The Department of Labor (DOL) has issued Field Assistance Bulletin (FAB) 2018-02, stating in response to a landmark circuit court decision that the DOL and Internal Revenue Service (IRS) will not bring enforcement actions against advisory firms for “non-exempt prohibited transactions,” so long as the firms are making a good-faith effort at providing non-conflicted service.
As explained by George Michael Gerstein, co-chair of the fiduciary governance practice for Stradley Ronon, and James Podheiser, chair of the law firm’s employee benefits group, the regulators have pledged not to bring an enforcement action against firms for non-exempt prohibited transactions that arise from providing fiduciary investment advice to retirement plans and individual retirement account (IRA) holders when they exercise “reasonable diligence and act in good faith” in complying with previously existing impartial conduct standards.
Given how much back-and-forth the industry has experienced in recent years in terms of conflict of interest standards, the attorneys say it is no surprise that many advice professionals are feeling unsure of what their current obligations actually are, even with this additional guidance. Rightly adding to advisers’ concerns, Gerstein and Podheiser warn, is the fact that the DOL’s new non-enforcement policy binds only itself and IRS; state regulators and private plaintiffs can potentially seek to bring an action for alleged non-compliance with impartial conduct standards.
One point of optimism for confused (and stressed) advisers is that the “impartial conduct standards” about which DOL is speaking in FAB 2018-02 should already be familiar, because they were originally set forth in the much-debated Best Interest Contract Exemption. While this exemption was technically thrown out by the 5th Circuit along with the rest of the DOL’s 2016 fiduciary rule language, for the past year, service providers have been eligible for “transition relief” by complying with the impartial conduct standards. This relief is now essentially enshrined for the time being by the DOL in FAB 2018-02, according to the attorneys.
“This means that service providers can continue with their existing compliance approach in connection with the impartial conduct standards,” Gerstein and Podheiser explain. “The DOL most likely issued FAB 2018-02 because of the confusion over the fiduciary rule’s iterations. What was designed as a sweeping and, to many, draconian, rule has since morphed into an ever narrower and more flexible slate of compliance obligations through a series of supplemental guidance issued by the DOL post-election. Uncertainty over how to comply with the fiduciary rule has been as much a hallmark of the rulemaking as the rule’s own conditions.”
As they Stradley Ronon attorneys see it, FAB 2018-02 seeks to alleviate some of this confusion by allowing firms to continue the compliance approach firms have been taking since last June. “The DOL then and now affords firms flexibility to fashion compliance with the impartial conduct standards in ways they determine in good faith satisfies the standards while taking into account the organization’s unique preferences and resources,” they muse.
“Because the DOL fiduciary rule was vacated by the 5th Circuit, the test for when one becomes a fiduciary in the first place, and, therefore, needs a prohibited transaction exemption, is set forth in the original 1975 five-part test,” the attorneys note. “FAB 2018-02 does not resuscitate the fiduciary rule or somehow indirectly continue to impose the expansive ways in which one can become an investment advice fiduciary. Rather, FAB 2018-02 appears designed to preserve existing compliance methods for securing prohibited transaction relief for these advisers who are fiduciaries under the old five-part test until the DOL issues formal guidance (likely through the proposal of a new exemption) in the future.”
Looking forward, the attorneys generally recommend advisers first determine if they continue to constitute an investment advice fiduciary “now that we are back to the much narrower five-part test and, if so, whether they have undertaken reasonably diligent and good faith efforts to satisfy the impartial conduct standards or otherwise comply with a different prohibited transaction exemption.”
Similar commentary from Wagner Law Group
Related commentary was shared with PLANADVISER by the Wagner Law Group out of Boston.
As the Wagner attorneys point out, the FAB states that during the period from June 9, 2017, “until after regulations or prohibited transaction exemptions or other administrative guidance have been issued,” neither the DOL nor IRS will pursue prohibited transactions 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 Best Interest Contract and Principal Transactions Exemptions, or treat such fiduciaries as violating the applicable prohibited transaction rules.
“Investment advice fiduciaries may also continue to rely upon other available exemptions, but neither the IRS nor the DOL would treat an adviser’s failure to rely upon such other exemptions as resulting in a prohibited transaction violation if the adviser satisfied the terms of the temporary enforcement policy,” they suggest. “The DOL recognized that the 5th Circuit’s decision left a number of open questions, with respect to which it intends to provide additional guidance in the future. However, as an immediate step, it wanted to provide guidance as to the breadth of the prohibited transaction exemptions that remain available for investment advice fiduciaries. Of course, with the fiduciary rule vacated, the number of individuals who may be investment advice fiduciaries will be significantly reduced.”
Concerning the reactions of other regulatory stakeholders, the Wagner attorneys say the FAB does not preclude the DOL from asking the Supreme Court to review the decision of the 5th Circuit, “although that course of action now seems unlikely.”
“Also, the temporary enforcement policy of the DOL and IRS does not affect the rights or obligations of other parties, but, in light of the 5th Circuit decision, actions by other parties would seem less likely,” they attorneys feel. “It will also be interesting to see how the DOL crafts additional guidance in a manner consistent with the 5th Circuit decision.”
In a refreshing moment of frankness, even the Wagner attorneys admit the FAB is “somewhat difficult to understand.”
“As mentioned, the DOL expects the fiduciary rule and related exemptions to [remain] vacated by the 5th Circuit. Once the 5th Circuit takes action, there will be no rule or exemptions upon which to apply a temporary enforcement policy,” they point out. “FAB’s extension of the policy beyond today, until after regulations or exemptions or other administrative guidance has been issued, is confusing and, if true, will be contrary to the 5th Circuit’s decision.”
Perspective from a tax and benefits attorney
Ropes & Gray tax and benefits partner Josh Lichtenstein also offered some preliminary commentary after the release of FAB 2018-02.
As he sees it, while confusing and even contradictory in some ways, the new FAB makes it clear that the DOL is aware of the level of uncertainty and potential disruption that could result in the financial industry in the wake of the 5th Circuit’s mandate to vacate the fiduciary rule and the related exemptions. He says the FAB still provides for important transition relief pending additional guidance.
“However, it also raises new questions by referring to the desire of some financial institutions to continue to rely on the new compliance structures that they created to comply with the BIC exemption,” he agrees. “Financial institutions will need to wait for further DOL guidance to determine how the 5th Circuit’s expected actions will impact their businesses, and to determine what, if any, additional changes they must make to comply with their fiduciary duties under ERISA.”