DOL’s Fiduciary Rule is Laid to Rest:

As discussed in previous editions of The Speed Reader, the DOL’s so-called “fiduciary rule” was enacted via regulations and other voluminous guidance during the Obama administration. Overall, the fiduciary rule significantly expanded the class of individuals and firms that were considered ERISA fiduciaries when providing investment advice to retirement plans and IRAs. However, in a March 15, 2018 decision in Chamber of Commerce of the United States of America v. DOL, the U.S Court of Appeals for the Fifth Circuit (the “Court”) vacated the fiduciary rule in its entirety. In short, the Court ruled that in publishing the fiduciary rule, the DOL unreasonably “reinterpreted the forty-year old term ‘investment advice fiduciary’” and exercised “an unheralded power to regulate a significant portion of the American economy.” Thus, the Court struck down the fiduciary rule as “arbitrary and capricious exercises of administrative power.”

On May 2, 2018 the Court denied several entities’ motions to intervene in the case. Also, the DOL has chosen not to seek a rehearing by the Court. Although the DOL could seek a review of the Court’s decision by the U.S. Supreme Court, that step is unlikely. Therefore, it appears that the fiduciary rule is now deceased.

In related news, on May 7, 2018, the DOL published Field Assistance Bulletin 2018-02 (the “FAB”). The FAB announced a temporary DOL enforcement policy for prohibited transactions that occurred as a result of the Court’s decision vacating the fiduciary rule and its prohibited transaction exemptions, such as the Best Interest Contract Exemption. (Many advisors likely unknowingly engaged in prohibited transactions after the fiduciary rule became effective on June 9, 2017 because they actually complied with that now-vacated fiduciary rule.) The FAB notes that “financial institutions, advisers, and retirement investors may have questions regarding the investment advice fiduciary definition and related exemptive relief following the court’s order” and that the DOL “intends to provide appropriate guidance in the future.” In the meantime, “for the period from June 9, 2017, until after regulations or exemptions or other administrative guidance has been issued, the [DOL] will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted in the BIC Exemption and Principal Transactions Exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules.” Also, the FAB’s footnote #4 states that the IRS will not apply prohibited transaction excise taxes (or the related reporting obligations) to any transaction or agreement to which the FAB applies. Here is a link to the FAB:

In more related news, on April 18, 2018, the U.S. Securities and Exchange Commission (the “SEC”) published a voluminous proposed rule to establish a standard of conduct for broker-dealers (“BDs”), and associated persons of a broker-dealer (“APs”), when they make a recommendation of any securities transaction or investment strategy involving securities to a retail customer. The SEC’s proposed standard of conduct is for BDs and APs to act in the best interest of the retail customer at the time a recommendation is made, without placing the financial or other interest of the BD or AP ahead of the retail customer’s interest. Under the proposal, that standard will be satisfied if:

  • Before or at the time of such recommendation, the BD or AP reasonably discloses to the retail customer (in writing) the material facts relating to the relationship’s scope and terms, as well as all material conflicts of interest involved with the recommendation;
  • In making the recommendation, the BD or AP exercises reasonable diligence, care, skill, and prudence;
  • The BD enforces written policies and procedures reasonably designed to identify and disclose or eliminate all material conflicts of interest that are associated with the  recommendation; and
  • The BD enforces written policies and procedures reasonably designed to identify and disclose and mitigate (or eliminate) material conflicts of interest arising from financial incentives associated with the recommendation.

This SEC guidance also proposes new and amended rules and forms requiring registered investment advisers (“RIAs”) and BDs to provide a brief relationship summary to retail investors. The summary would inform retail investors about the relationships and services the RIA’s and BDs offer, the standard of conduct and the associated fees and costs, any specified conflicts of interest, and whether the RIA or BD currently has reportable legal or disciplinary events. Retail investors would receive the summary at the beginning of the relationship, and they would receive updated information following any material change. The relationship summary would be subject to SEC filing and recordkeeping requirements.

In addition, the SEC’s proposal includes new rules intended to reduce investor confusion in the marketplace for RIA and BD services. Those new rules include the following: (1) a rule under the Securities Exchange Act of 1934 that would restrict BDs and APs, when they communicate with a retail investor, from using the term “adviser” or “advisor” in specified circumstances; and (2) new rules under the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 that would require BDs,  RIAs, and APs to disclose to the retail investor the BD’s, RIA’s, and AP’s SEC registration status and the AP’s relationship with the BD or RIA.

Finally, the SEC’s April 18, 2018 guidance contains a proposed interpretation of the standard of conduct for investment advisers under the Investment Advisers Act of 1940. In this connection, the SEC is requesting public comments regarding: (a) licensing and continuing education requirements for personnel of SEC-registered investment advisers; (b) delivery of account statements to clients with investment advisory accounts; and (3) financial responsibility requirements for SEC-registered investment advisers.

Here is a link to the SEC Fact Sheet that provides a high-level overview of the above-referenced two proposed rules and the proposed interpretation: