The DOL’s Temporary Enforcement Policy: Potential Traps for the Unwary

The overturning of the DOL’s Fiduciary Rule by the Fifth Circuit last year had two impacts: first, the definition of “fiduciary” for investment advice to plans and IRAs reverted back to the narrower Five-Part Test issued in 1975; second, the Best Interest Contract Exemption (or “BIC Exemption”) and amendments to other exemptions also ceased to exist.

On the first point, we explained in a prior post why broker-dealers should not automatically assume they can avoid fiduciary status under the reinstated Five-Part Test. (However, the range of situations where investment-related recommendations will be considered “fiduciary” advice is narrower.)

Unfortunately, though, for advisors who are fiduciaries, the loss of the BIC Exemption – which permitted the receipt of “conflicted compensation” when an advisor satisfied best interest and disclosure requirements – is problematic. Fortunately, the DOL recognized that problem and provided relief in Field Assistance Bulletin 2018-02 (the “FAB”). The DOL (and the IRS) sought to protect fiduciary advisors who were caught up unfairly by the Fifth Circuit’s ruling. The FAB states:

(F)or the period from June 9, 2017, until after regulations or exemptions or other administrative guidance has been issued, the Department 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.

The “impartial conduct standards” in the FAB include, among other things, a requirement to act in the best interest of the plan, participant or IRA owner. Fiduciaries that comply with the requirements of the FAB will also avoid excise taxes under the Internal Revenue Code prohibited transaction rules.

While this relief is significant, it is not without limitations. Here are some of the most important:

  • Discretionary Services Are Not Covered. The BIC Exemption did not cover prohibited transactions that arose from discretionary investment management…so the FAB relief doesn’t provide relief for prohibited transactions resulting from discretionary investment decisions. In counseling advisors, we find that this distinction sometimes creates confusion, particularly because services to plan and IRA investors may feature both non-discretionary and discretionary elements. These scenarios need to be analyzed closely. While there are some existing exemptions, they often are limited to certain forms of compensation or particular investment products.
  • ERISA Litigation Risk Remains. The relief afforded by the FAB applies only to DOL and IRS enforcement of the prohibited transaction rules. It does not prevent claims by plan fiduciaries, participants or IRA owners. There is no private right of action under the Code for conflicted advice to IRA owners (and ERISA doesn’t apply to IRAs). However, other types of claims may be brought, e.g., under the FINRA rules. For advice to plans and participants, fiduciary breach claims can still be brought under ERISA.

This is not an exhaustive list of potential concerns. Broker-dealers who may be advice fiduciaries – and keep in mind that “fiduciary” is defined by the actions of a broker-dealer and its advisors – need to consider the limitations of the FAB relief, and decide whether the non-enforcement policy adequately protects them from liability for prohibited transactions. If it does not, they should consider updating their policies, training and supervision to minimize the risk of inadvertent fiduciary status.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About the Author: Joshua Waldbeser

Joshua J. Waldbeser counsels plan sponsors and committees with respect to their fiduciary responsibilities under ERISA, as well as design and operational considerations for 401(k) plans, ESOPs and other defined contribution plans, cash balance and traditional defined benefit plans, and deferred compensation arrangements of all types. Josh also works extensively with insurance companies, investment advisors and funds, banks and trust companies, broker-dealers, record keepers, TPAs and other service providers with respect to ERISA, tax, securities and other compliance matters, including investment and fiduciary issues, as well as prohibited transactions and exemptions.

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