New DOL Fiduciary Rule Creating 'Regulatory Whiplash': Attorneys

The Labor Department is setting up “regulatory whiplash” and huge compliance costs by requiring retirement advisors to comply with a new fiduciary prohibited transaction exemption that it plans to eventually amend, attorneys at Eversheds Sutherland warn.

The attorneys note Tuesday in a legal alert that Labor’s recently issued FAQ, released April 13, previews Labor’s “next steps” regarding its fiduciary PTE, which are:

• Taking further regulatory and subregulatory actions including amending the investment advice fiduciary regulation, as set out in the Employee Retirement Income Security Act of 1975;
• Amending PTE 2020-02; and
• Amending or revoking some of the other existing class exemptions available to investment advice fiduciaries.

Regulatory actions will be preceded by notice and an opportunity for public comment, the FAQ states.

In its FAQ, Labor “is serving notice that, absent unanticipated circumstances, it will proceed with each of the specified actions, either through rulemakings or subregulatory guidance as administrative law requires,” the Eversheds attorneys state.

While “it was commendable of DOL to provide advance warning of what apparently will be yet another controversial proposal …” they write, “there is much to be concerned about in the FAQs.”

Fred Reish, partner at Faegre Drinker in Los Angeles, told ThinkAdvisor on Tuesday in an email that in the preamble to PTE 2020-02, “the DOL ‘re-interpreted’ a 1975 regulation that defines fiduciary advice, but did not amend the regulation. In effect, the only ‘regulation’ that defines fiduciary advice is the 1975 one.”

With the new FAQ, Labor is now saying, according to Reish, that the department will:

• Revisit and possibly amend the 1975 regulation (as the Obama-era Labor Department did before that rule was vacated by the U.S. Court of Appeals for the 5th Circuit);
• Revisit the 2020-02 prohibited transaction exemption to see if the department wants to add or modify the conditions in it that must be satisfied to get the protection of the exemption; and
• Review and probably amend other exemptions that relate to conflicts in fiduciary advice. “Among those other exemptions is PTE 84-24, which relates to the sales of insurance policies and annuities to plans and IRAs,” Reish said.

Rollover Recommendations

Labor, the Eversheds attorneys state, “remains prepared to enforce its new interpretive position on rollover recommendations” effective as of Feb. 16. “Financial service providers therefore are immediately exposed to enforcement risk on this issue.”

The prohibited transaction exemption 2020-02, which took effect the same day, is available for rollover recommendations, the Eversheds attorneys explain, and the temporary enforcement policy, which is also currently available as a compliance solution for rollover advice, will sunset Dec. 20, and “at least at this time, is not being extended notwithstanding reasonable requests for more transition time particularly in light of the uncertainties created by the change in administrations.”

That is, the attorneys continued, “DOL is instructing the regulated community, on pain of at least regulatory enforcement consequences, to design, install, document, test and train to a rollover compliance solution, other than the temporary enforcement policy, by Dec. 20.”

Compliance costs, the Eversheds attorneys argue, could likely be “in the hundreds of millions of dollars if not more.”

The Labor Department then intends, the attorneys continue, “during this process or soon thereafter, to modify the terms of the compliance solutions it has just compelled financial services providers to implement. It has suggested that it might, for example, revoke an existing PTE implemented as a rollover compliance solution by some providers, forcing them to start over again from scratch.”

This “regulatory whiplash is hard to justify or accept, from the perspective of both providers and retirement investors,” the Eversheds attorneys said.

Reish agreed that “it does create some concern if they [Labor] make major changes, particularly if those changes are announced close to Dec. 21, and there isn’t a delayed compliance date.”

However, if Labor does “make significant changes, I would hope for a delayed compliance date for those changes,” Reish said. “On the other hand, if the changes are minor and are consistent with the DOL’s Reg BI, it may be less of a problem, particularly for broker-dealers.”

The “bigger impact,” Reish argued, “will be if fixed indexed annuities and variable annuities are moved from PTE 84-24 to 2020-02. In that case, the DOL should provide a delayed compliance date for the insurance industry.”

Reish anticipates proposed guidance setting out Labor’s planned changes to be issued this year, but not finalized “until early next year.”