President Donald Trump’s February 3 executive order challenging the Department of Labor’s (DoL) fiduciary duty rule two months before its implementation has left the $16 trillion US retirement sector in limbo. But any clarity on a potential deferral or repeal of the rule is not expected until the latter end of 2017.
The widely-expected call for a review of the rule, which mandates that financial advisers act in the best interest of investors saving up for their retirement, has caused confusion in the industry.
Under the previous framework, only people who had direct investment discretion over client accounts, or those registered as investment advisers had to comply with an official best interest standard of care. But broker-dealers or insurance companies that didn’t have discretionary advice over a client account were only subject to a so-called suitability standard. This changed last year with the introduction of a fiduciary duty for them as well.
“There has always been a significant amount of opposition to the rule,” noted Morrison & Foerster senior of counsel Hillel Cohn. “Some critics said the fundamental principle of the rule was not workable for broker-dealers, others raised issues with requirements for the exemptions from the rule.”
- President Trump has ordered the Department of Labor (DoL) to review its fiduciary duty rule, which mandates retirement sector broker-dealers to act in the best interests of their clients;
- The rule has been the subject of ongoing criticism from some parts of the industry which claim it increases compliance costs and legal uncertainty;
- The DoL’s review is expected to extend beyond the April 10 implementation deadline for the rule, a situation with has left some market participants concerned about what they have to do;
- The DoL could invoke the good cause exception to delay adoption of the rule, or only amend the most controversial parts of it to avoid a full repeal;
- The rule is facing a separate challenge in a Texas federal court.
The review orders the Secretary of Labor to ascertain whether the year-old fiduciary rule adversely affects access to financial advice, disrupts the retirement services industry and limits customer choices.
While the president did not explicitly direct the DoL to delay the implementation date – a provision to this effect was dropped from the executive order the same day the review was ordered – a deferral is looking increasingly likely.
Some reports say the omission of a 180-day delay to the compliance date in Trump’s order was deliberate because it would have immediately and relatively easily been challenged, while a DoL decision to delay the rule and carry out a review would not.
And any delay would likely allow the government agency to undertake the analysis ordered by president Trump, which is expected to take several months to complete.
“It’s a difficult time at the moment for the industry,” said Cohn. “Some but not all firms are saying: ‘the rule is the future for now and we need to prepare for it, regardless of what happens at the DoL’.”
Latham & Watkins partner Stephen Wink said: “Considerable expense has been incurred in the industry to implement the rule’s requirements." He added: "Unwinding them will also take additional resources.”
The DoL’s options
Some organisations in the sector started working on changing their business practices several months ago in anticipation of the April 10 deadline. A number of broker-dealers including Morgan Stanley and Merrill Lynch have stated they will continue implementing any changes brought on by the rule. There are reports the former will scrap the ability for brokers to charge commissions for retirement account-based work as of April.
“It’s a question we are getting from a lot of clients: what do we do now?” said Ropes & Gray’s Josh Lichtenstein. “I would say that until there’s more clarity, continuing with compliance is the way forward.”
"Any delay would likely allow the DoL to undertake the analysis ordered by president Trump"
The required analysis and public statements by senior administration officials suggest that, after completing its review, the DoL may propose a major modification or revocation of the fiduciary rule.
“I would not be surprised by a wholesale repeal,” said Wink. “The DoL pushed the rule forward without working with the actual experts at the SEC or fully understanding the implications of the rule given the complex circumstances that exist in the market.”
This view aligns with that of a number of industry players who have consistently criticised the rule endorsed a year ago by the Obama administration, arguing it would lead to spiralling compliance costs and fees, as well as legal uncertainty.
White House National Economic Council director Gary Cohn told the Wall Street Journal that ‘Americans are going to have better choices and…better products because we’re not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year’.
According to Cohn, the DoL has several options regarding the implementation of the fiduciary rule. “It’s not easy to quickly rescind this rule,” he noted. “It can’t be done at the stroke of a pen.”
The agency could move to invoke the good cause exception in the Administrative Procedure Act (APA). This enables agencies to act without going through the full notice and comment process otherwise applicable under the APA. However, this exception’s legal status is uncertain and the likelihood of a court challenge is high.
Lichtenstein points to another possible solution at the DoL’s disposal.
“Everyone is talking about wholesale changes to the rules, but there are other things they could do without starting from scratch,” he said.
These include, for instance, amending provisions concerning the ability to engage in the sales act without being a fiduciary, and lessening the administrative and disclosure requirements contained in the exemptions.
"It’s a question we are getting from a lot of clients: what do we do now?"
“This could be messaged as a win for the administration,” said Lichtenstein. “The DoL can repeal the parts that are the most onerous – those subject to criticism - but also maintain the message that a best interest standard of care is essential.”
The DoL’s review is the latest addition to a series of challenges to the fiduciary rule, which experts predict will cost the industry in excess of $20 billion to comply with.
In contrast, the American Association of Retired Persons came out in support of the rule, saying that it was time ‘all Americans…count on retirement investment advice that is in their best interest, not the interest of Wall Street’.
Lawsuits filed in federal courts in Minnesota, Kansas and Washington DC have also tried to put implementation on hold. The latest of these, to be decided in Texas, will see plaintiffs including the Securities Industry and Financial Markets Association, the Financial Services Institute and the US Chamber of Commerce, argue that it goes against free speech rights.
But the DoJ could intervene in the event a federal judge rules that all or part of the provision is unlawful, much like the suspension on president Trump’s immigration ban. In a January 30 document, the DoJ said that the DoL guidance did not make the definition of fiduciary advice as expansive as the industry claimed.
President Trump has also ordered a review of another piece of Obama administration regulation, the 2010 Dodd-Frank financial reform law.
Welcome to Planet Trump
CFTC’s Massad: don’t undo Title VII