DOL Moves Step Closer to 18-Month Delay on Fiduciary Duty Rule and BICE

On August 28, 2017, the Office of Management and Budget (OMB) approved the Department of Labor’s (DOL) proposal to delay the full applicability dates of the Fiduciary Duty Rule and the Best Interest Contract Exemption (BICE). The proposal still must be finalized by the DOL.

The DOL will now release a proposed rule in the Federal Register with a comment period. The DOL’s proposed rule will delay for 18 months—from January 1, 2018, to July 1, 2019—full implementation of the Fiduciary Duty Rule, the BICE and other related rules (including PTE 84-24).

The full text of the proposed delay rule, when it is available, should be instructive. Industry participants will clearly scour the full proposal for clues as to whether this latest delay is a deliberate step towards full or significant repeal of the Rule’s most onerous provisions (especially the Best Interest Contract), or whether this is just another kick down the road with no clear plan for the future of the Rule.

Posted in Department of Labor (DOL), Fiduciary Duty Rule, Uncategorized | Tagged , , , , ,

DOL Seeks Additional Delay on Fiduciary Duty Rule and BICE

The Department of Labor (DOL) is seeking once again to delay final implementation of the Fiduciary Duty Rule and the Best Interest Contract Exemption (BICE), leading to further speculation as to whether the full Fiduciary Duty Rule or BICE will ever see the light of day.

On August 9, 2017, the DOL submitted to the Office of Management and Budget (OMB) proposed amendments to the Fiduciary Duty Rule, the BICE, and other related rules (including PTE 84-24), which would delay the full applicability dates of those rules another 18 months — from January 1, 2018, to July 1, 2019.

Of course, the real question is whether this is yet another slow step towards full or significant repeal, especially for the BICE.

After all, much rejoicing was heard back on July 3, when the DOL appeared to concede before the Fifth Circuit Court of Appeals that the BICE’s prohibition on class action waivers violates the Federal Arbitration Act and admitted in its papers (here at p. 59) that “the government is no longer defending this specific condition.” However, the government maintained then that the “invalidation of the anti-arbitration condition does not justify invalidation of the BIC Exemption or of the fiduciary rule as a whole.” Brief at pp. 59-60.

But now, the DOL is hesitating on the Rule and the BICE again, this time for another 18 months. The text of the latest proposed delay rule does not yet appear to be publicly available, which is a shame. After all, the full text of the first delay rule, that initially extended the applicability 60 days, from April 10, 2017 until June 9, 2017, was 60+ pages long and contained a lot of very interesting clarification from the DOL.

Regardless, it seems clear, at least, that the DOL wants time to consider the comments submitted in response to its Request for Information (see our blog post here), complete the analysis demanded by President Trump in his Presidential Memorandum (see our blog post here), and perhaps even to cooperate with the SEC on a uniform standard to apply to all investor accounts.

The proposed delay rule is now up for review before the OMB.



Posted in Administration, Department of Labor (DOL), Fiduciary Duty Rule, Uncategorized | Tagged

DOL Issues Request for Information on the Fiduciary Duty Rule; DOL and SEC Indicate They Will Work Together on Standard for Investment Advice

On June 29, 2017, the Department of Labor announced in a news release (available here) that it has published a Request for Information (“RFI”) (available here) related to the DOL Fiduciary Duty Rule, to allow the public to provide input that may be used to revise the Rule and its exemptions.

There is a 15-day comment period on whether the DOL should extend the January 1, 2018 applicability date, and a 30-day comment period on other issues raised in the RFI, such as whether new and more streamlined exemptions are advisable.  Both deadlines will begin to run once the RFI is published in the Federal Register.

The DOL specifically asks for input on (i) possible additional exemptions or changes to the Rule, as well as (ii) the advisability of extending the January 1, 2018 applicability date of certain provisions in the Best Interest Contract Exemption (the “BICE”), the Principal Transactions Exemption, and PTE 84-24.

In the RFI, the DOL reveals that it is “particularly interested in public input on whether it would be appropriate to adopt an additional more streamlined exemption or other rule changes for advisers committed to taking new approaches” to compliance, such as “clean shares,” T-shares, and fee-based annuities.  RFI at page 6.  The DOL notes that “[c]lean shares, T-shares, and fee-based annuities are all examples of market innovation that may mitigate or even eliminate some kinds of potential advisory conflicts otherwise associated with recommendations of affected financial products.  These innovations might also increase transparency of advisory and other fees to retirement investors.”  RFI at page 10.

