Fiduciary 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less stringent advisor standards through July 1, 2019, with the prospect that they may be significantly modified or withdrawn.)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.

Kathleen Connelly Addresses Changing Retirement Fee Arrangements in the 401(k) Industry

EVP Kathleen Connelly ​addresses ​changing retirement fee arrangements in the 401(k) industry, in a recent article published by Employee Benefit News. 401(k) plan clients ​​​​are skeptical of ​Fidelity’s decision to charge new clients (with $20 million or less in assets) a 0.05% fee on any Vanguard funds held in their retirement plans​.​ ​​​​Regarding Ascensus’ ​pricing methodology, Connelly notes, “At Ascensus, we made decisions that the plan lineup and the size of the plan shouldn’t impact the pricing if all other features and offerings otherwise remain the same​.”

DOL Delays Key Investment Fiduciary Requirements to Mid-2019

A much-anticipated extension of the current transition period for Department of Labor (DOL) investment fiduciary guidance has been announced. According to a DOL news release, the applicability date of several key elements of the guidance has been extended from January 1, 2018, to July 1, 2019. The additional 18-month transition period specifically applies to the controversial Best Interest Contract (BIC) exemption, to the “principal transactions” exemption for asset transactions between investment fiduciaries and employee benefit plans (including IRAs), and to certain proposed restrictions on annuities offered as retirement investments.

What Is Delayed?

Those who provide retirement investment advice in return for compensation generally are considered fiduciaries, with the potential obligations and liabilities that may entail. The DOL’s fiduciary investment advice regulations and exemptions, initially finalized in 2016, provided a roadmap for investment advice providers to comply with their fiduciary obligations.

These regulations have been considered technically in force as of June 9, 2017, but for all intents and purposes those subject to the requirements have been able to conduct business under much-relaxed DOL compliance standards. Specifically, the need to comply with several prohibited transaction exemptions (PTEs) has been delayed. Perhaps most notable, the requirement that investment advice providers enter into enforceable contracts with certain investors—the Best Interest Contract (BIC)—has not been required during the transition period, now extended from January 1, 2018, to July 1, 2019.

What Is Effective Now?

During the transition period, now up to July 1, 2019, those who provide retirement investment advice are required only to comply with the following Impartial Conduct Standards.

  • Charge no more than a reasonable amount for investment advisory services
  • Avoid making misleading statements
  • Make only recommendations that are in the client’s best interest

Unfortunately, these requirements are subjective and offer no bright lines for determining such things as “reasonable” or “best interest.” In addition, as the DOL noted in announcing the initial transition period (to January 1, 2018), the agency does not intend to punish fiduciaries “working diligently and in good faith” to comply. The DOL also noted in the announcement that the IRS would not assess excise taxes (for prohibited transactions) in situations where the DOL’s relaxed enforcement policy is being applied. It is expected that this understanding will continue to apply during the now-extended transition period ending July 1, 2019.

Future Is Unclear Under Trump Administration

The endgame for the DOL fiduciary investment advice guidance, which was the product of a more aggressive compliance philosophy under the prior presidential administration, is unclear. Earlier in 2017, President Trump issued Executive Order 13777, reflecting the intent to “reduce the regulatory burdens agencies place on the American people,” and directing federal agencies to evaluate existing regulations and make recommendations regarding those that can be repealed, replaced, or modified to make them less burdensome.

Whether the DOL investment fiduciary final regulations and accompanying exemptions will someday take full effect as they now exist is, at best, uncertain. Watch this News for further developments.

Thrivent, DOL Both Win in Fiduciary Rule Case

Unlikely as it would seem, both Thrivent Financial for Lutherans and the Department of Labor (DOL) could be considered winners when a U.S. District Court judge on November 3, 2017, granted an injunction against a key aspect of the DOL’s investment fiduciary guidance.

Thrivent Suit

Thrivent filed suit in 2016 against the DOL in U.S. District Court for the District of Minnesota, contending that a provision of the DOL fiduciary guidance Best Interest Contract (BIC) exemption would unfairly penalize the organization. That provision was intended to prevent financial organizations from contractually binding clients to give up their right to participate in class legal actions to settle grievances.

District Court Ruling

District Judge Susan Nelson granted the injunction against enforcement of that element of the fiduciary guidance on the grounds that it could harm Thrivent, and therefore, should not be enforced without further litigation. That litigation may, in fact, not go forward, since the DOL under the leadership of President Trump’s appointee, Alexander Acosta, had already indicated in its own guidance that the agency does not intend to enforce the provision that prompted Thrivent’s lawsuit.

Furthermore, the DOL formally asked the court not to issue a final ruling, and instead to issue a “stay” order, halting the case’s progress. As a result, concurrent with the injunction granted to Thrivent, Judge Nelson also granted the DOL’s request for a stay of the proceedings.

Key to understanding this apparent contradiction is the fact that the final fiduciary rule and accompanying prohibited transaction exemptions—prominent among them being the BIC exemption—were drafted under the administration of President Obama, whose DOL leadership advocated for tougher investment fiduciary standards. Since the election of President Trump, new DOL leadership has advocated for delayed and relaxed enforcement of the final fiduciary regulations and exemptions.

Many believe that some of the strongest provisions in the guidance package may eventually be altered or withdrawn. Unless Thrivent or the DOL determines that final settlement of the case is in its best interest—Thrivent perhaps anticipating a different DOL philosophy under a future administration—it appears unlikely that the case will be resumed.

American Oversight Group Sues DOL Over Freedom of Information Requests Related to Fiduciary Rule

American Oversight, a nonpartisan IRC Sec. 501(c)(3) watchdog group based in Washington, D.C., has sued the Department of Labor (DOL) over a perceived lack of transparency in response to the group’s Freedom of Information Act (FOIA) requests. The complaint was filed in the Washington, D.C. District Court on Tuesday, October 24, and details how American Oversight’s July 2017 requests under the FOIA did not receive an adequate response from the DOL, in the group’s opinion.

The group’s Executive Director, Austin Evers, states that the group’s intent is to “find out what’s going on behind closed doors” in discussions that related to the formulation of the so-called fiduciary rule, specifically how the different iterations of the rule were decided upon. The counts in the complaint are as follows.

  • Failure to conduct an adequate search of records under the FOIA
  • Wrongful withholding of non-exempt records under the FOIA

This marks the latest in a long line of legal action taken against the DOL and their fiduciary rule, but unlike the previous court filings, this complaint does not appear to challenge the rule directly. Rather, it challenges the perceived lack of transparency of the process behind the drafting of the rule, specifically related to the influence of special interest groups and whether the final rule was settled “behind closed doors” long before any public comments were considered.

Federal Funding Bill Would Kill DOL Fiduciary Guidance

A funding bill introduced in by the U.S. House of Representatives includes a non-funding component—to nullify the Department of Labor’s conflict-of-interest (fiduciary investment advice) regulations and prohibited transaction exemptions (PTEs).

In the wake of Congress extending federal agency funding for an additional three months as part of hurricane relief legislation (through December 8, 2017), a bill has been introduced in the House to fund these agencies through the remainder of the 2018 fiscal year.

One of the non-funding provisions would nullify the DOL’s conflict-of-interest final regulations and accompanying prohibited transaction exemptions (PTEs). This provision states, “Notwithstanding any other provision of law, the final rule issued by the Department of Labor entitled ‘Definition of the Term Fiduciary, Conflict-of-Interest Rule-Retirement Investment Advice’ and published by the Department of Labor in the Federal Register on April 8, 2016…shall have no force or effect.”

While this legislation is seen as having a favorable chance of passage in the House, its prospects in the Senate are viewed as doubtful.