Enforcement of the DOL Rule
Art by Tim Bower
The recent administrative complaint brought by the Enforcement Section of the Massachusetts Securities Division against a broker/dealer (B/D) has clearly gotten advisers’ attention. Whether or not you agree with the premise of the action or the authority of the Massachusetts Enforcement Section, it reminds us that the Department of Labor (DOL)’s policy of temporary enforcement relief is not the same as a “no enforcement” policy.
Advisers should not assume they needn’t comply with the impartial conduct standards prior to July 1, 2019. Indeed, the DOL states the opposite in its guidance. In addition, it seems other regulators may be willing to make sure advisers are at least trying to comply.
In Field Assistance Bulletin (FAB) 2017-02, the DOL said it will not pursue claims against fiduciaries or treat them as being in violation of the fiduciary duty rule and related exemptions so long as they “are working diligently and in good faith to understand and come into compliance with the fiduciary duty rule and exemptions.” In extending the applicability date of certain provisions of the prohibited transaction exemptions (PTEs) to July 1, 2019, the DOL restated its temporary enforcement policy and provided, “as the department reviews the compliance efforts of firms and advisers during the transition period, it will focus on the affirmative steps that firms have taken to comply with the impartial conduct standards and to reduce the scope and severity of conflicts of interest that could lead to violations of those standards.”
In other words, the DOL stated that it may investigate advisers to make sure they are working diligently and in good faith to comply. Notably, the DOL’s definition of “investment advice” has been in full effect since June 9, 2017, and, therefore, advisers are likely acting as fiduciaries in a broader set of circumstances. This is particularly the case where rollover distribution recommendations are made.
Thus, while the DOL has no enforcement jurisdiction with regard to recommendations within individual retirement accounts (IRAs), it could take the position that recommendations with regard to rollovers from Employee Retirement Income Security Act (ERISA) plans to IRAs are fiduciary acts under ERISA that squarely fall within its enforcement jurisdiction and under its liability provisions.
The intervention by state regulators into the enforcement of the DOL’s PTEs certainly complicates the compliance landscape for advisers. In its administrative complaint, the enforcement section pointed to its broad authority under Massachusetts law to require broker/dealers to conform to compliance procedures established by their firm. It made this claim even where such procedures were established for purposes of complying with the DOL’s regulation and exemptions.
The enforcement section may not be successful. There are questions here regarding federal pre-emption and whether the firm did, in fact, comply with its own policies and procedures as required under the above-described DOL guidance. However, this action certainly raises the issue of whether other state regulators may follow suit. Given that several states are considering the enactment of laws or regulations imposing fiduciary standards on advisers, regulators within those states and others may follow the lead of Massachusetts.
Finally, advisers should consider the role that the Securities and Exchange Commission (SEC) and FINRA [Financial Industry Regulatory Authority] may play in the enforcement of the DOL’s rule and related exemptions. Investigators from both agencies have recently asked all retirement plan advisers to present their policies and procedures related to compliance with the impartial conduct standards.
It remains to be seen what these regulators will do with this information, but having no policies and procedures likely will not be viewed favorably. Further, even if neither of the two agencies believes it has enforcement jurisdiction in this regard, the SEC has entered into an information- sharing agreement with the DOL. In the past several years, when the SEC had questions about an adviser’s compliance with ERISA, it has referred cases to the DOL.
David Kaleda is a principal in the fiduciary responsibility practice group at Groom Law Group, Chartered, in Washington, D.C. He has an extensive background in the financial services sector. His range of experience includes handling fiduciary matters affecting investment managers, advisers, broker/dealers, insurers, banks and service providers. He served on the Department of Labor’s ERISA Advisory Council from 2012 through 2014.