Fiduciary issues

Temporary Enforcement Policy Applies After Court Invalidates DOL Fiduciary Guidance

The Department of Labor’s Employee Benefits Security Administration (EBSA) has issued Field Assistance Bulletin (FAB) 2018-02, which outlines a temporary enforcement policy that follows the agency’s investment fiduciary final regulations and exemptions package being vacated by the U.S. Fifth Circuit Court of Appeals.

Fifth Circuit Court Action

In March of 2018 the Fifth Circuit Court ruled that the DOL’s fiduciary guidance had exceeded the agency’s authority under the Employee Retirement Income Security Act (ERISA). The Court’s ruling to vacate the regulations and exemptions essentially nullified the guidance in its entirety, nationwide.

When it appeared the DOL would not appeal the ruling by an April 30 deadline, the American Association of Retired Persons (AARP) and the attorneys general of California, New York, and Oregon attempted to intervene and appeal on behalf of those they believed might be harmed by loss of the DOL guidance. They were denied that option by the Fifth Circuit Court. The DOL still has the right to appeal the decision to the U.S Supreme Court, but it is unlikely that FAB 2018-02 would have been issued had that course of action been planned.

DOL Status Before Fifth Circuit Court Action

Before the Fifth Circuit Court vacated the guidance, those who provide investment advisory services to retirement investors had been under relaxed standards for complying with the DOL fiduciary advice rules. Those standards were to be in effect for the period June 9, 2017, through July 1, 2019. During that period, firms and representatives were to observe what are known as “impartial conduct standards,” which required the following.

  • Receive only reasonable compensation
  • Make no misleading statements
  • Act in the best interest of the retirement investor

FAB 2018-02

The temporary enforcement policy now outlined in FAB 2018-02 essentially continues the application of the above standards until further notice, and applies to all elements of the DOL’s fiduciary guidance. This includes the DOL final regulations, the Best Interest Contract (BIC) exemption, and several other related prohibited transaction exemptions (PTEs).

As stated in FAB 2018-02, “…for 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…” by the DOL guidance that was vacated by the Fifth Circuit Court.

The Treasury Department and the IRS have also confirmed that no action will be taken to assess civil penalties for prohibited transactions for fiduciary investment advice covered by the DOL relief in FAB 2018-02.

FAB 2018-02 further states that investment advice fiduciaries may choose to rely on other, prior prohibited transaction exemptions that have been issued by the DOL for fiduciary investment advice they provide, but this is not considered necessary if the advisor or advisory firm meets the conditions of the impartial conduct standards.

AARP and 3 States Are Denied Opportunity to Defend DOL Fiduciary Guidance

In a ruling handed down yesterday, May 2, the U.S. Fifth Circuit Court of Appeals denied motions by the American Association of Retired Persons (AARP) and the attorneys-general of California, New York, and Oregon that they be allowed to intervene in Department of Labor (DOL) fiduciary guidance litigation. In mid-March, the Fifth Circuit Court vacated in its entirety the DOL’s 2016 fiduciary advice regulations and exemptions package, ruling that the DOL had exceeded its authority under ERISA. Defendants—the Department of Labor—had until Monday April 30 to appeal the ruling.

Because the DOL had given no indication of its intent to appeal—given a very much changed DOL position under the current administration—AARP and the states’ attorneys general requested that the Court allow them to intervene, essentially seeking to appeal in the DOL’s stead. The motions filed by AARP and the states also requested an “en banc” rehearing of the case, which would have included all of the Fifth Circuit Appeals Court judges, not just the three that ruled in March to vacate the DOL guidance.

The effective date for the Fifth Circuit Court’s vacating of the DOL fiduciary guidance, which is currently in a relaxed and simplified compliance status, is expected to be on or about May 7. The DOL technically still has the ability to appeal to the U.S. Supreme Court. However, that is considered highly unlikely, given the DOL having foregone the opportunity to appeal at the Fifth Circuit level.

