Fiduciary Rule Implementation Now Appears Certain

In the end the Trump administration will allow the Obama-era DOL fiduciary rule to take effect; industry observers are split about what exactly this means for the long-term.

All signs from the Department of Labor (DOL) suggest the fiduciary rule regulations adopted in the waning days of the Obama presidency will begin to take effect June 9, 2017, much to the surprise of a whole host of industry analysts, lobbyists and trade groups.

Regular readers of PLANADVISER will already know what a symbolic milestone this is, given the decade-long debate leading up to this point. Just in the last year the fiduciary rule’s future has seemingly flipped at least two or three times, starting with the election of Donald Trump and the bicameral Republican majority in the U.S. Congress. Given the new president’s and the GOP’s rhetorical stance towards government regulation of financial markets, it was naturally assumed that the fiduciary rule would be, by one mechanism or another, prevented from taking effect.

However, the full Congress has failed as yet to pass any measures impacting the fiduciary rule implementation, and the new administration took four full months to fill the position of Labor Secretary. This left Alexander Acosta precious little time to begin the process of somehow removing or revising the rulemaking. Trump’s DOL managed to delay the rulemaking’s earliest compliance deadlines from April to June, but it apparently has given up trying to fully halt the implementation.

Of course, there is nothing stopping the administration from moving again on this issue after the first or subsequent implementation dates have passed, during the transition process. The idea is that a new administration cannot just arbitrarily toss out fairly crafted rulemaking installed by a predecessor, but it can implement a fairly crafted set of rules on its own that more or less have the same ultimate effect.  

Indeed, here is how a field assistance bulletin published by the DOL’s Employee Benefits Security Administration (EBSA) describes that possibility, citing President Trump’s February 3rd memorandum ordering the DOL to continue to work on the fiduciary rule: “The public comment period on questions raised in the Presidential Memorandum, and generally on questions of law and policy concerning the fiduciary duty rule and PTEs, closed on April 17, 2017. The Department is actively engaging in a careful analysis of the issues raised in the President’s Memorandum. It is possible, based on the results of the examination, that additional changes will be proposed to the fiduciary duty rule and PTEs.”

The DOL also “intends to issue a Request for Information (RFI) in the near future seeking additional public input on specific ideas for possible new exemptions or regulatory changes based on recent public comments and market developments. The Department is also aware that after the fiduciary duty rule and PTEs were issued firms have begun to develop new business models and innovative market products to mitigate conflicts of interest. The RFI will specifically ask for public comment on whether it is likely to take more time to implement these new approaches than what the Department envisioned when it set January 1, 2018, as the applicability date for full compliance with all of the exemptions’ conditions, and, if so, whether an additional delay in the January 1, 2018 applicability date would reduce burdens on financial services providers and benefit retirement investors by allowing for a smoother implementation of those market changes.”

NEXT: Compliance during the transition period 

The potentiality of subsequent rulemaking or Congressional action notwithstanding, the fiduciary rule curve balls have clearly been difficult for retirement industry providers to cope with—and the situation is likely to continue. The example presented by Merrill Lynch is particularly informative. The firm was among the first nationally known advice providers to signal how it would approach compliance with the strict new conflict of interest standards and prohibited transactions. Then, with president Trump’s victory and widespread speculation that the fiduciary rule would surely be derailed, Merrill suggested its advisers would be given more flexibility to retain commission-based business models.

With the new confirmation from DOL that the fiduciary rule will in fact begin to take effect June 9, Merrill could very likely choose to reverse its stance once again. Even with the back-and-forth, the firm is perhaps in a better position than the sizable number of providers who have not come out publicly to explain how they would approach commission-based business once the fiduciary rule took effect. Some of the firms will have been planning behind the scenes for this day, yet it also stands to reason that at least a few will be genuinely surprised and troubled by the emerging news that the fiduciary rule will indeed take effect. 

Important to note is that, while the fiduciary rule itself has not been changed, the DOL under Trump’s leadership has issued several new additional transition exemptions—most notably a new “best-interest contract transition exemption” and a new “transition 84-24 exemption.”

According to Fred Reish and Brad Campbell, trusted ERISA attorneys with Drinker Biddle and Reath, these new transition exemptions will do a lot in terms of easing some of the compliance burden associated with meeting the fiduciary rule requirements. The new transition 84-24 exemption in particular is expected to help independent insurance agents continue to serve the retirement plan market through commission-based business models, for example, although real challenges remain.

The transition period will run into 2018, Campbell and Reish noted. It will be in that transition time period that the Labor Department determines ultimately whether to make changes going forward, and right now it seems like it could still go either way.

It’s also still possible that Congress could theoretically impose another delay before that date, or somehow move to overturn the rulemaking itself, but this prospect also seems unlikely. For context, one simply has to consider the unfolding story around Dodd-Frank and the Affordable Care Act—two other signature Obama policies that have proven to be impressively difficult to discard.

NEXT: Industry reacts with skepticism 

Financial Services Institute (FSI) President and CEO Dale Brown was among the first to offer up a reaction to the new DOL field assistance bulletin and the confirmation that the fiduciary rule would be allowed to take effect.

“We have fully supported an SEC created uniform fiduciary standard since before Dodd-Frank become law. At the same time, we have opposed the DOL fiduciary rule because of our belief that it will push the cost of retirement advice and planning services out of the reach of Main Street investors,” he suggests. “Unfortunately, the DOL’s decision not to further extend the DOL fiduciary rule’s applicability date will make those concerns a reality. This decision will make it harder for many Americans to save for a dignified retirement.”

Brown says his lobbying organization is “disappointed in this latest development … We agree with the guiding principles Secretary Acosta outlined, that Americans should be trusted to make their own decisions about retirement planning advice, products and services they need; that the rule should benefit the investing public, not the plaintiffs’ bar; and that the DOL should take full advantage of the SEC’s expertise to craft a better rule.”

He pledges to “work with Secretary Acosta, Congress and through the legal system to bring clarity to our members, and relief to hard-working Americans.”