SEC Chair and DOL Secretary Both Confirmed: Who Will Take Lead on Fiduciary Duty Rule?

On April 27, 2017, the Senate confirmed Alexander Acosta as the new Secretary of Labor, and on May 2nd, the Senate confirmed Jay Clayton as SEC Chairman. With Trump’s nominees for the respective positions now in place, some insiders expect to see a unified approach on a fiduciary standard rule.

After all, the Dodd-Frank Act of 2010 gave the SEC – not the DOL – the authority to promulgate rules to provide a fiduciary standard of conduct for broker-dealers. But, when the SEC failed to act on this authority, the DOL stepped in and enacted its own Fiduciary Duty Rule for retirement investors.

Currently, that DOL Fiduciary Duty Rule is scheduled to go into effect on June 9, 2017.

Will it still?

The same day he was approved by the Senate as DOL Secretary, Acosta received a letter signed by 124 Congressional Republicans urging him to further delay implementation of the Fiduciary Duty Rule and eventually kill it. The letter called the issue an “urgent need” and echoed the concerns of financial industry groups who warn of the Rule’s negative impact on the retirement industry.

And on the SEC side, then-acting SEC Chair Michael Piwowar blasted the DOL Rule back on March 2, and suggested that the SEC should be taking the lead on the development of a standard of conduct. “I think it is a terrible, horrible, no good, very bad rule,” Piwowar said at the Investment Adviser Compliance Conference in Washington. “For me, that rule was never about investor protection. It was about enabling trial lawyers to increase profits.”

Piwowar followed up on April 21:

“We have an opportunity, with a changeover in administration now, for the SEC to reassert its role in this space,” Piwowar said at a Mutual Fund Directors Forum Conference in Washington. “That’s something that I look forward to having discussions [about] with the new chairman.”

Piwowar suggested “taking a step back” and perhaps using the 2008 results of the RAND study that the SEC commissioned as a starting point for the renewed discussion. The RAND study found that retail investors generally had difficulty understanding the distinctions between investment advisers and broker-dealers, including their duties of care, the titles they use, the services they offer, and the fees they pay for those services.

Some industry insiders urge that the DOL should step aside and defer to the SEC – as the SEC has over 80 years of experience on the subject and began the rule-making process back in 2007 by commissioning the RAND Study.

So, what will Acosta and Clayton do? The text of the DOL’s Delay Rule, which was issued on April 7, suggested very strongly that the DOL intended to allow the extended June 9, 2017 applicability date for the Fiduciary Duty Rule to go forward. Our blog post analyzing the Delay Rule is here.

And yet some insiders expect Acosta to assert his new role by further delaying the Rule or even taking steps to rescind it.

Ultimately, given how unpredictable the process has been to date, financial institutions and advisers would be wise to prepare for the DOL Rule to go forward as scheduled on June 9. Given that the DOL has explicitly said it expects firms to “implement procedures to ensure that they are meeting their fiduciary obligations” as of June 9, it would be risky to assume that, whatever they ultimately do, the new DOL Secretary or DOL Chair will act quickly enough to prevent those “fiduciary obligations” from taking effect on June 9.

Posted in Department of Labor (DOL), Fiduciary Duty Rule, SEC, Uncategorized | 1 Comment

DOL Issues Rule Delaying Applicability Date of Fiduciary Duty Rule for 60 Days, Until June 9, 2017

On Friday, April 7, 2017, the DOL published its final rule delaying the applicability date of the Fiduciary Duty Rule for 60 days, from April 10, 2017 until June 9, 2017. The full text of the final rule (the Delay Rule), 82 Fed. Reg. 16902, is here.

The Delay Rule has five important parts:

  • The applicability date of the Fiduciary Duty Rule is delayed for 60 days until June 9, 2017 – meaning that the application of a fiduciary standard to persons who make recommendations to retirement investors takes effect on June 9;
  • The applicability date of the Best Interest Contract Exemption (the BICE) and the Principal Transactions Exemption is delayed for 60 days until June 9, 2017;
  • Fiduciaries relying on the BICE and the Principal Transactions Exemption are required to adhere only to the “best interest” standard and the other Impartial Conduct Standards of those exemptions during the transition period from June 9, 2017 through January 1, 2018 – meaning that the other conditions in the BICE and the Principal Transactions Exemption, such as requirements to make specific written disclosures and representations of fiduciary compliance in investor communications, are not required until January 1, 2018;
  • The applicability of amendments to PTE 84-24 is also delayed until January 1, 2018 (thereby allowing indexed and variable annuity transactions to proceed under PTE 84-24 until January 1, 2018, rather than the more strenuous BICE), except that the Impartial Conduct Standards will become applicable on June 9, 2017; and
  • The applicability dates of the amendments to other previous granted PTEs are extended for 60 days until June 9, 2017.

