wait till we have a little more clarity on the issues affecting NAFA’s appeal.”

NAFA did not ask the court to cancel the hearing completely. Heinrich explained that NAFA and others are still awaiting a decision in the 5th U.S. Circuit Court of Appeals case against Labor’s fiduciary rule. That case was brought by nine plaintiffs, which include the U.S. Chamber of Commerce, SIFMA and the Financial Services Institute.

“Court watchers had anticipated a decision already” given that the oral arguments in that case took place on July 31, Heinrich said. “A decision in that circuit could very well effect the issues before the D.C. Circuit.”

The judge presiding over the Thrivent case in Minnesota granted in early November a preliminary injunction in favor of Thrivent, which has been fighting to halt the anti-arbitration clause set out in the rule’s best-interest contract exemption.

The injunction ensures that, at least until the litigation is concluded, Thrivent won’t face enforcement actions or excise taxes for noncompliance with the BIC. The firm has argued that the anti-arbitration rule would harm its business.

“The Court finds that Thrivent has sufficiently demonstrated the threat of irreparable harm, both now and in the future,” Judge Susan Richard Nelson wrote. “While monetary loss alone does not warrant injunctive relief, the current state of regulatory limbo threatens Thrivent with harm that cannot be remedied monetarily.”

Nelson explained: “In order to comply with the anti-arbitration condition’s applicability date, Thrivent must take actions now that involve changes to its business model. In addition to the expenditure of time and money that these changes necessitate, undertaking such changes may irreparably disadvantage Thrivent against its competitors and with respect to its members.”