Labor, IRS extend enforcement policy on a fiduciary rule that no longer exists

The Labor Department and Treasury Department will continue a non-enforcement policy with the fiduciary rule, as the U.S. Court of Appeals for the Fifth Circuit is expected to issue a mandate today enforcing its March decision to vacate the Obama-era regulation.

“The Department has concluded that financial institutions should be permitted to continue to rely upon the temporary enforcement policy,” regulators wrote in a field assistance bulletin released Monday morning.

In the FAB, regulators say they intend to provide future guidance and, potentially, new permanent prohibited transaction relief for investment advice fiduciaries that coordinates with the 5th Circuit’s decision to vacate the rule.

In June of 2017, the fiduciary rule’s impartial conduct standards were implemented, requiring all investment recommendations to qualified retirement accounts to be in investors’ best interest.

Most of the rule’s extensive new disclosure and warranty requirements were delayed until July 2019, as was full implementation of the rule’s Best Interest Contract Exemption, which would allow broker-dealers to sell commission-based products.

Under Labor’s temporary enforcement policy, which was issued last summer, regulators said they would not pursue enforcement action as long as investment providers were “working diligently and in good faith to comply with the impartial conduct standards.”

Despite field assistance bulletin, confusion continues

In the FAB, Labor acknowledged the confusion among providers and investors in the wake of the 5th Circuit decision to vacate the fiduciary rule.

In extending its temporary enforcement policy, Labor is issuing policy for compliance with the impartial conduct standards, which will cease to exist when the 5th Circuit issues its mandate finalizing the March ruling.

The move is bound to sow confusion among industry, say legal experts.

“I believe there is still substantial confusion,” said Jamie Fleckner, chair of the ERISA Litigation Practice at Goodwin. “This issue is not fully resolved by DOL’s temporary enforcement policy.”

“The FAB is difficult to understand,” said Marcia Wagner, managing director of the Wagner Law Group.

“After the 5th Circuit decision, there should be no obligation to comply with the impartial conduct standard,” added Ms. Wagner. “The DOL may be saying that even though it is no longer in effect, if a financial institution chose to nonetheless comply with it, neither DOL nor the IRS will take any enforcement action.”

In the FAB, Labor acknowledged the significant resources firms have invested to comply with the impartial conduct standards and the BIC Exemption. Some firms may opt to rely on newly created compliance structures.

“DOL is not necessarily stating that the impartial conduct standard is still good law, but rather, until the DOL figures out exactly what it wants to do, if a financial institution continues to comply with the standard, there will be no enforcement action,” said Ms. Wagner.

“The DOL will need to better explain what it meant by this FAB,” added Ms. Wagner.

Notably, Labor’s FAB says the temporary enforcement policy “does not address the rights or obligations of other parties.”

“That means its views would not prevent private litigation,” explained Mr. Fleckner.

Notwithstanding private parties’ right to bring lawsuits, the 5th Circuit’s decision vacating the rule will make potential claims less likely, according to a client alert published by The Wagner Law Group.

Nor does publishing the FAB prevent Labor from petitioning the Supreme Court to review the 5th Circuit’s decision. Labor has a June 14 deadline to do so.

According to the Wagner Law Group’s client alert, that course of action “seems unlikely.”