ERISA’s Fiduciary “Investment Advice” Rules

May 23, 2018

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EXECUTIVE ORDERS AND MEMORANDA
  • Executive Order on Enforcing the Regulatory Reform Agenda dated February 24, 2017, requires each agency to establish a Regulatory Reform Task Force that will, at a minimum, attempt to identify regulations that: (i) eliminate jobs, or inhibit job creation; (ii) are outdated, unnecessary, or ineffective; (iii) impose costs that exceed benefits; (iv) create a serious inconsistency with regulatory reform initiatives and policies; (v) are inconsistent with section 515 of the Treasury and General Government Appropriations Act or the guidance thereunder; or (vi) derive from or implement other Executive Orders or Presidential Directives that have been subsequently rescinded or substantially modified. Each Task Force is required to provide the agency head a report detailing the progress within 90 days of the order. The order extends to, among other agencies, the Department of Labor.
  • Presidential Memorandum dated February 3, 2017. Provides for the Department of Labor to conduct an economic and legal analysis of the regulation and rescind the rule if, among other things, it is inconsistent with the Administration's priorities.
BILLS INTRODUCED IN THE HOUSE OR SENATE
  • The House Appropriations Committee on July 12, 2017 released the draft fiscal year 2018 Labor, Health and Human Services, and Education funding bill, which includes funding for programs within the Department of Labor. The draft bill includes a provision that would cause the Department of Labor’s new Fiduciary Rule to be of no force or effect. 
  • Affordable Retirement Advice for Savers Act (H.R. 2823),‎ sponsored by Rep. Phil Roe (R-TN), would amend ERISA and the Internal Revenue Code to establish a statutory definition of “investment advice” under the applicable fiduciary provisions. ‎The bill was introduced in the House on June 8, 2017 and was subsequently approved by the Education and the Workforce Committee on July 19, 2017 by a vote of 23-17. 
  • Affordable Retirement Advice Protection Act (S. 1321), sponsored by Sen. Johnny Isakson (R-GA), would amend ERISA to establish a statutory definition of “investment advice” under the applicable fiduciary provisions. The bill was introduced in the Senate on June 8, 2017. 
  • The Financial CHOICE Act of 2017 (H.R. 10), sponsored by Rep. Jeb Hensarling (R-TX), would, among other things, repeal the Department of Labor's new Fiduciary Rule, require further rulemaking on the point to await and be coordinated with similar SEC rulemaking and provide specified standards to be applicable to SEC rulemaking regarding certain fiduciary matters. The bill was introduced in the House of Representatives on April 26, 2017 and was subsequently approved by the House Financial Services Committee on May 4, 2017 by a vote of 34-26.
  • On January 6, Rep. Joe Wilson (R-SC) introduced a bill that would delay the implementation of the DOL Fiduciary Rule for two years after the enactment of his proposed legislation.
ADMINISTRATIVE ACTION
  • In an action approved by a 4-1 vote, the SEC published for public comment the following: Regulation Best Interest, Disclosure Requirements and Labeling Rules for Financial Professionals, and New Interpretive Guidance Regarding the Standard of Conduct for Investment Advisers. This action, if finalized, would, among other things, generally create a new standard of conduct for broker-dealers under the Securities Exchange Act of 1934, requiring broker-dealers to act in the best interest of retail customers when making recommendations, without putting the broker-dealers’ financial or other interests ahead of the interests of retail customers, and would provide interpretive guidance regarding the scope of investment advisers’ fiduciary obligation under the Investment Advisers Act of 1940. This rule would be separate and apart from the Department of Labor's amended fiduciary rule (which has been vacated by the Fifth Circuit, subject to appeal).

‎Dechert published a Newsflash addressing the foregoing, which may be viewed here

  • The U.S. Department of Labor on November 27, 2017 issued an extension extending for an additional 18 months the special transition period relating to the Best Interest Contract Exemption and the Class Exemption for Principal Transactions that were promulgated as part of the new Fiduciary Rule. The stated purpose of the extension is to give the DOL the “time necessary to consider public comments under the criteria set forth in the Presidential Memorandum of February 3, 2017, including whether possible changes and alternatives to these exemptions would be appropriate in light of the comment record and potential input from, and action by, the Securities and Exchange Commission and state insurance commissioners.” The former transition period was from June 9, 2017 to January 1, 2018. The new transition period ends on July 1, 2019. During this extended transition period, relevant investment advice fiduciaries only have to comply with the “Impartial Conduct Standards” to satisfy the exemptions’ requirements and will not be required to enter into a “best interest” contract (in the case of IRAs), adopt certain policies and procedures and provide certain disclosures, in order to be in compliance with the exemptions.

