DOL Responds to Fiduciary Rule Lawsuit

By Rebecca Moore | July 19, 2016
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NAFA nonetheless argues that DOL exceeded its authority by “impos[ing] ERISA fiduciary obligations on parties to transactions involving IRAs.” The DOL says NAFA’s first contention—that “ERISA does not permit the Department to impose ERISA fiduciary obligations on any fiduciaries involved in IRA transactions,”—is a red herring. The DOL responds that in revising the definition of fiduciary investment advice and granting the BIC Exemption, it did not “impose ERISA fiduciary obligations” on fiduciaries to IRAs, as NAFA contends. As was the case prior to promulgation of the rule, those who qualify as fiduciaries with respect to employer-based plans are required under ERISA to adhere to fiduciary duties and to refrain from specified prohibited transactions, absent an applicable exemption, whereas, those who qualify as fiduciaries with respect to IRAs are not subject to fiduciary duties under ERISA but are subject only to the parallel prohibited transaction provisions in the Code.

In arguing to the contrary, NAFA emphasizes that while ERISA requires fiduciaries to adhere to fiduciary obligations, the Code contains no parallel provisions for fiduciaries to IRAs. The DOL responds that, while that may be the case, all that can be inferred is that Congress did not intend to mandate such obligations for fiduciaries to IRAs. But nothing in the Code or ERISA suggests that, in exercising its discretion to fashion appropriate exemptions, DOL could not, as it did, condition an exemption on adherence to the impartial conduct standards, including fiduciary standards of prudence and loyalty. To the contrary, when considered in context, the Code connotes just the opposite. Notably, under the prohibited transaction provisions, the default is that transactions must be free from conflicted advice, or else the transaction cannot proceed at all. In other words, the DOL says, Congress deemed such transactions so fraught with conflict and the potential for abuse that it prohibited them altogether in both ERISA and the Code.

The DOL says Congress permitted such transactions by way of exemptions only if the Secretary determined that protections could be put in place, such that, despite the conflicts, the transaction would be in the interest of, and protect the rights of, the retirement investor. By giving DOL discretion to craft exemptions as needed to protect participants and beneficiaries, Congress intended to delegate to DOL the authority to determine what obligations should apply to fiduciaries to IRAs.

The DOL’s response is here.