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PSCA Executive Reports

June 28, 2018

Fiduciary Rule

On June 21, 2018, the United States Court of Appeals for the Fifth Circuit issued its mandate officially vacating in toto the U.S. Department of Labor’s 2016 Fiduciary Rule, including the Best Interest Contract or “BIC” Exemption, and the DOL’s other related 2016 prohibited transaction exemptions. The mandate is the final step following the Fifth Circuit’s March 15, 2018 judgment in U.S. Chamber of Commerce v. DOL, where the court held that the Fiduciary Rule was invalidly promulgated. Click here for a copy of the mandate.

This brings to a close the legal battle over the Fiduciary Rule as the deadline for a party to request that the Supreme Court take the case lapsed after June 13, 2018. It also means that the “Five Part Test” from 1975 has sprung back to life. Under that test, a person is a fiduciary if he or she (i) renders advice to the plan as to the value of or advisability of buying, selling, or investing in securities or other property (ii) on a regular basis (iii) pursuant to a mutual agreement, arrangement or understanding, written or otherwise, between the plan or plan fiduciary (iv) that the services will serve as a primary basis for investment decisions, and (v) the advice will be individualized to the plan based on the particular needs of the plan regarding such matters as investment policies or strategy, overall portfolio composition and diversification. It also appears to mean that Advisory Opinion 2005-23A (the “Deseret Opinion”) on the treatment of rollover advice has been restored. Under that advisory opinion, one-time rollover advice generally should not be fiduciary advice if the service provider is not otherwise a fiduciary. However, there is an open question as to whether such rollover recommendations are investment advice if they are made by a person serving as a fiduciary for other purposes. 

In the short term, many financial institutions that had relied on the transition portion of the BIC Exemption are considering their next steps. One option that is being considered is retreating from fiduciary status. A second alternative is reliance on Field Assistance Bulletin 2018-02 (the “FAB”). Under the FAB, DOL has taken the position that, until after regulations, exemptions, or other administrative guidance are issued, it will not pursue prohibited transaction claims against fiduciaries “who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted” had the Fiduciary Rule and related exemptions not been struck down.

Looking further ahead, financial institutions will likely be reengaging with regulators. The SEC has proposed a slate of rules that would cover the retirement space. Separately, financial institutions that achieved BIC Exemption compliance may seek new exemptions that provide broad relief for advice fiduciaries. Finally, consumer groups are likely to continue to push for additional consumer protection regulations at both the state and federal level. 

Plan sponsors will want to hold tight to see what service providers do unless a plan sponsor is in the middle of service provider negotiations now – in which case, planning for contingencies in your negotiations may be wise. In particular, plan sponsors can expect to receive new communications from service providers who had been relying on the BIC on new strategies available to avoid prohibited transactions (including under the FAB). Plan sponsors will also want to evaluate what standards they want to apply to rollover recommendation services in the future given the apparent reinstatement of the Deseret Opinion, which calls into question whether one-time rollover recommendations are investment advice if they are made by a person serving as a fiduciary for other purposes.


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