Washington Pulse: SEC Best Interest Standard is Major Departure from DOL Fiduciary Guidance

Eight years after receiving a directive from Congress to consider standards of conduct for investment recommendations, the Securities and Exchange Commission (SEC) has issued proposed guidance for broker-dealers and registered investment advisors who make recommendations to retail clients. Unlike the DOL fiduciary regulations, the guidance applies only to securities; not to traditional bank, credit union, and insurance investment products. Many had hoped for a uniform standard for brokers and registered investment advisors (RIAs), however this guidance does not take that approach.


Who will regulate investment advising behavior?

This SEC guidance comes at a time of uncertainty for oversight of investment advising relationships. After the U.S. Department of Labor (DOL) issued final regulations on fiduciary investment advice for retirement savers, a court case recently resulted in a finding that the DOL exceeded its authority. Unless the DOL or another party successfully appeals, the DOL’s guidance will be nullified. This would leave the SEC regulations—if finalized—as the standard for broker-dealers who make investment recommendations.


What is in the guidance package?

The SEC has issued two proposed regulations and a proposed interpretation.


SEC Best Interest Standard ≠ DOL Best Interest Contract

The SEC’s proposed “regulation best interest” is not the same as the legally-enforceable “best interest contract” (BIC) in the DOL fiduciary investment advice regulations. Instead, the SEC’s best interest standard would be enforceable under its current arbitration framework. To satisfy the proposed SEC guidance, a broker-dealer must “act in the best interest of the retail customer” when a recommendation is made, and not put his own financial or other interest ahead of the customer. Broker-dealers can accomplish this by meeting the following conditions.


Disclosure Obligation

  • Disclose the nature of the broker-dealer/client relationship (which for brokers is not a fiduciary relationship, as it is for RIAs), and any material conflicts-of-interest—including financial incentives that might cause a broker-dealer to put his interests ahead of the customer’s.


Care Obligation

Exercising reasonable diligence, care, skill and prudence to:

-Understand the investment product recommended to a customer
-Determine that this recommendation could be in the interest of some customer
-Determine that a recommendation is in a particular customer’s best interest based on her investment profile
-Determine that a proposed series of transactions is also in that customer’s best interest based on her investment profile


Conflict of Interest: Disclosure, Mitigation, and Elimination

Establish, maintain, and enforce written policies and procedures to identify material conflicts-of-interest due to financial incentives tied to investments and either disclose and mitigate such conflicts, or eliminate them.


Contents of the Customer Relationship Summary

While the SEC guidance is primarily directed to broker-dealers and the securities recommendations they make, a new disclosure requirement applies to both broker-dealers and RIAs. These regulations would require both to make clear their roles in a brief “customer relationship summary” (CRS) form that includes

  • an introduction highlighting the types of investment services and accounts offered to retail investors
  • a description of the relationships and services a firm offers to retail investors, including the legal standards of conduct to be expected (e.g., RIAs are fiduciaries, broker dealers are not)
  • a description of the fees and costs a retail investor would pay the firm
  • a comparison of brokerage and RIA services (for firms that are one or the other, but not both)
  • a description of the conflicts-of-interest that may exist, including compensation that differs based on investments chosen.
  • how a customer can get additional information, including legal and disciplinary actions involving the firm or representative.
  • key questions a retail investor may want to ask for greater detail about services, specific fees, etc.

In general, the SEC advises representatives to be direct and clear about their status as a broker-dealer or RIA—or dual status—and to refrain from using language or terms formally or informally that may mislead a customer. Form CRS must be filed electronically with the SEC.


Fiduciary standard clarifications

While the fiduciary standard is not new for registered investment advisors, the SEC has never before formally included “best interest” obligations as part of their interpretation of the fiduciary obligations for RIAs. They define the prongs of the fiduciary standard of conduct to include:

  • Duty of Care
    • Duty to provide advice that is in the client’s best interest
    • Duty to seek best execution
    • Duty to provide services and to provide advice and monitoring over the course of the relationship
  • Duty of Loyalty
    • Duty to put its client’s interests first and not favor one client over another
    • Duty to make full and fair disclosure of all material facts relating to its relationship with its client
    • Duty to seek to avoid conflicts of interest and, at a minimum, disclose all material conflicts


Who is covered by the SEC guidance?