The DOL states the Delay Rule is necessary to enable the DOL to perform the analysis required by Trump’s February 3 Presidential Memorandum on Fiduciary Duty Rule, which instructed the DOL to analyze:

  • Whether the Fiduciary Duty Rule may harm investors’ ability to access retirement savings offerings, products, information or advice;
  • Whether the applicability or implementation of the Fiduciary Duty Rule will cause disruption in the financial services industry that will adversely affect retirees; and
  • Whether the Fiduciary Duty Rule is likely to result in an increase in litigation and consumers’ costs to access the retirement market.

The Presidential Memorandum instructs that, if the DOL answers any of the above questions in the affirmative, then the DOL is required to propose a rule (for notice and comment) “rescinding or revising the [Fiduciary Duty] Rule, as appropriate and as consistent with law.”

Our blog post discussing Trump’s February 3 Memorandum is here.

So, will the DOL act again before June 9, either to push the applicability date out farther, or to revise or rescind the Fiduciary Duty Rule in light of the analysis performed in accordance with Trump’s Memorandum?

The full text of the Delay Rule makes that sound unlikely.

Rather, the DOL states several times that it expects to have its analysis required by the Presidential Memorandum completed by January 1, 2018:

“Based on its review and evaluation of the public comments, the Department has concluded that some delay in full implementation of the Fiduciary Rule and PTEs is necessary to conduct a careful and thoughtful process pursuant to the Presidential Memorandum.” Delay Rule at 16905.

“At the same time, however, the Department has concluded that it would be inappropriate to broadly delay application of the fiduciary definition and Impartial Conduct Standards for an extended period in disregard of its previous findings of ongoing injury to retirement investors.” Delay Rule at 16905.

“[Full compliance] is not required until January 1, 2018, by which time the Department intends to complete the examination and analysis directed by the Presidential Memorandum. In this way, the Fiduciary Rule (i.e., the new fiduciary definition itself) will become applicable after the 60-day delay, and the BIC Exemption and the Principal Transactions Exemption will be available as of that date but these exemptions will only require fiduciaries to adhere to the Impartial Conduct Standards for covered transactions until January 1, 2018, when the remaining conditions will apply unless revised or withdrawn. Delay Rule at 16905.

“In the Department’s view, this approach gives the Department an appropriate amount of time to reconsider the regulatory burdens and costs of the Fiduciary Rule and PTEs, calls for advisers and financial institutions to comply with basic standards for fair conduct during that time, and does not foreclose the Department from considering and making changes with respect to the Rule and PTEs based on new evidence or analyses developed pursuant to the President’s Memorandum.” Delay Rule at 16906.

This means that it appears very likely that the June 9, 2017 applicability date will go forward.

So, firms and financial advisers should expect that, on June 9, 2017, the following provisions will go into effect:

  • They will be fiduciaries to the extent they give investment advice to retirement investors; and
  • They will be subject to the Impartial Conduct Standards, which require that firms and advisers:
    • Provide advice that is in the retirement investors’ best interest (i.e., recommendations that are prudent and loyal);
    • Charge no more than reasonable compensation; and
    • Make no misleading statements about investment transactions, compensation, and conflicts of interest.

The DOL makes clear that it expects firms, during the transition period from June 9, 2017 to January 1, 2018, to “implement procedures to ensure that they are meeting their fiduciary obligations, such as changing their compensation structures and monitoring the sales practices of their advisers to ensure that conflicts [of] interest do not cause violations of the Impartial Conduct Standards, and maintaining sufficient records to corroborate that they are adhering to Impartial Conduct Standards.” Delay Rule at p. 16910.

