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Posts Tagged ‘U.S. Department of Labor’

DOL Fiduciary Rule Suffers a Slow Death

Posted on: May 15th, 2018

By: Ted Peters

In 2016, the U.S. Department of Labor (“DOL”) promulgated a set of rules and regulations now infamously referred to as the “Fiduciary Rule.”  After multiple criticism and legal challenges, the Fifth Circuit Court of Appeal struck down the Fiduciary Rule effective May 7, 2018.  Surprising many, the DOL elected not to challenge the Fifth Circuit ruling.  Even more surprising, however, was the bulletin issued by the DOL on the effective date of the court’s order.

The court’s ruling, which was not opposed by the DOL, left many unanswered questions.  Enter the DOL’s field bulletin.  Rather than admitting the total defeat of the Fiduciary Rule, however, the DOL seeks to maintain the status quo.  Specifically, the DOL announced that pending further guidance, advisors will not be penalized for either complying with the Fiduciary Rule, or ignoring it in favor of pre-existing standards.  Unfortunately, this announcement leaves the single most important question unanswered – what is the standard to which advisors will be held?  With the U.S. Securities and Exchange Commission working on its own set of rules, and the wait-and-see approach embraced by the DOL notwithstanding, only time will tell.

If you have questions or would like more information, please contact Ted Peters at [email protected].

Has Fiduciary Rule Suffered a Fatal Blow?

Posted on: April 4th, 2018

By: Theodore C. Peters

The Employee Retirement Income Security Act of 1974 (“ERISA”) defined a “fiduciary” as someone who provides investment advice for a fee.  The following year, the U.S. Department of Labor (“DOL”) promulgated regulations that provided a five-part test for assessing whether someone was a fiduciary as defined by ERISA.  Seeking to implement a uniform fiduciary rule for all retail investment accounts, the DOL issued the Fiduciary Rule on April 6, 2016.  The Fiduciary Rule re-defined who is an “investment advice fiduciary” under ERISA and heightened the fiduciary duty to a “best interest” standard for those clients with ERISA plans and IRAs.  Previously, brokers were bound only to make “suitable” recommendations.  The Fiduciary Rule also created a “Best Interest Contract Exemption” that permitted financial advisors to avoid penalties stemming from prohibited transactions so long as they contractually affirmed their fiduciary status.

Several industry groups brought suit against the DOL, opposing implementation of the Fiduciary Rule.  In 2017, the United States District Court for the Northern District of Texas, in an 81-page ruling, ruled in favor of the DOL.  Chief Judge Barbara M.G. Lynn concluded that the DOL had not exceeded its authority and had not created a private right of action for clients. On March 15, 2018, in Chamber of Commerce v. United States Department of Labor, the Court of Appeals for the Fifth Circuit invalidated the Fiduciary Rule in a 2-1 decision.

In reversing the lower court, the Court addressed a simple but critical issue: whether the DOL exceeded its rulemaking authority by expanding the definition of “investment advice fiduciary.” The Court concluded that the new definition was in conflict with ERISA and the Internal Revenue Code because it was inconsistent with the common meaning of “fiduciary.”  The Court noted that the DOL arbitrarily and improperly sought to broaden the scope of its authority through the concept of investment “advice,” that included products sold by financial salespersons and even insurance agents. Further, the Court criticized the best interest contract exemption, which permitted brokers to receive compensation for investment products they recommend (thereby creating potential conflicts), provided they agree by contract to act in the investor’s “best interests.”

By vacating the Fiduciary Rule under the Administrative Procedures Act, the Fifth Circuit effectively voided the entire rule nationwide.  The DOL could possibly request a hearing en banc before the entire Fifth Circuit, or alternatively, petition for a writ of certiorari to the United State Supreme Court.  Or perhaps, the DOL will take no action at all, in which case the Fiduciary Rule will presumably die on the vine, and the five-step test enunciated in 1975 would be resurrected. Of note, however, mere days before the Fifth Circuit’s decision, the Tenth Circuit ruled in favor of the DOL in the context of a more limited challenge to the Fiduciary Rule highlighting a split between federal circuits – which may in turn spur the DOL to seek Supreme Court review.

Regardless of what action the DOL takes, the Securities Exchange Commission (“SEC”) is likely to seek to implement its own rules.  Commencing in October 2017, the SEC began reviewing the DOL’s Fiduciary Rule with a goal of introducing its own new rule governing investment advice.   SEC Chairman Jay Clayton testified before the Senate Banking Committee that the drafting of an SEC rule that harmonizes with the DOL’s Fiduciary Rule was a priority.  Despite the Fifth Circuit ruling, the SEC’s resolve appears to remain steadfast.  During a Q&A session at the SIFMA compliance conference just days after the ruling, Jay Clayton said “I’m not sitting on this… [and] as far as I’m concerned, we’re moving forward.”

If you have questions or would like more information, please contact Ted Peters at [email protected].

Service Advisors Once Again Exempt From Overtime

Posted on: April 3rd, 2018

By: Brad Adler & Michael Hill

After years of back and forth in the lowers courts, the Supreme Court has ruled that service advisors at auto dealerships are exempt employees under the Fair Labor Standards Act (“FLSA”).  It’s the rare case that goes to the Supreme Court twice.  But after taking the scenic route through the federal court system, the Supreme Court’s Encino Motorcars, LLC v. Navarro decision finally has arrived and brought much-needed clarity to auto dealerships across the country.

As we have written in several previous blogs, the confusion began in 2011, when the U.S. Department of Labor (“DOL”) suddenly (and without explanation) reversed its decades-old position that service advisors were exempt from the FLSA.  The text of the statute at issue provides that “salesman . . . primarily engaged in selling or servicing automobiles” at covered dealerships are exempt.  Since the 1970s, courts and even the DOL itself took the position that a service advisor was such a “salesman.”  In 2011, however, the DOL threw a monkey wrench under the hood by issuing a new rule that “salesman” under the statute no longer would include a service advisor.

This ruling from the Supreme Court, however, applies a straightforward interpretation of the statute’s language and holds that a service advisor is a “salesman . . . primarily engaged in . . . servicing automobiles.”  According to Justice Clarence Thomas, who authored the majority’s opinion, “servicing automobiles” includes more than just working underneath the hood of a car.  “Servicing” is a concept broad enough to encompass meeting with customers, listening to their concerns, suggesting or recommending certain repairs and maintenance, selling new accessories or replacement parts, following up with customers as services are performed, and explaining the repairs and maintenance work to customers when they come to pick up their vehicles.

The Encino Motorcars decision also brought back a special souvenir for employers in other industries.  In reversing the Ninth Circuit’s decision, the Supreme Court expressly rejected the oft-quoted principle that exemptions to the FLSA “should be construed narrowly.”  It now is the Supreme Court’s view that, because the FLSA does not actually say its exemptions should be interpreted narrowly, “there is no reason to give [them] anything other than a fair (rather than a ‘narrow’) interpretation.”  As there are over two dozen exemptions just to the overtime-pay requirement of the FLSA, Encino Motorcars may provide some ammunition for employers fighting exemption disputes in the future.

For questions about this case or how it may impact your business, or other questions or advice regarding wage and hour laws, please contact [email protected] or [email protected].