HR Management & Compliance

DOL Fiduciary Rule Officially Vacated by Appellate Court; SEC Seen Receiving Baton on Adviser Oversight

The U.S. Department of Labor’s (DOL) fiduciary rule was laid to rest June 21 when the U.S. Court of Appeals for the 5th Circuit issued a final mandate to vacate the regulation aimed at expanding the definition of an investment advice fiduciary.

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The DOL rule largely became effective in June 2017 (see May 2017 story), but was first vacated by a 2-1 panel vote by the same court in March (see story) for exceeding the DOL’s rulemaking authority. The federal court’s official vacatur order had been expected by most in the retirement plan community.

As reported, the five-part test in place since 1975 has been called back into action for determining fiduciary status for investment advisers and other retirement plan service providers working with Employee Retirement Income Security Act (ERISA) plans and individual retirement accounts (IRAs). That test was used for decades before the now-invalid DOL initiative was launched in 2010. The agency had claimed the five-part test for fiduciaries was too narrow and outdated to sufficiently protect retirement savers.

Under the test, a person who provides investment advice to an ERISA client for a fee is not considered an ERISA fiduciary unless each of the following five elements is satisfied: (1) the person renders advice regarding the value of— or the advisability of investing in, purchasing, or selling—securities or other property; (2) on a regular basis; (3) pursuant to a mutual understanding with the ERISA client that: (4) the advice will serve as a primary basis for the ERISA client’s investment decisions; and (5) the advice will be individualized based on the needs of the ERISA client.

Advice for Asset Managers

According to one employee benefits law firm’s client bulletin posted June 22, “asset managers who revised subscription documents, placement agent agreements, marketing materials and other documents to take advantage of the Fiduciary Rule’s ‘Independent Fiduciary Exception’ may begin removing that language from those documents when convenient.”

Fried, Frank, Harris, Shriver & Jacobson LLP said in the bulletin that “[t]here is no need for asset managers to contact ERISA clients regarding the change in law or to update subscription and other documents immediately.”

The 5th Circuit’s June 21 mandate also erases the Best Interest Contract (BIC) and Principal Transaction exemptions (PTEs) that generated both controversy and support for the DOL rule (see related March column).

The DOL earlier this year issued a “no-enforcement” policy that recognized that many fiduciaries had invested significant compliance resources and time aligning their policies with impartial conduct standards ahead of new agency guidance.

SEC Proposal

In the meantime, the U.S. Securities and Exchange Commission (SEC) in April (see story) published proposed conflict-of-interest rules for broker-dealers and investment advisers. The comment period for the SEC’s proposal runs until August 7.

The SEC’s proposed rules “are intended to supplant the Fiduciary Rule,” according to another June 22 client bulletin, from the employee benefits team at Kilpatrick Townsend & Stockton LLP. However, returning to the five-part test “is a significant retreat for the DOL, which viewed its 1975 regulations as outdated.”

Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.