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Interesting Angles on the DOL’s Fiduciary Rule #88

The Fiduciary Rule: What’s Next (Part 4)?

This is my 88th article about interesting observations concerning the Department of Labor’s (DOL) fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

This is the fourth of my four-part series on the critical questions raised by the 5th Circuit Court of Appeals decision to “vacate,” or throw out, the Fiduciary Rule. The first article (Angles #85) discussed the general legal issues created by the 5th Circuit decision to vacate the Fiduciary Rule. Then, Angles #86 and Angles #87 described fiduciary status for advisors under the “old” 5-part test and the standard of care for fiduciary advisors. This post discusses conflicts of interest for fiduciary advisors under ERISA and the Code—and what the future may hold.

The most difficult of the three issues is how the regulators will deal with conflicts of interest. That is true for two reasons. (This article does not discuss the SEC’s new proposed Regulation Best Interest. That will be covered in future articles.)

The first is that the approach taken by the SEC and DOL in the past have been very different and are foundational to their thinking and, most likely, in how they may go forward. For example, the Department of Labor must comply with ERISA and Internal Revenue Code provisions on prohibited transactions for financial conflicts of interest. Generally speaking, fiduciary conflicts of interest are strictly prohibited under both ERISA and the Code. As a result, to permit financial conflicts of interest that result from fiduciary advice, the DOL must issue exceptions (called “exemptions”) from the prohibited transaction rules. In order to do that, the DOL must determine that the conditions of the exemption are adequate to protect the interests of retirement investors. On the other hand, the SEC has, by and large, relied on disclosures to mitigate the potentially harmful effects of conflicts of interest. The SEC’s expectation appears to be that, if conflicts are disclosed, investors will review those disclosures and make reasoned investment decisions.

The second reason is that, because of the prevalence of 401(k) and 403(b) plans, some relatively unsophisticated retirement investors are accumulating significant amounts of money. That raises the issue of whether disclosures of conflicts of interest, without more, will adequately protect those investors. Unfortunately, disclosure documents can be lengthy and complex, which may make it difficult for less sophisticated investors to appreciate the full significance of the disclosed conflicts.

The DOL may require more than just disclosures in their new prohibited transaction exemptions—which could be released, in proposed form, in the third quarter of this year.

Also, with regard to the SEC, Chairman Clayton has suggested that there should be a shorter (perhaps four pages), more transparent, disclosure document for the conflicts of interest of RIAs and broker-dealers. It remains to be seen whether something that short could adequately cover the material conflicts of interest with sufficient detail to fully inform an investor.

On April 18, 2018, the SEC proposed a new Regulation Best Interest and short disclosure documents. The proposed regulation would impose a best interest standard of care on broker-dealers.

It is likely—at least in my view—that the DOL will follow suit and issue a proposed regulation re-defining fiduciary advice—perhaps more broadly than the new 5-part test, but less expansive than the Fiduciary Rule.

The DOL will also need to issue prohibited transaction exemptions. (Note: The BIC exemption provided relief for a number of common fiduciary prohibited transactions. However, the 5th Circuit also vacated the BIC exemption.) I suspect that the DOL exemptions will, for the most part, follow the SEC’s disclosure requirements, but perhaps adding additional protections for retirement investors.

For both the SEC and DOL proposals, there will be comment periods following the issuance of the proposals. After receiving comments, the SEC and the DOL will develop their final guidance. Then, I suspect that both agencies will delay the applicability of the final rules—perhaps to January 1, 2020—to allow broker-dealers, RIAs and other service providers to make necessary changes.

Part 1- Interesting Angles on DOL’s Fiduciary Rule #1

Part 2 - Best Interest Standard of Care: Interesting Angles on the DOL’s Fiduciary Rule #2 

Part 3 - Hidden Preamble Observations: Interesting Angles on the DOL’s Fiduciary Rule #3

Part 4 - TV Stock Tips and Fiduciary Advice: Interesting Angles #4

Part 5 - Level Fee Fiduciary Exemption: Interesting Angles on DOL’s Fiduciary Rule #5

Part 6 - Fiduciary Regulation And The Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #6

Part 7 - Fiduciary Regulations And The Exemptions : Interesting Angles on the DOL’s Fiduciary Rule #7

Part 8 - Designated Investment Alternatives: Interesting Angles on the DOL’s Fiduciary Rule #8

Part 9 - Best Interest Standard and the Prudent Man Rule: Interesting Angles on the DOL’s Fiduciary Rule #9

Part 10 - FINRA Regulatory Notice: Interesting Angles on the DOL’s Fiduciary Rule #10

Part 11-ERISA and the Internal Revenue Code: Interesting Angles on the DOL’s Fiduciary Rule #11

