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‘Full Speed Ahead’ With DOL Fiduciary Compliance Despite Delay

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With the Office of Management and Budget’s approval of the Labor Department’s 18-month fiduciary rule delay having most assuredly kicked in (approval was anticipated within a week or two at press time in early November), should advisors put the brakes on compliance?

(Labor on Nov. 27 announced the official 18-month extension for the start of key provisions of the fiduciary rule.)

For advice providers, “it’s always been full speed ahead” on compliance with Labor’s fiduciary rule, Erin Sweeney, counsel with Miller & Chevalier in Washington, told IA in a Nov. 8 interview.

“A delay doesn’t mean there will be monumental changes” to the rule, Sweeney continued. Her clients, which include retirement plan investment committees, intermediaries and other advice providers, “are done or nearly done” with their compliance, she added.

Investment committees, however, “are saying press the pause button” on compliance, she explained, because they are “concerned about conflicted advice for plan participants. [They’re] not going to allow their recordkeepers to give advice until [they] know more” about what’s in the final rule.

Some recordkeepers “that used to provide only recordkeeping services are now seeking to provide fiduciary investment advice to 401(k) plan participants,” Sweeney said. “Although the recordkeepers are providing the advice for ‘free,’ plan investment committees are concerned about potential conflicted advice because the recordkeepers may steer the 401(k) plan participants into investments that generate fees for affiliates of the recordkeepers.”

Accordingly, she continued, investment committees “are holding the line on recordkeepers who want to provide fiduciary investment advice until the investment committees analyze the final fiduciary rule.”

Indeed, the 18-month delay as finalized would extend the applicability date of the rule’s best-interest contract exemption, the 84-24 exemption dealing with sales of annuities and Principal Transactions exemptions from Jan. 1, 2018 to July 1, 2019.

The Labor Department filed its proposed rule, titled “18-Month Extension of Transition Period and Delay of Applicability Dates; Best Interest Contract Exemption; Class Exemption for Principal Transactions; PTE 84-24,” with OMB on Nov. 2.

Labor Secretary Alexander Acosta told a Minnesota court in a filing in the case brought by Thrivent Financial for Lutherans against the fiduciary rule, that it would likely take three weeks from the Nov. 2 filing date for OMB to approve the delay. Industry officials anticipated a speedier two-week approval.

But as Fred Reish, partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group in Los Angeles, noted, he wants to see “if any additional conditions are imposed and whether the nonenforcement policy is extended,” under the final rule that’s approved by OMB.

Lisa Bleier, managing director and associate general counsel at the Securities Industry and Financial Markets Association, a fiduciary rule opponent, told IA that a delay “will help provide certainty to investors and avoid confusion and cost associated with continued piecemeal delays.”

While SIFMA’s member firms “have long advocated for the creation of a best interest standard which protects the client and client’s choice,” Bleier added, the Securities and Exchange Commission “should also now take the lead on a broad, principles-based standard of conduct that does not limit the product offerings in the market.”

Indeed, SEC Chairman Jay Clayton told lawmakers in October that the agency is working on its own fiduciary rule and coordinating with Labor. He also said a SIFMA conference in late October that the SEC’s fiduciary rule wouldn’t supplant Labor’s.

Labor has “their process, we have our process. …we have to respect this,” Clayton said, adding that “at the end of the day we’re all going to operate in this” fiduciary space.

“The SEC has a responsibility to be a leader in this space, DOL has a responsibility and the states have a responsibility. We need to cooperate. At the end of the day, hopefully, we’ll end up in a place where the investor is satisfied,” he said.

Lawsuits on Horizon?

Once the 18-month delay is approved, industry officials anticipate lawsuits will be filed against Labor. Micah Hauptman, financial services counsel for the Consumer Federation of America, a staunch fiduciary rule supporter, told IA that CFA would have to see the final rule as approved by OMB “before making any further determinations on next steps.”

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.”


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