What happens after that is anyone’s guess. As the DOL states: “[B]etween now and January 1, 2018, the Department will perform the examination required by the President. Following the completion of the examination, some or all of the Rule and PTEs may be revised or rescinded, including the provisions scheduled to become applicable on June 9, 2017.Delay Rule at 16906.

Posted in Uncategorized | 2 Comments

Eighth Circuit Holds McCarran-Ferguson Act Bars RICO Claim Against Insurance Companies Based on Captive Reinsurance Transactions

On Thursday, April 13, 2017, the Eighth Circuit held that the McCarran-Ferguson Act barred a plaintiff from pursuing her RICO claims against an insurance company and its affiliates. The plaintiff had alleged the insurance company and its affiliates had conspired to falsely report their “shadow insurance” transactions to inflate the insurance company’s financial condition and increase the cost to purchase annuities. The federal district court had dismissed the case (the order is here), finding the claims preempted by the McCarran-Ferguson Act. The Eighth Circuit affirmed. The decision, Ludwick v. Harbinger Group, et al., Case No. 16-1561, is here.

Briggs and Morgan, led by Frank Taylor, represented Fidelity & Guaranty Life Insurance Company (F&G), and argued the case before the district court on behalf of F&G.  Debevoise and Plimpton, led by Maeve O’Connor, represented all Appellees before the Circuit.

The Plaintiff, who owned an F&G annuity, asserted that F&G fraudulently moved billions of dollars in liabilities off its books by transferring them in a series of  captive reinsurance transactions (i.e., shadow insurance).  The Plaintiff alleged that F&G’s accounting of its transactions meant that F&G’s financial condition was not as represented, and therefore her annuity was not worth what she paid for it.  She sued under RICO, alleging the F&G and its parent company conspired to distribute deceptive financial reports and marketing materials.

F&G and the other Defendants argued that the Plaintiff’s claims were barred by the McCarran-Ferguson Act, which prohibits application of a federal statute that does not specifically relate to insurance (such as the RICO statute) to impair or supersede state regulation of insurance. F&G argued that, because the state must regulate and approve F&G’s reinsurance transactions, application of the RICO statute to Plaintiff’s claim would impair the state’s regulation of insurance.

The Western District of Missouri agreed and granted F&G’s Motion to Dismiss for failure to state a claim.

On appeal to the Eighth Circuit, Plaintiff argued that her suit did not impair state regulation of insurance, because her claims pertained only to F&G’s bookkeeping, not the underlying propriety of the reinsurance transactions or the state regulator’s approval of them.  The Eighth Circuit disagreed, holding that “questions about insurance company’s solvency are, no surprise, squarely within the regulatory oversight by state insurance departments.”  Decision at p. 5.  The Eighth Circuit noted that reinsurance transactions with affiliates must be submitted to the state insurance commissioner for review before they can be consummated.  Therefore, a federal court could not rule in Ludwick’s favor without holding, more or less explicitly, that the state insurance regulators were wrong to allow the transactions to proceed.

The Eighth Circuit concluded: “Litigating Ludwick’s RICO claims would interfere with state regulation of the insurance business, and the claims are barred by the McCarran-Ferguson Act. The district court was right to dismiss.” Decision at p. 10.

Posted in Uncategorized

The Briggs Forum on Financial Markets: Securities, Insurance, Litigation and Regulation is Thursday, April 20

The Briggs Forum on Financial Markets: Securities, Insurance, Litigation and Regulation (formerly known as the Upper Midwest Securities Litigation and Enforcement Forum) is Thursday, April 20 at Windows on Minnesota, on the 50th floor of the IDS Center.

Our exceptional lineup of speakers will present on challenges and strategies that affect the financial industry, including securities and insurance regulation and enforcement, cyber security and customer data, and current events and ethical considerations.

The full agenda of speakers and topics is as follows:

8:00 – 8:30 am Registration and Continental Breakfast
8:30 – 8:45 am Welcome: Financial Markets in the New Era
 
8:45 – 9:15 am Regulatory Priorities in Minnesota
 
  • Michael J. Rothman, Commissioner,
    Minnesota Department of Commerce
9:15 – 10:15 am DOL Fiduciary Duty Rule: What Now?
 