Unlike the DOL’s fiduciary investment advice regulations, the SEC broadens the pool of investors captured by its new investor protection rules. The SEC’s proposed regulations are not specific to retirement savers but instead cover the general retail investor.

The SEC guidance, however, also narrows the pool of investment recommendation providers covered by the guidance as its new rules only apply to broker-dealers and registered investment advisors. The guidance does not generally apply to personnel of banking or insurance organizations.


Which activities fall under the SEC guidance?

The three components address activities with respect to securities investments, such as stocks, bonds, and mutual funds, for retail clients. This includes the purchase, sale, or holding of such investments. By comparison, the DOL fiduciary rules apply to a broader class of investments than just securities. The DOL rule includes investments in certificates of deposit and certain insurance products that are not governed by the SEC framework.

While the SEC guidance is somewhat ambiguous, it appears to cover retirement plan participants receiving direct investment recommendations but exclude employer plans as a business exception. The guidance also appears to cover investors in individual tax-advantaged accounts such as IRAs, health savings accounts, and education savings accounts.

Clarifications on these and certain other issues are being sought.


More to come

The SEC requests comments from the public on this guidance, during a 90-day period. Based on public comments made by SEC commissioners, these SEC proposed regulations and disclosure guidelines could be just the first elements of more comprehensive guidance from the agency on investment advising relationships.  If true, more guidance may be forthcoming. Visit and subscribe to our Industry and Regulatory news feed for the latest developments.


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AARP and Attorney Generals to Challenge 5th Circuit Decision to Vacate Fiduciary Rule

As detailed in several filings today, April 26, 2018, with the 5th Circuit Court of Appeals, the AARP and attorneys general from Oregon, California, and New York have requested that they be allowed to intervene in the DOL’s fiduciary rule case. In mid-March, the 5th Circuit vacated in its entirety the DOL’s fiduciary rule, stating that the DOL had exceeded its authority under ERISA. Defendants were given until Monday, April 30, to appeal the ruling.

Because the DOL has given no sign that they intend to appeal, AARP and the attorneys general have requested that the court allow them to intervene. The motions filed by AARP and the states also request an “en banc” rehearing of the case should their requests to intervene be approved by the court. This “en banc” rehearing would involve review by the full panel of 5th Circuit judges, whereas the March ruling vacating the fiduciary rule was decided by a three judge panel.

Perhaps further complicating an already complex issue, the Securities and Exchange Commission (SEC) released their own proposed “best interest” regulations and disclosure requirements earlier this week, targeted mainly at broker-dealers. Should the DOL’s rule be upheld on appeal and the SEC’s proposed regulations put in place, the potential exists to have two unique sets of rules, greatly complicating compliance.

DOL Bulletin Clarifies Prior Guidance Regarding Fiduciary Standards for ETIs and Shareholder Rights

The Employee Benefits Security Administration (EBSA) arm of the Department of Labor (DOL) has released Field Assistance Bulletin 2018-01 (FAB 2018-01), which clarifies earlier interpretations set forth in Interpretive Bulletins 2015-01 and 2016-01. Interpretive Bulletin 2015-01 addresses fiduciary standards as they relate to so-called economically targeted investments (ETIs) (investments selected based on nonfinancial factors, such as environmental, social, or corporate governance policy goals). Interpretive Bulletin 2016-01 addresses the exercise of shareholder rights under qualified plans.

FAB 2018-01 states that ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits, specifically in cases where nonfinancial factors could potentially influence investment selection. “Fiduciaries,” FAB 2018-01 cautions, “must not too readily treat [these] factors as economically relevant [and should] be focused on financial factors that have a material effect on the return and risk of an investment.” However, as stated in Interpretive Bulletin 2015-01, these nonfinancial factors may be considered as “tie-breakers” when competing investments serve the plan’s economic interest equally well, and may be considered more than tie-breakers if they present material business risks or opportunities that are properly treated as economic considerations themselves.

