Enforcement of the Department of Labor fiduciary rule and prohibited transaction exemption could be even worse than some firms anticipated, a panel of Faegre Drinker attorneys said yesterday.

Should DOL regulators find RIAs and broker-dealers aren’t putting investors best interests first when making a retirement plan or IRA rollover suggestion, the DOL can hit firms with a 10-year moratorium on rollovers, a 100% excise tax and an order requiring firms to make investors whole, former DOL attorney and Faegre Drinker partner Joshua Waldbeser said during the webinar. He added that all three sanctions could be exercised if violations are systemic enough.

The rule, passed shortly before President Joe Biden took office, stipulates that investment advice fiduciaries who rely on any of the rule’s exemptions must be able to demonstrate that the advice they render to retirement plan and IRA customers is in the customers’ best interest if the advisors want to receive compensation that would otherwise be prohibited, including commissions, 12b-1 fees, revenue sharing and markups and markdowns in certain principal transactions.

After industry lobbyists asserted that firms needed more time, DOL recently announced it would extend the enforcement relief period to January 2022 and give relief on certain requirements of documentation and disclosures concerning rollovers until June of next year. Non-enforcement was originally scheduled to end on Dec. 20.

But the extension doesn’t mean that the DOL won’t be “very active when it comes to enforcing ERISA,” Waldbeser said.

“If a firm engages in a systematic pattern of violating an exemption, there is a possibility of being suspended from using the exemption for 10 years," he said.

A rollover suspension is just one of the enforcement tools the DOL has at it’s disposal, he added.

If the DOL finds fiduciary and prohibited transaction exemption (PTE) violations at an RIA or broker-dealer, “any compensation and profits will need to be disgorged. It’s possible, too, that you will be on the hook to make a retirement investor whole for losses, although I think that’s going to create some particular challenges to figure out what that is, particularly on IRA rollovers,” Waldbeser said.

“I think it’s safe to say there will be a fair amount of coordination between DOL on the ERISA side, the Securities and Exchange Commission on the Regulation Best Interest side and maybe to some extent the IRS, which has the jurisdiction to collect the excise takes for prohibited transaction violations under the tax code,” he added.

Enforcement is designed to be very prohibitive if you get hit with excise tax, he said.

“When you’re giving rollover advice it’s important to remember you’re giving it to a plan participant, so you are subject to ERISA in that momentum. It’s not until the money moves over to an IRA that you’re outside of ERISA. But under the code as well, there is a two-tier system of excise taxes that apply to almost all ERISA plans, too, in addition to IRAs,” Waldbeser said.

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