Dechert submitted a comment letter to the DOL regarding the Fiduciary Rule, which may be viewed here.

  • The U.S. Department of Labor on August 30, 2017 issued a Field Assistance Bulletin confirming that it would not pursue a claim based solely on the failure to comply with the BIC Exemption’s requirements regarding class actions as applied to arbitration agreements. Previously, (i) in July 2017, in the pending Chamber of Commerce case (5th Cir.) regarding the Fiduciary Rule, the DOL acknowledged and admitted in a brief that the BIC Exemption's requirement that a "best interest" contract not contain a bar on class actions (which is contained in the private-right-of-action provisions of the BIC Exemption that are currently suspended) is inconsistent with certain other federal law (at least in the context of arbitrations) and (ii) in August 2017, the DOL submitted a letter in the pending Thrivent v. Acosta (D. Minn.) case stating that the claim there revolving around the requirement in the BIC Exemption relating to class actions “will likely be mooted in the near future.”  
  • The U.S. Department of Labor on August 9, 2017 submitted a Notice of Administrative Action in the Thrivent v. Acosta litigation (D. Minn.) stating that the Department had submitted a proposal to amend the "best interest contract" exemption and two other exemptions that form a part of the Fiduciary Rule so as to delay until July 1, 2019 the applicability of material portions of those exemptions, and also to extend until that time certain existing transition relief applicable to the exemptions. On August 31, 2017, the DOL published the proposed delay in the Federal Register. Comments on the proposal are due on September 15, 2017.

‎Dechert published a Newsflash addressing the foregoing, which may be viewed here

  • Department of Labor publishes in the Federal Register a Request for Information (RFI) regarding the Fiduciary Rule, which seeks, among other things, comments regarding a delay in the January 1, 2018 applicability date of certain provisions of the Best Interest Contract Exemption and also seeks input regarding possible additional exemption approaches or changes to the Fiduciary Rule. Comments regarding a potential delay of the January 1, 2018 applicability date are due on or before July 21, 2017. Responses to all other RFI questions are due on or before August 7, 2017.

Dechert published a Newsflash addressing the foregoing, which may be viewed here.

  • Wall Street Journal op-ed by Secretary Acosta announcing that the Fiduciary Rule will generally become applicable on June 9 (with full implementation on January 1, 2018, pending any change in policy based on the DOL’s continuing review). 
  • Department of Labor issues Conflict of Interest FAQs (Transition Period) providing information about compliance with the Fiduciary Rule during the transition period between June 9, 2017 and January 1, 2018. 
  • Field Assistance Bulletin 2017-02 of the Department of Labor announcing with respect to the Fiduciary Rule that, during the phased implementation period ending on January 1, 2018, the DOL will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the Fiduciary Rule, or treat such fiduciaries as being in violation of the rule. 

Dechert published an OnPoint addressing the foregoing, which may be viewed here

  • Final Rule by the Department of Labor (i) generally extending for 60 days, until June 9, 2017, the applicability date of the new fiduciary rule defining who is a fiduciary under ERISA and the Code and of the related Best Interest Contract ("BIC") Exemption, and (ii) providing that compliance with conditions of the BIC Exemption (and with the amendments to Prohibited Transaction Exemption 84-24) other than adherence to the "Impartial Conduct Standards" is not required until January 1, 2018. 

Dechert published a Newsflash and an OnPoint addressing the foregoing, which may be viewed here and here.

  • Field Assistance Bulletin 2017-01 of the Department of Labor announcing (on March 10, 2017) a temporary enforcement policy pursuant to which (i) if the DOL extends the April 10 applicability date of the new fiduciary rule (and related exemptions) but does so after April 10, the DOL will not initiate any enforcement action because of noncompliance during the "gap" period, and (ii) if the DOL ultimately does not extend the April 10 applicability date, the DOL will not initiate any enforcement action because of noncompliance, provided that all of the applicable conditions of the rule (and the exemptions) are satisfied within a reasonable period after announcement that the applicability date will not be extended. Subsequently (on March ‎27, 2017), the IRS in Announcement 2017-4 issued corresponding non-enforcement temporary relief with respect to the application of excise taxes under Section 4975 of the Internal Revenue Code.

Dechert published a Newsflash addressing the foregoing, which may be viewed here

  • Proposed rule by the Department of Labor providing for a 60-day delay, until June 9, 2017, in the applicability date of the new fiduciary rule under ERISA. The notice-and-comment period for the delay is 15 days, and the DOL has also invited comments on various considerations relating to the rule itself and provided for a comment period therefor of 45 days.

