Pushback Regarding DOL Fiduciary Rule Continues

On April 6, the U.S. Department of Labor (“DOL”) released the fiduciary rule in its final form. The rule was released after months of public comment, with many of the nation’s insurers, agents, brokers/dealers and trade associations being adamantly against the proposed language.  Under the new rule, the “fiduciary” is defined as a who provides recommendations or advice for a fee to a plan, a plan fiduciary, a plan participant, or an IRA owner for a fee regarding: (i) the advisability of acquiring, holding, disposing, or exchanging plan or IRA assets; (ii) the investment of assets after those assets are rolled over, transferred, or distributed from a plan or IRA; and (iii) the management of those assets. The new regulation became effective on June 7, 2016.  The final rule generally becomes effective on April 10, 2017; however, certain aspects of the prohibited transaction class exemptions will not be fully effective until January 1, 2018.

Additionally, there were six other Prohibited Transaction Exceptions (“PTEs”) releases made the same day.  The most significant for the average broker/dealer and or investment adviser is the Best Interest Contract Exemption (“BIC Exemption”).  The BIC Exception would be required to be utilized by anyone persons giving investment recommendations and receiving variable compensation.  The key element of the BIC Exception would be a contract that holds the firm to act in the client’s “Best Interest”.

While there was substantial push-back on the DOL fiduciary rule and the BIC Exception, it continues be under attack by proposed legislation and lawsuits.  Both broker/dealers, investment advisers and other groups are not taking this new rule lying down, and the DOL now faces numerous lawsuits and proposed legislation which are questioning the validity of the rule.

Generally, the lawsuits allege that the DOL overstepped its rule making authority when it issued its new regulation. Five of those lawsuits have been consolidated into one action in the United States District Court for the Northern District of Texas, and a hearing in that consolidated action has been set for November 17, 2016. Another lawsuit has been filed in the United States District Court for the District of Kansas, and in another suit which was filed in the District of Columbia, the parties are briefing a motion for a preliminary injunction filed by the plaintiff association. The plaintiff association has argued, among other things, that implementing the new rule will have irreparable harm on the fixed annuity industry because the new fiduciary definition will cause a substantial loss in jobs and that the DOL has expanded fiduciary liability beyond the intent of Congress when it passed ERISA, which according to the plaintiff, ERISA fiduciary status is meant to cover only those who provide ongoing management of the plan or its assets.

In addition to the litigation, the DOL fiduciary rule has faced a number of legislative challenges, the first which occurred of the date the rule was released.  On July 7, 2016, the Labor, Health and Human Services, Education and Related Agencies Subcommittee of the Republican-controlled House Appropriations Committee approved a spending bill for the DOL that included a rider which would have prohibit enforcement of the rule. According to a July 6, 2016 press release issued by this Subcommittee, the purpose of this rider (along with two other unrelated riders to separate spending bills) is to “help U.S. businesses create jobs and grow the economy by reducing or eliminating overly burdensome government regulations.” A Democratic amendment to remove the rider was rejected. The full Appropriations Committee has yet to vote on the spending bill.

In the House of Representatives, on April 21, 2016, the Education and Workforce Committee voted 22-14 to pass a Republican-backed motion of disapproval with respect to the fiduciary rule. The motion of disapproval was subsequently approved by the House.  On May 24, 2016, the Senate passed the joint resolution previously passed by the House of Representatives disapproving the fiduciary rule pursuant to the Congressional Review Act. The vote on the joint resolution was 56 to 41. The joint resolution of disapproval was vetoed by President Obama, and the House and Senate were unable to override the veto.

Additionally, on September 13, 2016, the Republican-controlled House Financial Services Committee approved by a vote of 30 to 26 legislation which would among other things prohibit enforcement of the rule, and make major changes in the Frank Dodd Act.  The legislation blocking enforcement of the rule is part of a much larger bill known as the “Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act of 2016” (H.R. 5983).  The bill now goes to a vote in the full Senate.

Notwithstanding the attacks on the DOL fiduciary rule and related legislation, litigation takes time, and political solutions can take longer.  Therefore, financial organizations have little choice as effective April 10, 2017, they will need to be in compliance with the new fiduciary rule, or face DOL enforcement actions.  That will require the utilization of the Best Interest Contracts for all new advisory business generating commission and or variable compensation, having named a Best Interest Contract Enforcement Officer and modifying your supervisory procedures to address the new fiduciary rule and the documentation, disclosure, notice and record-keeping requirements of the BIC Exception.