DOL to Allow Advisors to Continue Using Fiduciary Standard

May 30, 2018 by Melissa L. Lucar, Esq.

On May 7, the Department of Labor (DOL) announced that it would allow financial advisors to continue using the temporary enforcement policy outlined in their final rule. The DOL announced the decision in the agency's Field Assistance Bulletin No. 2018-02, where they stated that until additional guidance is issued, the rule, although not enforceable, can be relied upon to address policy concerns.

Labor also announced that it is “convinced that this temporary enforcement relief is appropriate and in the interest of plans, plan fiduciaries, plan participants and beneficiaries, IRAs and IRA owners.”

The agency’s Employee Benefits Security Administration also noted on Monday that the U.S. Court of Appeals for the 5th Circuit is expected to issue a final decision that will vacate the DOL’s fiduciary rule, the best interest contract exemption, the principal transactions exemption, and all amendments related to existing PTEs.

It appears that since Labor decided not to appeal the 5th Court’s decision, they instead moved towards allowing investment firms to use the rule to provide temporary guidance until a replacement is in place.

Although the DOL is urging financial advisors and institutions to use the rule for guidance, they stated it “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.”

Labor is concerned that the ongoing uncertainty about the fiduciary obligations and scope of exemptive relief could disrupt the financial services industry, and cause a gap in the opportunity for retail clients to obtain advice on retirement planning and investment.

In its bulletin, the department stated “it is aware that some financial institutions “may be uncertain as to the breadth of the prohibited transaction exemptions that remain available for investment advice fiduciaries following the court’s order.”

The DOL contends that since many financial institutions have dedicated resources to developing policies and procedures to comply with the Best Interest Contract exemption and other guidelines, it can continue to rely upon the compliance structure without fear of violations.

Consumer advocates were quick to jump on the announcement, criticizing it as a way for the DOL to shirk its responsibilities in regulating the investment markets. They contend that by stating they are not going to enforce the exemptions against advisors, Labor is allowing investment advisors, while they may be acting in good faith to comply with standards, to go unpunished for prohibited transactions.

Proponents of the move stated that the announcement is good for the financial industry in that it expands the options financial institutions have in making a good faith effort to comply with fiduciary standards. While many hope that this is a short-term fix, they also see future announcements coming from Labor to provide more exemptions and formal relief.

Final fiduciary exemptions will not be provided until the Securities and Exchange Commission releases its final standard of conduct rules, expected later this year. The SEC’s proposed fiduciary rule package was released on April 18 and is currently undergoing review and public comment.