Part 12- Potential Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #12

Part 13-Investment Policies: Interesting Angles on the DOL’s Fiduciary Rule #13

Part 14- Investment Suggestions: Interesting Angles on the DOL’s Fiduciary Rule #14

Part 15- Best Interest Contract Exemption: Interesting Angles on the DOL’s Fiduciary Rule #15

Part 16 - Adviser Recommendations: Interesting Angles on DOL’s Fiduciary Rule #16

Part 17 - Level Fee Fiduciary: Interesting Angles on DOL’s Fiduciary Rule #17

Part 18- Best Interest Contract Exemption and IRA Advisor Compensation: Interesting Angles on the DOL’s Fiduciary Rule #18

Part 19- Interesting Angles on the DOL’s Fiduciary Rule #19: Advisors' Use of "Hire Me" Practices.

Part 20- Three Parts of "Best Interest Standard of Care": Interesting Angles on the DOL’s Fiduciary Rule #20

Part 21- Retirement Plan Documentation and Prudent Recommendation: Interesting Angles on the DOL’s Fiduciary Rule #21

Part 22-Banks and Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #22

Part 23-Prohibited Transactions: IRA and RIA Qualified Money: Interesting Angles on the DOL’s Fiduciary Rule #23

Part 24 - Differential Compensation Based on Neutral Factors

Part 25-Reasonable Compensation Versus Neutral Factors: Interesting Angles on the DOL’s Fiduciary Rule #25

Part 26- Interesting Angles on the DOL’s Fiduciary Rule #26- Reasonable Compensation for IRAs: When and How Long?

Part 27 - Definition of Compensation

Part 28 - What About Rollovers that Aren’t Recommended?: Interesting Angles on the DOL’s Fiduciary Rule #28

Part 29- Interesting Angles on the DOL’s Fiduciary Rule #29- Capturing Rollovers: What Information is Needed?

Part 30- Three Kinds of Level Fee Fiduciaries . . . and What’s A “Level Fee?”: Interesting Angles on the DOL’s Fiduciary Rule #30

Part 31 - Interesting Angles on the DOL’s Fiduciary Rule #31: “Un-levelizing” Level Fee Fiduciaries

Part 32 - What “Level Fee Fiduciary” Means for Rollover Advice: Interesting Angles on the DOL’s Fiduciary Rule #32

Part 33- Discretionary Management, Rollovers and BICE: Interesting Angles on the DOL’s Fiduciary Rule #33

Part 34- Seminar Can Be Fiduciary Act: Interesting Angles on DOL’s Fiduciary Rule #34

Part 35- Presidential Memorandum on Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #35

Part 36 -Retirement Advice and the SEC: Interesting Angles on the DOL’s Fiduciary Rule #36

Part 37 - SEC Retirement-Targeted Examinations: Interesting Angles on the DOL’s Fiduciary Rule #37

Part 38- SEC Examinations of RIAs and Broker-Dealers under the ReTIRE Initiative: Interesting Angles on the DOL’s Fiduciary Rule #38

Part 39- FINRA Regulatory Notice 13-45: Guidance on Distributions and Rollovers: Interesting Angles on the DOL’s Fiduciary Rule #39

Part 40 - New Rule, Old Rule - What Should Advisers Do Now?: Interesting Angles on the DOL’s Fiduciary Rule #40

Part 41 - While We Wait: The Current Fiduciary Rule and Annuities: Interesting Angles on DOL’s Fiduciary Rule #41

Part 42 - Rollovers under DOL’s Final Rule: Interesting Angles on DOL’s Fiduciary Rule #42

Part 43 - BICE Transition: More Than the Eye Can See - Interesting Angles on DOL’s Fiduciary Rule #43

Part 44 - Basic Structure of Fiduciary Package (June 9): Interesting Angles on DOL’s Fiduciary Rule #44

Part 45 - DOL Fiduciary “Package”: Basics on the Prohibited Transaction Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #45

Part 46 - How Does an Adviser Know How to Satisfy the Best Interest Standard?: Interesting Angles on the DOL’s Fiduciary Rule #46

Part 47- “Real” Requirements of Fiduciary Rule: Interesting Angles on DOL’s Fiduciary Rule #47

Part 48- The Last Word: The Fiduciary Rule Applies on June 9- Interesting Angles on the DOL’s Fiduciary Rule #48

Part 49- The Requirement to Disclose Fiduciary Status: Interesting Angles on the DOL’s Fiduciary Rule #49

Part 50- Fourth Impartial Conduct Standard: Interesting Angles on DOL’s Fiduciary Rule #50

Part 51- Interesting Angles on the DOL’s Fiduciary Rule #51: Recommendations to Transfer IRAs

Part 52 - Interesting Angles on the DOL’s Fiduciary Rule #52: The Fiduciary Rule and Exemptions: How Long Will Our Transition Be?