And, importantly, regarding the BICE, the DOL explicitly says that it “is interested in the possibility of regulatory changes that could alter or eliminate [the BICE’s] contractual and warranty requirements.”  RFI at page 8.

Notably, the Request does not seek input on whether the fiduciary standard should be maintained or whether the Rule itself should survive.  However, the DOL notes that it is still in the process of reviewing and analyzing input received in response to its previous request for comments on issues raised in Trump’s Presidential Memorandum.  Trump’s Memorandum had directed the DOL to evaluate the Rule as a whole to determine whether it should be revised or rescinded.  So, the question of revision or rescission clearly remains on the table.

Meanwhile, on Tuesday, June 27, 2017, Labor Secretary Acosta and SEC Chair Clayton told separate Senate panels they would work together on investment advice regulation.

In live testimony before a Senate panel, Secretary Acosta was asked whether the DOL is talking with the SEC about the Fiduciary Duty Rule.  Secretary Acosta told the panel that he had asked SEC Chair Clayton whether the SEC will work with the DOL on reviewing the Rule and that Clayton responded in the affirmative.  And Clayton told a separate Senate panel that it is his intent as SEC Chair to move forward on financial regulation in a way that is coordinated.  However, it was not clear from either Acosta’s or Clayton’s comments how extensive the cooperation will be or even  whether the coordination will have to wait until the SEC receives a full staff of commissioners.

Posted in Uncategorized | 1 Comment

Supreme Court Rules 5-4 That Pendency of Class Action Suit Does Not Toll 3-Year Statute of Repose for Claims Brought Under § 11 of Securities Act

On June 26, 2017, the Supreme Court ruled, in California Public Employees’ Retirement System v. ANZ Securities, Inc., that a pending putative class action does not toll the running of the three-year time bar for claims brought under § 11 of the Securities Act. The Court ruled that the three-year time limit set forth in § 13 of the Securities Act is a statute of repose designed to provide defendants full and final protection from suit after three years and is therefore not subject to equitable tolling principles, including the class action-tolling rule.

The decision was split 5-4, with Justice Kennedy writing for the majority and Justice Ginsburg authoring the dissent. The decision is here.

In 2007 and 2008, Lehman Brothers raised capital through several public securities offerings. In 2008, a putative class action was filed in the Southern District of New York, alleging that the registration statements for certain of the securities offerings contained material misstatements or omissions, in violation of § 11 of the Securities Act. CalPERS was a member of the putative class.

Section 13 of the Securities Act provides two time limits for § 11 lawsuits: the action must be brought (i) within one year after the untrue statement or omission was or reasonably should have been discovered; but (ii) in no event more than three years after the securities were offered to the public.

In February 2011, more than three years after the relevant securities offerings, CalPERS filed a separate complaint against the same defendants in the Northern District of California, alleging the same claims.

Soon thereafter, a proposed settlement was reached in the putative class action, but CalPERS opted out. The defendants then moved to dismiss CalPERS’ separate action, alleging that the claims were untimely.

CalPERS argued that the limitations period was tolled during the pendency of the class action, under the rule previously set forth by the Supreme Court in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974).

The district court disagreed with CalPERS and dismissed the case as untimely; the Second Circuit affirmed.

The Supreme Court affirmed, holding that the three-year limit in § 13 is a statute of repose and is therefore not subject to equitable tolling, including the equitable tolling provided under the American Pipe class action-tolling rule.

The Court distinguished American Pipe by noting that the statute in that case was one of limitations, not of repose; it began to run when the cause of action accrued. Slip Op. at p. 11. The three-year statute at issue in CalPERS’ case, on the other hand, is a statute of repose. The statute runs from the offering of the securities, not from a plaintiff’s discovery of defects in the registration statement, and it provides that “[i]n no event” shall the action be brought more than three years after the offering.

The Court noted that the “text, purpose, structure, and history of the [§ 13] statute all disclose the congressional purpose to offer defendants full and final security after three years.” Slip Op. at 11.

Therefore, the Court held, while the statute in American Pipe could be tolled by equitable principles, the three-year limit in § 13 could not. The Court reasoned that “the object of a statute of repose, to grant complete peace to defendants, supersedes the application of a tolling rule based in equity.” Slip Op. at 7.