FAB 2018-01 further clarifies that investment policy statements are permitted, but are not required, to contain policies concerning the use of these nonfinancial factors to evaluate investments, and that the selection of a Qualified Default Investment Alternative (QDIA) based on these factors could raise questions about the fiduciary’s compliance with ERISA’s duty of loyalty. “Nothing in the QDIA regulations suggests that fiduciaries should choose QDIAs based on collateral public policy goals,” notes the FAB.

Lastly, the FAB addresses shareholder activities that may require expenditure of plan assets (e.g., proxy voting), clarifying that Interpretive Bulletin 2016-01 was not meant to imply that plan fiduciaries should routinely incur significant plan expenses to fund advocacy, press, or mailing campaigns on shareholder resolutions, call special shareholder meetings, or initiate or actively sponsor proxy fights on environmental or social issues.


SEC Proposes Regulations to Govern Investment Advising Relationships

Following a near-unanimous 4-1 vote, the Securities and Exchange Commission (SEC) is issuing proposed regulations intended to govern relationships between investment professionals and the investors they serve. These regulations are seen by many as an alternative to the Department of Labor (DOL) investment fiduciary regulations and prohibited transaction exemption guidance package. (Full enforcement of the DOL guidance is currently suspended, with less stringent advisor standards through July 1, 2019, with the prospect that they may be significantly modified or withdrawn.)

The SEC has for some time been expected to act on its own to propose standards for investment advising relationships, having been given a directive to do so under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The SEC, in fact, held a public hearing yesterday, Wednesday (April 18, 2018), on standards for relationships between investors and broker-dealers or investment advisors. Some opponents of the DOL’s investment advice guidance had long argued that it is more properly the province of the SEC to regulate investment advising relationships, including advice given to retirement savers.

The SEC release includes three documents.

Under the proposed SEC regulations, broker dealers would be required to put investors’ interests before their own. In addition, the proposal would clarify the SEC’s views on the application of the fiduciary duties and standards that investment advisers owe their clients. The regulations also aim to clarify investor confusion about their relationship with investment professionals, and propose to restrict some broker-dealers and their associated financial professionals from using the term “adviser” or “advisor” as part of their name. Finally, the proposal would require firms to disclose their registration status with the SEC.

Public comments will be accepted for a 90-day period following publication of the proposal in the Federal Register. The SEC will then determine its next steps.

SEC to Hold Hearing on Investment Advice Standards

The Securities and Exchange Commission (SEC) announced that it has scheduled a public hearing to be held Wednesday, April 18, on standards for relationships between investors and broker-dealers or investment advisors.

The SEC was given a directive by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to consider standards for advice provided to investors, an initiative that until now has not been taken up by the SEC. In the interim, the Department of Labor (DOL) proposed and finalized guidance on investment advice standards that specifically apply to retirement savings investors. Much of this DOL guidance is technically in effect, but enforceable only to a limited extent during an interim period through July 1, 2019—many expect that its most restrictive provisions may never be implemented.

Some opponents of the DOL’s regulations and prohibited transaction exemption package had argued that it was more properly the province of the SEC to regulate investment advice, including advice given to retirement savers.

The public hearing scheduled by the SEC for April 18 is announced as intended to address the following issues.

  • Whether existing rules should be amended to require broker-dealers and registered investment advisors to provide a brief summary of their relationship with the investor
  • Whether the SEC should propose regulations establishing a standard of conduct for broker-dealers (and their agents) when making recommendations for investments or investment strategies
  • Whether to propose an official SEC interpretation of standards of conduct for investment advisors

The hearing is to be held at the SEC’s Washington, D.C., headquarters.

Annuity Group Withdraws its Appeal of DOL Fiduciary Rule Defeat

The National Association for Fixed Annuities (NAFA) has withdrawn its appeal of a 2016 district court loss in a suit challenging the Department of Labor (DOL) fiduciary investment advice guidance.

