My colleague Ryan Walter recently spoke with me about the real impact of the DOL rule decisions. On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the Department of Labor’s fiduciary rule.
In its nuanced decision, the Fifth Circuit drew a clear distinction between fiduciary firms and individuals that act with the trust and confidence of their clients and the mere sales activities more commonly associated with securities salespersons. In attempting to blur the line between these practices, the Fifth Circuit held, the DOL overstepped its bounds and created a rule that could not be considered “reasonable.”
This sounds like a resounding victory for opponents of the DOL rule — and it may be. But there is still some level of uncertainty at this point.
The DOL did not ask for the case to be reheard by the full roster of Fifth Circuit judges before the May 1 deadline, and the AARP and the state attorneys general of California, Oregon and New York failed in their requests to intervene and get a rehearing en banc. However, the DOL still has until June 13 to seek permission to argue its case in front of the Supreme Court, in which case a stay of the Fifth Circuit’s ruling is likely.
By now, most advisors already have implemented policies and procedures designed to account for the DOL rule. Understandably, this can be a source of consternation for firms that have poured copious amounts of time, energy, and money into bringing their firms up to speed with a rule that may now never see the light of day. But given the current regulatory environment, most advisors would be wise to maintain the status quo with respect to the procedures that already have been implemented.
Since the DOL rule entered its transition period in June 2017, the requirements for RIAs have been fairly limited. In most cases, advisors have been required to take only a few steps towards becoming compliant with the DOL rule’s transition period requirements, including: • Acknowledging fiduciary status in writing • Disclosing the conflict of interest associated with recommending a rollover that will increase the firm’s compensation • Implementing a rollover analysis to document the rationale for why a rollover is being recommended
These steps continue to be recommended, regardless of the DOL rule’s ultimate fate. Advisors continue to be fiduciaries under ERISA and/or the Internal Revenue Code when rendering investment advice to retirement clients, in addition to serving as fiduciaries for all clients under the Advisers Act and state equivalents.
A conflict of interest remains for firms when recommending a rollover that will increase their compensation. And a documented rollover analysis continues to be the best way to prove to a scrupulous regulator that the rollover recommendation was made with the client’s best interests in mind, rather than the firm’s bottom line.
Firms whose processes and procedures were overhauled in preparation for the DOL rule’s arrival may be well served to note the developments relative to the DOL rule in their compliance manuals. We have seen firsthand that other regulatory bodies are willing to pick up the baton from the DOL in bringing enforcement actions related to retirement investors.
If a firm can specifically identify certain DOL rule-related provisions in its compliance manual, it can potentially avoid a similar fate by noting the status of the DOL rule and making it clear that such sections are inapplicable until the DOL rule is, at last, resolved.
While the DOL rule may very well have drawn its last breath, the processes outlined above are highly recommended. Not only will they protect firms in the event the Fifth Circuit’s ruling is changed, stayed or overturned, but they also will serve to safeguard the firm from regulators seeking to capitalize on the state of regulatory upheaval.
Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York and Philadelphia that represents investment advisors, financial planners, BDs, CPA firms, registered reps and investment companies, and is a regular contributor to Investment Advisor. He can be reached at firstname.lastname@example.org.