  • Nicole James Gilchrist, Senior Counsel, Thrivent Financial
  • Eric L. Marhoun, EVP and General Counsel,
    Fidelity & Guaranty Life Insurance
  • Ambassador Tom McDonald, Partner, BakerHostetler
  • Julie H. Firestone, Briggs and Morgan, P.A. (Moderator)
10:15 – 10:30 am Break
10:30 – 11:30 am Focus on the Regulators: What Can We Expect in Financial Regulation
 
  • R. Scott DeArmey, District Director, FINRA
  • Paul Mensheha, Regulatory Counsel, SEC
  • Frank A. Taylor, Briggs and Morgan, P.A. (Moderator)
11:30 am – 12:30 pm Networking Lunch (provided)
12:30 – 1:15 pm Current Events and Ethical Considerations
  • Professor Richard W. Painter,
    University of Minnesota Law School
1:15 – 2:15 pm An Aging Population: Elderly Clients and Clients with Diminished Capacity
  • Melissa J. Morris, Special Care Planner,
    Minneapolis Financial Group
  • Anita Raymond, LISW, CMC,
    Volunteers of America
  • Andrea Smith, Corporate Counsel, Wells Fargo
  • Robert A. McLeod, Briggs and Morgan, P.A. (Moderator)
 2:15 – 2:30 pm Break
 2:30 – 3:15 pm Managing the Inside/Outside Counsel Relationship
  • Margaret A. Goetze, Associate General Counsel,
    RBC Wealth Management
  • Jen Randolph Reise, AVP Corporate Compliance and Ass’t Corporate Secretary, Regis Corporation
  • Eric J. Rucker, Senior Counsel, 3M
  • Scott G. Knudson, Briggs and Morgan, P.A. (Moderator)
3:15 – 4:15 pm The New Great Train Robbery: Cyber Security and Protecting Customer Data
 
  • James C. Browning, Jr., Deputy General Counsel and VP, Stifel, Nicolaus & Company
  • Michelle M. Carter, Assistant Vice President – Executive Risk, Hays Companies
  • David E. Rosedahl, General Counsel,
    Dougherty & Co.
  • Daniel J. Supalla, Briggs and Morgan, P.A. (Moderator)
4:15 – 5:00 pm  Networking Reception
The agenda has been submitted for 6 CLE credits (.75 ethics credit, 1 elimination of bias credit and 4.25 general credits).
Lunch will be provided.

Click here to register.

 

Posted in Cybersecurity and Data Privacy, Department of Labor (DOL), Fiduciary Duty Rule, FINRA, Insurance, Litigation, Retirement Planning, SEC, Securities Litigation, Uncategorized | Tagged , ,

Are You Ready to Comply With the DOL Fiduciary Duty Rule If It Goes Into Effect on April 10? (Part III: Your E&O Policy)

We are now two weeks from the still-current April 10 implementation date of Department of Labor’s (DOL) Fiduciary Duty Rule.

The DOL is still considering a proposed 60-day delay, but that delay might not be approved before April 10. And, while the DOL has said that, if the delay isn’t granted by April 10, it still won’t enforce the Fiduciary Duty Rule “for a reasonable time” after April 10, that won’t necessarily prevent plaintiff’s firms from suing under the Rule after April 10. (Our previous blog post discussing the DOL’s Temporary Enforcement Policy) is here.

We have previously discussed preparing your commission grids (here) and the Best Interest Contract Exemption (BICE) disclosures (here).

We now turn to your firm’s errors & omissions (E&O) policy. In the event a plaintiff’s firm decides to sue under the Fiduciary Duty Rule, you will want to have considered whether such a claim is covered.

Here are some issues to discuss with your broker, in advance of April 10:

  • Is your policy’s definition of “Professional Services” broad enough to cover claims based not only on imprudent advice, but conflict of interest and excessive fees?
  • Does your policy include a fiduciary liability exclusion? If so, you should consider if you can negotiate a carve-out of that provision – sooner rather than later.
  • Does your policy include a statutory violation exclusion and would the E&O carrier apply that exclusion to a claim brought under the DOL Fiduciary Duty Rule?
  • Does your policy include a class action exclusion, and if so, can your firm negotiate that exclusion out of the policy?
  • Finally, if your policy excludes coverage for damages based upon excessive fees, try to negotiate at least defense costs for such claims.