The Court provided a clear summary of its ruling, as follows:

The 3-year time bar in §13 of the Securities Act is a statute of repose. Its purpose and design are to protect defendants against future liability. The statute displaces the traditional power of courts to modify statutory time limits in the name of equity. Because the American Pipe tolling rule is rooted in those equitable powers, it cannot extend the 3-year period. Slip Op. at 16-17.

Given the Court’s reasoning, the ruling likely applies as well to claims under Rule 10b-5, which may be brought not later than the earlier of two years after discovery of the facts constituting the violation or five years after such violation.

Accordingly, plaintiffs who wish to preserve their right to separately litigate claims that are subject to a running statute of repose cannot rely on the pendency of a putative class action to toll their claims. They will need to either file a separate protective case or intervene in the class action within the time period to protect their rights. Defendants, on the other hand, can feel secure that, after they settle a class action, they will not be exposed to opt-out litigation filed after the statute of repose has run.

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Supreme Court Limits SEC’s Disgorgement Power

On June 5, 2017, the United States Supreme Court unanimously held in Kokesh v. Securities and Exchange Commission, No. 16-529, that “any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.”  Slip. Op. at 11.  The Opinion can be found here.

Equally important is the ruling’s implication that, even if the case is timely filed, the SEC can only seek disgorgement of funds or property that was received in the five years prior to the filing of the SEC’s action. In other words, even if the alleged wrongdoing occurred over more than five years, the SEC’s claim for disgorgement can only go back five years from the date the action was filed.

The SEC brought its case against Kokesh in 2009, and alleged that Kokesh had misappropriated $34.9 million between 1995 and 2009. After a jury found for the SEC, monetary sanctions were imposed. The district court held that, when it came to a penalty, the five-year statute of limitations precluded any penalties for misconduct that occurred more than five years prior to the date the SEC filed its action.

As to disgorgement, however, the district court held that there was no statutory provision that limited the time period for which a disgorgement claim could be asserted, and therefore entered judgment against Kokesh for the full $34.9 million misappropriated over fourteen years, plus interest.

The Tenth Circuit affirmed.

The Supreme Court  reversed and held that disgorgement constitutes a “penalty,” and is therefore subject to the five-year statute of limitations found in 28 U.S.C. § 2462.

Interestingly, the Supreme Court explicitly noted that Kokesh should not be viewed as a determination of whether courts have the authority to order disgorgement in SEC enforcement proceedings or on whether the district court in Kokesh properly applied disgorgement principles.

In other words, in Kokesh, the Supreme Court not only severely limited the SEC’s ability to “claw back” alleged ill-gotten gains, it pointedly raised the issue of whether courts even possess the authority to order disgorgement in SEC enforcement proceedings.

Posted in Uncategorized

Should the DOL Fiduciary Duty Rule be Rescinded While the SEC Ponders its Own Standard?

On June 1, 2017, the Securities and Exchange Commission requested input regarding the DOL Fiduciary Duty Rule and the SEC’s development of its own fiduciary standard governing investment advice to retail investors. To view Chair Clayton’s public statement requesting Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers, click here.

In the public statement, Chair Clayton remarked: “The [DOL’s] Fiduciary Rule may have significant effects on retail investors and entities regulated by the SEC. It also may have broader effects on our capital markets. Many of these matters fall within the SEC’s mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.” Chair Clayton stressed the need for intergovernmental coordination and “robust, substantive input that will advance and inform the SEC’s assessment of possible future actions.”

Curiously, the SEC did not specify a deadline for the requested input, which raises the question: Just how long is this analysis going to take? After all, the RAND study concluded almost ten years ago. And, the DOL Fiduciary Duty is scheduled for full implementation on January 1, 2018.

In our view, the SEC’s reasoning leads to one, and only one conclusion: The DOL Rule should be rescinded until the Commission completes its analysis and there has been full and complete intra-agency review and publication of (a) whether there should be a uniform fiduciary duty standard and, if so, (b) its scope. The Commission is charged with regulation of our capital markets, of which retirement accounts are only a part.

Otherwise, chaos will reign and the retail investor will ultimately suffer, as “orderly disorder is based on careful division.”