NAFA lost its initial suit in federal district court in the District of Columbia in November 2016. NAFA had argued that the DOL guidance treated annuity investment products unfairly and in an unduly restrictive manner, in part by requiring that the sale of fixed-indexed annuities to retirement savers be subject to the contractual requirements of the DOL’s Best Interest Contract (BIC) prohibited transaction exemption. Having lost in district court, NAFA initially appealed to the D.C. Circuit Court of Appeals. That suit was temporarily suspended, however, pending a decision in the Fifth Circuit Court of Appeals in another suit against the DOL brought on similar grounds.

The Fifth Circuit ruled March 16 against the DOL and in favor of the plaintiffs, the consequences of which if the ruling stands, would be to essentially undo the DOL’s fiduciary investment advice guidance.

It is believed by some that NAFA is now withdrawing its D.C. Circuit appeal in order to avoid creating a split between the 5th Circuit and the D.C. Circuit in the event that the latter court might have ruled in its favor and against DOL. When appeals courts in multiple districts reach different conclusions in cases that are substantially similar, these splits are often settled by the U.S. Supreme Court. Some feel that NAFA hopes the 5th Circuit Appeals Court ruling against the DOL will stand—meaning, it will not be successfully challenged by the DOL, or by a third party and will eventually be applied nationwide. Allowing the Supreme Court to decide split appeals court rulings would hold additional risk for NAFA and others who oppose the DOL’s fiduciary investment advice guidance.


Court Rules in Favor of DOL Fiduciary Restrictions on Annuity Products

In the latest episode of what has become an ironic series of Department of Labor (DOL) enforcement and federal judicial events, the U.S. 10th Circuit Court of Appeals has ruled against plaintiffs who oppose DOL restrictions on annuity products sold to retirement savers.

Since the issuance of final DOL regulations governing fiduciary investment advice in 2016, several lawsuits have been filed by opponents of these more restrictive regulations and their several accompanying prohibited transaction exemptions. In every court decision to date, the plaintiffs opposing the tighter fiduciary investment advice guidelines have lost, and DOL has won. The irony is that, with the change from Obama to Trump administrations, enforcement of the new regulations and exemptions under a Trump-led DOL has been delayed and liberalized. Many believe they will never be implemented in their issued form. The DOL under current leadership is seen by some as having essentially switched sides in the enforcement scenario, but the courts have proceeded to hear the existing cases on their merits, and not in light of current DOL enforcement intentions.

The 10th Circuit opinion just issued specifically upholds the guidance’s new restrictions on fixed-income annuities and variable annuities. The guidance places these annuity products under the new Best Interest Contract (BIC) exemption, requiring certain contractual agreements and enforcement recourse that opponents argued made the use of these annuities by providers and sales representatives more complex and fraught with liability risk. In its opinion, the Court described these annuity products’ characteristics as not only complex, but creating more investment risk for savers, being less predictable than other investments, and offering more opportunity for advisor conflicts of interest in the sales process. The court cited these factors in finding that there was justification in the DOL’s 2016 guidance requiring them to be sold under the terms of the more restrictive BIC exemption.

Appeals Court Declares Plan Service Provider Transamerica Not a Fiduciary, Not Guilty of Breach

The U.S. Ninth Circuit Court of Appeals has reversed a California district court ruling and vacated that lower court’s class-action certification in Santomenno v. Transamerica Life Insurance Company.

The plaintiffs, who were participants in several ERISA-governed retirement plans for which Transamerica provided investments and services, alleged that Transamerica was a plan fiduciary and breached its duties in that role. The breaches allegedly occurred in Transamerica’s negotiating with plans the compensation for its services, in withdrawal of fees from participant accounts, and in its receipt of revenue sharing payments from investment managers associated with the plans.

As noted in the Court’s opinion, the appeals court found that the statutory fiduciaries to the plans were the employers, not Transamerica, although it is possible for a service provider to become a functional fiduciary. The court pointed out that its ruling follows precedent set by other appeals courts that have found such negotiations between service providers and plans not to be fiduciary acts, noting further that fees withdrawn from participant accounts had been disclosed, and that the revenue sharing payments—also previously disclosed—were received from investment managers, not participant accounts.