Remember – it is always better to ask questions about your coverage before you need it.

 

Susan Gelinske and Lauren Lonergan contributed to this post.

 

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

DOL’s Temporary Enforcement Policy Brings Cold Comfort

The Department of Labor’s (DOL) Temporary Enforcement Policy on the Fiduciary Duty Rule published on March 10, 2017 (Temporary Policy) has, from our point of view, little impact and serves merely to confuse.

The Temporary Policy seems to imply that the DOL will temporarily stay enforcement of the Rule. Specifically, the DOL states:

  • If the DOL issues a rule after the April 10 implementation date that delays the Fiduciary Duty Rule, then the DOL “will not initiate an enforcement action” based upon any failure to comply with the Fiduciary Duty Rule or its exemptions during the “gap period” between the April 10 implementation date and the date the delay is implemented.
  • If the DOL does not delay the April 10 implementation date, then the DOL “will not initiate an enforcement action” because a firm or advisor failed to comply with the Fiduciary Duty Rule or its exemptions, provided that the adviser or financial institution satisfies the applicable conditions of the Fiduciary Duty Rule and its exemptions, including sending out the required disclosures, within a “reasonable period” after the DOL announces that there will be no delay. https://www.federalregister.gov/documents/2017/01/19/2017-01316/best-interest-contract-exemption-for-insurance-intermediaries.

Field Assistance Bulletin No. 2017-10, copy here.

But, remember, when the Rule was published, the DOL emphasized that it would not bring enforcement actions because of limited resources. The DOL stated quite clearly that private litigation would serve as the enforcement tool.

If enforcement is left to private litigants, then the Temporary Policy has little or no impact, since the Temporary Policy does not prevent private litigants from bringing actions. Also, the reprieve for an undefined “reasonable period” does little to bring comfort or clarity.

Given the confusion created by the DOL’s Temporary Policy, it strikes us that the Rule should be vacated, and the process should begin anew. Businesses and investors need clarity, not an ever-changing field of play.

Posted in Department of Labor (DOL), Fiduciary Duty Rule, Uncategorized | Tagged , , | 1 Comment

Are You Ready to Comply With the DOL Fiduciary Duty Rule If It Goes Into Effect on April 10? (Part II: The BICE)

We are now five weeks from the still-current April 10 implementation date of United States Department of Labor’s (DOL) Fiduciary Duty Rule.

Yes, a delay still seems very likely. On March 1, the DOL issued a proposed rule that would delay the implementation date 60 days, to June 9. There is a 15-day comment period on the proposed delay. Then, the Office of Management and Budget (OMB) still has to approve the delay.

Until that happens, the April 10 implementation date controls. Will you be ready? For that matter, will you be ready if the Rule goes into effect on June 9?

Last week, we discussed preparing your commission grids, and working to make sure they comply with the Fiduciary Duty Rule. (That post is here.)

This week, we turn to the Best Interest Contract Exemption (the BICE).

While full compliance with the BICE is not required until January 1, 2018, there are some important requirements that take effect on April 10. During the “transition period” (the period between April 10, 2017 and January 1, 2018), firms are required to do the following under the BICE:

  • Comply with the “Impartial Conduct Standards.” The Impartial Conduct Standards require firms and advisers to: (i) give advice that is in the best interest of the retirement investor; (ii) charge no more than reasonable compensation; and (iii) make no misleading statements about investment transactions, compensation, and conflicts of interest.
  • Provide a written notice to retirement investors that: (i) acknowledges their fiduciary status; (ii) states that the firm and its advisers will comply with the Impartial Conduct Standards and disclose material conflicts of interests; and (iii) makes certain disclosures regarding the firm’s recommendations of proprietary products or investments that generate third party payments.
  • Designate a person or persons responsible for addressing material conflicts of interest and monitoring advisers’ adherence to the Impartial Conduct Standards.
  • Comply with the recordkeeping requirements of Section V(b) and (c) of the BICE.

As you can see from the above, any firm that believes it can wait until January 1, 2018 to worry about compliance with the BICE does so at its peril.

Posted in Administration, Department of Labor (DOL), Fiduciary Duty Rule, Uncategorized | Tagged , , , , | 1 Comment