Part 53 - Fiduciary Rule and Discretionary Investment Management: Interesting Angles on DOL’s Fiduciary Rule #53

Part 54 - Interesting Angles on the DOL’s Fiduciary Rule #54: The DOL’s RFI and Possible changes to BICE

Part 55- DOL’s RFI and Recommendation of Annuities- Interesting Angles on DOL’s Fiduciary Rule #55

Part 56-Recommendations of Contributions as Fiduciary Advice: Interesting Angles on the DOL’s Fiduciary Rule #56

Part 57- Relief from 408(b)(2) Requirement on Change Notice: Interesting Angles on the DOL’s Fiduciary Rule #57

Part 58- Recommendations to Contribute to a Plan or IRA- Interesting Angles on the DOL’s Fiduciary Rule #58

Part 59- What Plans and Arrangements Are Covered by the Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #59

Part 60- What the Tibble Decision Means to Advisers: Interesting Angles on the DOL’s Fiduciary Rule #60

Part 61- Interesting Angles on the DOL’s Fiduciary Rule #61: The Fiduciary Rule, Distributions and Rollovers

Part 62 - Is It Possible To Be An Advisor Without Being A Fiduciary? - Interesting Angles on the DOL’s Fiduciary Rule #62

Part 63-Policies and Procedures: The Fourth BICE Requirement - Interesting Angles on the DOL’s Fiduciary Rule #63

Part 64 -What Does the Best Interest Standard of Care Require?-Interesting Angles on the DOL’s Fiduciary Rule #64

Part 65- Unexpected Consequences of Fiduciary Rule - Interesting Angles on the DOL’s Fiduciary Rule #65

Part 66- Concerns About 408(b)(2) Disclosures: Interesting Angles on the DOL’s Fiduciary Rule #66

Part 67- From the DOL to the SEC - Interesting Angles on the DOL’s Fiduciary Rule #67

Part 68-Recommendations of Distributions - Interesting Angles on the DOL’s Fiduciary Rule #68

Part 69- Compensation Risks for Broker-Dealers and RIAs: Interesting Angles on the DOL’s Fiduciary Rule #69

Part 70-Interesting Angles on the DOL’s Fiduciary Rule #70: The Fiduciary Rule and Recordkeeper Services

Part 71- Senate, Tax Cuts and Jobs Act, income tax rate, Corporate Tax Rate, Passthrough Entities, Foreign Income, Qualified Property, Interest Deduction Limitation

Part 72-Interesting Angles on the DOL’s Fiduciary Rule #72 - The "Wholesaler" Exception

Part 73- Interesting Angles on the DOL’s Fiduciary Rule #73: Recordkeeper Investment Support for Plan Sponsors

Part 74 -Interesting Angles on the DOL’s Fiduciary Rule #74: One More Fiduciary Issue for Recordkeepers

Part 75 - Interesting Angles on the DOL’s Fiduciary Rule #75: The Fiduciary Rule: Mistaken Beliefs

Part 76 - Interesting Angles on the DOL’s Fiduciary Rule #76

Part 77 - Interesting Angles on the DOL’s Fiduciary Rule #77: The Fiduciary Rule: Mistaken Beliefs (#2)

Part 78 - Interesting Angles on the DOL's Fiduciary Rule #78: The Fiduciary Rule: Mistaken Beliefs (#3) 

Part 79 - Interesting Angles on the DOL’s Fiduciary Rule #79-The Fiduciary Rule: Mistaken Beliefs (#4)

Part 80 - Enforceable During Transition?: Interesting Angles on the DOL’s Fiduciary Rule #80

Part 81 - Interesting Angles on the DOL’s Fiduciary Rule #81: The Fiduciary Rule Prohibits Commissions... or Not (Myth #6)

Part 82 - Interesting Angles on the DOL’s Fiduciary Rule #82- Undisclosed (and Disclosed) 12b-1 Fees: The Different Views of the SEC and DOL

Part 83 - Part 2 of Undisclosed (and Disclosed) 12b-1 Fees: Interesting Angles on the DOL’s Fiduciary Rule #83

Part 85 - Interesting Angles on the DOL’s Fiduciary Rule #85

Part 86 - Interesting Angles on DOL's Fiduciary Rule #86

Part 87 - What's Next for DOL's Fiduciary Rule #87

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About this Author

Fred Reisch, Drinker Biddle Law Firm, Los Angeles, Labor and Employment Law Attorney
Partner

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

Fred works with both private and public sector entities and their plans and fiduciaries and represents plans, employers and fiduciaries before federal agencies such as the DOL and IRS. He consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) recordkeeping services, investment products and...

(310) 203-4047