Posted in Department of Labor (DOL), Fiduciary Duty Rule, SEC, Uncategorized

Acosta and New DOL FAQs Confirm: Fiduciary Standard Will Take Effect June 9, But Expect Changes to the DOL Rule Before January 1, 2018

On May 22, 2017, new DOL Secretary Alexander Acosta published an Op-Ed piece in the Wall Street Journal (found here; a subscription to the Journal is required to access the piece), confirming that, as we previously suspected, the DOL will allow the fiduciary standard for retirement advice to take effect on June 9. (Our previous blog post discussing the delay to June 9 is here.)

In his piece, Acosta sounds, at best, skeptical about the Rule. He writes, “the Fiduciary Rule as written may not align with President Trump’s deregulatory goals. This administration presumes that Americans can be trusted to decide for themselves what is best for them.” However, Acosta concedes that the DOL has “found no principled legal basis to change the June 9 [applicability] date while we seek public input.”

Acosta advises that the DOL will seek additional public input on the entire Fiduciary Duty Rule and on “how to revise this rule.” Acosta explicitly hopes that the SEC will be a “full participant” in revising the Rule as the SEC has “critical expertise in this area.” (Our previous blog post discussing the interplay between the DOL and the SEC in considering a fiduciary standard is here.)

So, that means on June 9, the Fiduciary Duty Rule will go into partial effect. Persons who make recommendations to retirement investors will be considered fiduciaries. Full implementation is currently scheduled for January 1, 2018, but, given Acosta’s comments, it seems clear that further (and probably significant) changes will be made before then.

The DOL also issued new Conflict of Interest FAQS last week, further explaining what firms and advisers must do during the transition period from June 9, 2017 to January 1, 2018. (The FAQs can be found here.)

  • Firms and advisers advising retirement investors must comply with an exemption (such as the BICE or PTE 84-24) after June 9 if they receive compensation for investment advice that varies based upon the transaction or product sold.
  • The BICE will be less onerous during the transition period. To rely on the BICE during the transition period, firms and advisers need only comply with the “Impartial Conduct Standards,” which are: (i) give advice that is in the “best interest” of the retirement investor (meaning advice that is prudent and loyal); (ii) charge no more than reasonable compensation; and (iii) make no misleading statements about investment transactions, compensation, and conflicts of interest. The other BICE conditions, including the requirement to execute a contract with the customer containing certain enforceable promises, making certain specified disclosures, and implementing certain policies and procedures, will not be required during the transition period.
  • Also, during the transition period, firms and advisers may continue to rely on PTE 84-24 for all annuity contracts, except that they must also comply with the Impartial Conduct Standards.
  • The DOL again cautioned that it “expects financial institutions to adopt such policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the Impartial Conduct Standards.” However, the DOL specified that it “does not require firms and advisers to give their customers a warranty regarding their adoption of specific best interest policies and procedures, nor does it insist that they adhere to all of the specific provisions of [the BICE].” FAQs at p. 5.

The FAQs reaffirm that, during the transition period, “even if a fiduciary adviser recommends proprietary products or investments that generate commissions or other payments that vary with the investment recommended, the adviser can meet the impartial conduct standards by ensuring that the recommendations are prudent; the investment advice is based upon the customer’s financial interests, rather than the adviser’s competing financial interests in the transaction; the communications are free from material misrepresentations; and the associated fees and charges are reasonable.” FAQs at p. 5.

Consistent with Acosta’s Op-Ed piece, the FAQs state that the DOL intends to issue a Request for Information soon for additional public input on the Rule and its exemptions, including whether an additional delay to the full implementation date is prudent.

Finally, the DOL attempts to reassure firms and advisers that it will work together with them “to help them come into compliance with the Fiduciary Rule” and that its focus will be “marked by an emphasis on compliance assistance (rather than citing violations and imposing penalties).” FAQs at p. 10. The DOL states that it is issuing “a new temporary enforcement policy for the transition period, under which the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions.” FAQs at pp. 10-11.

Some insiders in the financial markets are taking comfort from the DOL’s assurances that it will work with firms and advisers to assist in achieving compliance rather than to punish good faith efforts that may nevertheless fall short. Others, however, have said that they are reminded of President Reagan’s famous quote that “the nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’”

Posted in Administration, Department of Labor (DOL), Fiduciary Duty Rule, Retirement Planning, Uncategorized | Tagged , , , , ,