The DOL’s Fiduciary Race Ahead of 2021

There is precious little time remaining for the proposal and adoption of any new advisory industry conflict of interest rules that the DOL hopes to make effective during this presidential administration.

While it may be hard to believe, from a regulator’s perspective, 2021 is right around the corner.

Applied to the retirement universe, with 2021 only a little over 16 months away, the Department of Labor is facing tight deadlines if it wants to finalize a new “fiduciary” rule or investment advice prohibited transaction exemptions before a new administration could possibly take office. While the DOL’s spring 2019 regulatory agenda indicates that DOL intends to release a proposed “fiduciary” rule some time in December 2019, given the timing of the regulatory process, to minimize challenges or the potential reversal of its guidance, DOL may need to have its proposal out by October 2019 if it wants to be in a position to finish its rulemaking before the next Administration’s swearing in on January 20, 2021.

After the 2016 Fiduciary Rule was struck down, some members of the retirement community anticipated that DOL would quickly release a cleanup rule confirming that there would be a return to the 1975 Fiduciary Rule with its familiar “five part” test. Instead, DOL announced a temporary enforcement bulletin in Field Assistance Bulletin 2018-02 while DOL worked to “provide appropriate guidance in the future” and evaluated “the need for other … prohibited transaction relief for investment advice fiduciaries.”

Effective Regulations and Congressional Resolutions

As the SEC has finalized its “Regulation Best Interest,” the consistent drumbeat from DOL officials is now that DOL will “harmonize” its regulatory framework for investment advice with the SEC package. To explain DOL’s potential time pressures, it is easiest to work backward from January 20, 2021.

On January 21, 2021, either President Trump will be sworn in for a second term (in which case, the deadlines described in this article will be of lesser importance) or someone else will be sworn in as the 46th president. Typically, one of the first actions an incoming president takes is to announce that any regulations that are not already in effect are being put on hold while the incoming administration reviews whether they are consistent with their agenda. “Effective” is not the same as “published in the Federal Register.” In reality, it means “actually being applied.” The upshot is that any new regulation would need to be effective by January 20, 2021.

For a major rule, agencies typically provide at least six months from the date that a rule is finalized before it becomes effective. This lag time is designed to provide regulated entities with an opportunity to come into compliance after the final rule is announced. To provide six months, a final rule would need to be published by July 20, 2020.

In addition to the risk that an incoming administration could simply pull the rule, a rule can be nullified through a resolution enacted under the Congressional Review Act (CRA). Under the Congressional Review Act, agencies are required to provide a notice when they promulgate a final rule. Then Congress has 60 legislative working days to pass a joint resolution disapproving of the rule.

The CRA is powerful because 60 legislative working days is longer than 60 calendar days and also because CRA resolutions cannot be filibustered in the Senate. Prior to the 2017 inauguration, the deadline to avoid having the new congress have the ability to disapprove of a rule via the CRA was June 13, 2016. If it elects to be conservative, DOL may decide to publish a final rule and provide the required notice to Congress before the end of May 2020.

A Daunting Timeline

Having established the deadlines, the process that DOL faces continues to be daunting.

Before a final rule is published, OMB would have to review it. This process generally takes roughly a month, so the final rule would need to be at OMB before the end of April 2020. Further, before DOL could prepare its final rule, it would need to review any comments that were submitted in response to its proposed rule and make any changes it determines appropriate. This would likely take two to three months from the end of the comment period (if DOL moved expeditiously), so any comment period would need to end before the end of January 2020. Before the comment period could end, it would need to begin.

Typically, a major proposal would have either a 60 or 90 day comment period. If the comment period is 90 days, a proposed rule would need to be issued before the end of October 2019. Before a proposed rule could be issued, OMB would need to review the proposed rule. Again, this process typically takes roughly a month. This one month period means that we’d expect to see notice on OMB’s website that a rule has been submitted by mid-September for any rule that DOL hopes to finalize without the rule being at risk of being overruled or withdrawn as a result of any change in administration in 2021.

The race is on.


Note from the editor:

David Levine and Kevin Walsh are both principals with Groom Law Group in Washington, D.C.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.