As highlighted by Ignites, Morningstar recently released a report on the growth of assets in passive funds pursuing a sustainable strategy. Interestingly, about half of the funds are thematic. Unsurprisingly, virtually all are equity funds. The US market for these types of funds continues to lag other regions, though that gap is not unique to ESG passive funds, and applies to ESG broadly.
As I wrote in Profit & Loss last year, FX service providers, particularly those in an agency capacity, should continue to monitor the fate of the DOL Fiduciary Rule, particularly for straddling the line between pure sales/marketing and those communications that may give rise to a “recommendation” under the 2016 rule. Hedging managers will stand to benefit if we revert to the 1975 rule.
Expert attorneys warn the new non-enforcement policy binds only the DOL and IRS; state regulators and private plaintiffs could potentially seek to bring an action for alleged non-compliance with impartial conduct standards.
I am here on Amelia Island, FL about to start our panel on fiduciary law developments: the SEC release (and what it means practically-speaking, the delta between adviser and broker-dealer duties, the issues around the new disclosures, etc.), the latest on the DOL Fiduciary Rule (FAB 2018-02, the Fifth Circuit decision, how firms should proceed with compliance), what is in store from state legislatures and regulators, and the recent DOL ESG guidance and how managers should view the guidance. There are over 200 attendees here and, based on questions I received last night, there is a real need for clarity on fiduciary governance at the federal and state levels!
Three members of Stradley Ronon’s new Fiduciary Governance Group will present at the Investment Company Institute’s 2018 General Membership Meeting on May 22 in Washington, DC. David W. Grim, Lawrence P. Stadulis and George Michael Gerstein will comprise the panel, “The SEC the DOL and the States: A New Fiduciary World,” where they will discuss rapidly developing fiduciary law developments at the federal and state levels.
Grim, most recently Director of the U.S. Securities and Exchange Commission’s Division of Investment Management, provides counsel on all aspects of investment management law. He assists clients with a unique perspective developed during his over 20 years of public service at the SEC, including his time as one of only a small number of people who has served as the top regulator of the asset management industry. Grim joined the Division of Investment Management in 1995 directly from law school and rose to become its leader. He developed regulatory policy and legal guidance for investment advisers and investment companies, including mutual funds, exchange-traded funds, closed-end funds, variable insurance products, unit investment trusts and business development companies.
Stadulis co-chairs the fiduciary governance group and advises clients in matters pertaining to the registration and regulation of investment advisers and investment companies under federal and state securities laws. He also manages related issues pertaining to investment advisers and investment companies, including matters involving ERISA, broker-dealer regulation and banking laws.
Gerstein co-chairs the fiduciary governance group and advises clients on the fiduciary and prohibited transaction provisions of ERISA. He counsels banks, trust companies, broker-dealers, investment managers, private fund (including hedge funds and private equity funds) sponsors, and advisers on their responsibilities under federal law when managing plan assets. George routinely advises clients on the DOL Fiduciary Rule and other fiduciary developments at the federal and state levels, and additionally, he counsels clients on fiduciary-like duties and restrictions under other laws, including federal and state banking requirements, and the rules and regulations of governmental plans.
The Department of Labor (DOL) issued Field Assistance Bulletin (FAB) 2018-02, which states that the DOL and Internal Revenue Service (IRS) will not bring an enforcement action against firms for non-exempt prohibited transactions that arise from providing fiduciary investment advice to plans and IRA holders when they exercise reasonable diligence and act in good faith in complying the impartial conduct standards. This non-enforcement policy binds only the DOL and IRS; state regulators and private plaintiffs could potentially seek to bring an action for alleged non-compliance with the impartial conduct standards.
The impartial conduct standards are already familiar to many service providers because they were originally set forth in the Best Interest Contract Exemption, which (along with the rest of the DOL’s 2016 Fiduciary Rule) was vacated by the Fifth Circuit Court of Appeals. For the past year, service providers have been eligible for “transition relief” by complying with the impartial conduct standards, which relief is essentially encapsulated by the DOL in FAB 2018-02. This means that service providers can continue with their existing compliance approach in connection with the impartial conduct standards.
The DOL most likely issued FAB 2018-02 because of the confusion over the Fiduciary Rule’s iterations. What was designed as a sweeping and, to many, draconian, rule has since morphed into an ever narrower and more flexible slate of compliance obligations through a series of supplemental guidance issued by the DOL post-election. Uncertainty over how to comply with the Fiduciary Rule has been as much a hallmark of the rulemaking as the rule’s own conditions. FAB 2018-02 seeks to alleviate some of this confusion by allowing firms to continue the compliance approach firms have been taking since last June. The DOL then and now affords firms flexibility to fashion compliance with the impartial conduct standards in ways they determine in good faith satisfies the standards while taking into account the organization’s unique preferences and resources.
FAB 2018-02 provides relief for prohibited transactions that arise from non-discretionary investment advice. Because the DOL Fiduciary Rule was vacated by the Fifth Circuit, the test for when one becomes a fiduciary in the first place, and, therefore, needs a prohibited transaction exemption, is set forth in the original 1975 five-part test. FAB 2018-02 does not resuscitate the Fiduciary Rule or somehow indirectly continue to impose the expansive ways in which one can become an investment advice fiduciary. Rather, FAB 2018-02 appears designed to preserve existing compliance methods for securing prohibited transaction relief for these advisers who are fiduciaries under the old five-part test until the DOL issues formal guidance (likely through the proposal of a new exemption) in the future. One should first determine if they continue to constitute an investment advice fiduciary now that we are back to the much narrower five-part test and, if so, whether they have undertaken reasonably diligent and good faith efforts to satisfy the impartial conduct standards or otherwise comply with a different prohibited transaction exemption.
The SEC proposals will be published in the Federal Register tomorrow, May 9, and the comment period will expire on Tuesday, August 7.