Dechert published a Newsflash addressing the foregoing, which may be viewed here

  • Press Release of the Department of Labor relating to a possible delay in the applicability date of the fiduciary rule (Feb. 3, 2017). (Coordinated with the February 3, 2017 Presidential Memorandum relating to the resolution.)

Dechert published a Newsflash addressing the foregoing, which may be viewed here

LEGISLATIVE AND ADMINISTRATIVE REPORTS
  • The U.S. Department of the Treasury issued a report on October 27, 2017, pursuant to Executive Order 13772, titled “A Financial System that Creates Economic Opportunities, Asset Management and Insurance,” which addresses, among other things, the Fiduciary Rule. The report (i) provides that the Treasury Department supports the DOL’s efforts to reexamine the implications of the Rule and to delay full implementation “until the relevant issues . . . are evaluated and addressed to best serve investors, and believes that such assessment and resolution of standard of conduct issues should include participation by the SEC and other regulators,” (ii) addresses administrative oversight over the standards of care applicable to the annuities market and (iii) recommends that the DOL and the SEC “engage with state insurance regulators regarding the impact of standards of care on the annuities market . . . in order to achieve consistent standards of conduct across product lines.”
  • Letter from ‎Rep. Sessions (Chair. of the House Comm. on Rules) to Pres. Trump urging an immediate announcement of a delay in the applicability of the fiduciary rule (Feb. 2, 2017).
  • Report of the House Freedom Caucus (Dec. 14, 2016) recommendation #138 (remove “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule – Retirement Investment Advice” at 29 CFR 2510.3-21(c))).
JUDICIAL ACTIVITY
  • Decision in Chamber of Commerce v. Alexander Acosta, Secretary of Labor, dated May 22, 2018, in which the U.S. Court of Appeals for the Fifth Circuit denied motions made by the States of California, New York and Oregon to (i) reconsider the Court’s earlier denial of the States’ motion for leave to intervene in the underlying action (in which the Fifth Circuit vacated the DOL Fiduciary Rule) and (ii) permit the filing of a petition for rehearing en banc seeking review of the Court’s order decision the motion to intervene.
  • Decision in Chamber of Commerce v. Alexander Acosta, Secretary of Labor, dated May 2, 2018, in which the U.S. Court of Appeals for the Fifth Circuit denied motions made by the States of California, New York and Oregon, and by the AARP, for leave to intervene in the underlying action in which the Fifth Circuit vacated the DOL Fiduciary Rule.
  • Opinion in Chamber of Commerce v. Alexander Acosta, Secretary of Labor, dated March 15, 2018, in which the U.S. Court of Appeals for the Fifth Circuit reversed the ruling of the U.S. District Court for the Northern District of Texas, and vacated the DOL Fiduciary Rule, finding that the DOL had exceeded its regulatory authority in promulgating the rule and that the rule’s definition of “fiduciary” was unreasonable.

Dechert published several Newsflashes and OnPoints addressing the foregoing, which may be viewed here.

  • Order dated February 21, 2017, in Thrivent Financial v. Edward Hugler, in which Judge Susan Richard Nelson of the U.S. District Court for the District of Minnesota denied the DOL’s request for a stay in the proceedings while the DOL reviews the issues raised in the President’s Memorandum of February 3.
  • Opinion in Market Synergy Group v. U.S. Dep’t of Labor dated February 17, 2017, in which the U.S. District Court for the District of Kansas upheld the DOL’s amended Prohibited Transaction Exemption 84-24, which was issued in connection with the DOL’s New Fiduciary Rule.
  • Opinion in Chamber of Commerce v. Edward Hugler, Acting Secretary of Labor dated February 8, 2017, in which Chief Judge Barbara M.G. Lynn of the United States District Court for the Northern District of Texas denied the plaintiffs’ motion for summary judgment and upheld the DOL Fiduciary Rule. The court also denied the defendants’ motion, submitted on February 8, to stay the proceedings while the DOL reviews the issues raised in the Presidential Memorandum of February 3. The DOJ's motion states that the DOL is assessing its legal options for delaying the applicability date of the rule. On February 24, the plaintiffs filed a notice of appeal, and then, on March 11, moved for an injunction to block the rule pending the appeal, which the district court denied on March 14. On March 21, the plaintiffs filed an emergency motion with the Fifth Circuit seeking an injunction to block the rule pending appeal, or alternatively expediting the appeal. On March 29, defendants filed its opposition. On April 5, the Fifth Circuit denied both motions.