Update on DOL Fiduciary Rule

BY MICHAEL REIF

Fall 2021

SPOTLIGHT_Thumbnail_390x160

President Obama and his Department of Labor revived the concept of the fiduciary rule in April of 2015. The subsequent rulemaking process included thousands of pages of commentary, petitions, and days of hearings that ultimately resulted in the April 2016 final rule, which bore an effective date of June 9, 2017, and envisioned a phase-in period through January 1, 2018. The new rule expanded ERISA’s definition of an “investment advice fiduciary,” and it automatically characterized all financial professionals working with retirement plans or giving retirement planning advice as fiduciaries—a status that bound them legally and ethically to a heightened standard. This approach differed from the original rule in two important ways. First, it embodied a “functional approach” to defining investment advice rather than characterizing advice as subject to the rule simply because it was offered by a registered investment advisor (RIA). Second, it loosened the advice requirements, eliminating the needs-focused tailoring and mandating only that the investment advice be directed to the plan, beneficiary, or participant.

Despite the years-long roll-out, enactment of the final rule prompted impacted institutions to prepare for the realities of the rule. Many lobbied against it even as they spent time and money preparing for its ultimate implementation. Even after it was final, the rule continued to be the subject of debate, analysis, scrutiny, and angst, prompting legislative proposals to revoke or rewrite the statutory definition and related exemptions and to delay the rule’s implementation altogether.

The regulatory landscape shifted dramatically, however, with the election of Donald Trump in 2016. Just weeks after taking office, President Trump issued an executive order instructing the Department of Labor review the rule. New Labor Secretary Alexander Acosta soon officially delayed implementing the rule in spring and summer 2017, directed his department to accept additional public comment on it, and eventually pushed back full implementation to July 1, 2019.

While facing this hostility from within the very department that had issued it, the rule was also the subject to multiple external challenges, including a variety of lawsuits that focused on its fundamental legitimacy. Eventually, in March 2018, the Fifth Circuit Court of Appeals vacated the rule altogether in a 2-1 decision that found the rule “unreasonabl[e]” and determined that the DOL had engaged in “an arbitrary and capricious exercise of administrative power” when it enacted the rule in 2016.

Amid the uncertainty created by the 5th Circuit’s ruling, the DOL enacted a temporary enforcement policy that remained in effect until the summer of 2020, when the department released what could be fairly seen as a compromise position. That 2020 guidance formally reinstated the investment advice fiduciary definition in effect since 1975 but added new interpretations that extended its reach regarding retirement accounts—specifically for rollover scenarios—and also proposed a new exemption for conflicted investment advice and principal transactions. In December of 2020, toward the end of the Trump administration, the Department of Labor officially adopted this third effort, and the incoming Biden administration allowed it to become official on February 16, 2021. The still-temporary enforcement policy is scheduled to sunset on December 20, 2021, though the DOL—known for its at-times late action—could still extend the life of the compromise measure even as it debates the prospect of a new rule that hews more closely to the 2016 standard.

Related Publications

Fall 2021
Are All Fiduciaries Created Equal?
Erica Ramsey - The Robins Kaplan Spotlight, Vol. 6, No. 3
Fall 2021
Context Matters: Fiduciaries and the Rule Against Self-Dealing
Brendan Johnson, Tim Billion - The Robins Kaplan Spotlight, Vol. 6, No. 3
Summer 2021
Summer 2021
In the Beginning: Choosing the Right Corporate Entity
Manleen Singh - The Robins Kaplan Spotlight, Vol. 6, No. 2
Summer 2021
Life After Settlement: Crafting Agreements to Avoid Future Disputes
Eric Magnuson, Tim Billion - The Robins Kaplan Spotlight, Vol. 6, No. 2
Back to Top