What's Next?
Alison Cooke Mintzer (photo by Chris Ramirez)
Another day, another turn of the fiduciary rulemaking world where confusion and speculation abound. We’ve been talking about the adviser conflict of interest debate for years—through multiple administrations—and it seems destined to continue down its long and winding road.
The saga is almost too complicated to follow. Many expected the Department of Labor (DOL) fiduciary rule to be delayed or otherwise negated by the Trump administration, but Secretary of Labor Alexander Acosta, early on, released a letter saying there was “no principled legal basis” to delay the rule, and so part of it went into effect, while the second half, relating to the best interest contract and its exemptions, was, at a later date, delayed until 2019. Despite multiple efforts by Congress to enact some sort of legislation to put an end to the rule, nothing ever passed both chambers and made it to the executive branch.
All the while, legal challenges against the rule made their way through a few different venues. The most significant case, it turns out, was that being heard in the 5th Circuit, which, in March, determined that the DOL had severely overreached with the rule, sounding what many said was its death knell. California, New York and Oregon’s attorneys general, alongside the AARP, have tried to intervene and resurrect the case. Though they have been rejected once, as I write this, they are still trying to get the court to reconsider, and the 5th Circuit has not yet officially vacated the rule. At this stage, the DOL says it expects the court to soon issue a mandate “effectuating its opinion vacating the entire fiduciary rule, the [best interest contract] exemption, the principal transactions exemption and related amendments to existing PTEs [prohibited transaction exemptions].”
Last week, a letter was sent by five Senate Democrats to the DOL trying to determine how the regulator would approach the fiduciary rule since the 5th Circuit decision. But I doubt much should be expected to come of their initiative.
Where do all these machinations leave us? I joked last week that this constant back and forth reminds me of a scene from “Monty Python and the Holy Grail.” In it, a man tries to offload an apparent corpse to the Dead Collector. While the man tries to obtain his money, the “dead man” tells them, “I’m not dead!” After a few exchanges, the Dead Collector knocks the man down with a club, seeming to “solve” the problem. (I get that this sounds terrible as I write it, but in the whole Monty Python movie context, it is actually amusing.)
I feel like that’s kind of where we are with the fiduciary rule. It’s not quite dead, but it looks dead, and it might not take much more to officially return us to the “old” five-part test. However, as an industry, we unlikely can really return to that state, in all practicality. There is a heightened awareness of what it means to be a fiduciary, and clients demanding that their adviser keep their interest at heart shouldn’t be surprising.
As advisers tell it, part of the challenge with the rule being in limbo is there is no longer an exemption available for those fiduciaries that give advice and receive increased compensation as a result, potentially creating a prohibited transaction. The DOL has put out guidance in a Field Assistance Bulletin (FAB) about its continued temporary enforcement policy, and is expected to release some sort of exemption in the future.
To add to the confusion, that exemption may have to also consider what’s happening elsewhere in the capital—at the Securities and Exchange Commission (SEC). At both the SEC and FINRA, discussions and proposals are already underway about working in clients’ best interest.
The situation is still “Hazy,” to cite the Magic 8-Ball, and it won’t become much clearer anytime soon, even after the 5th Circuit issues its mandate. With new regulatory bodies weighing in, and many providers and advisory firms having invested in technology to comply with a rule that was going into effect—and did, in part—each person and group will have to find its own approach to navigating the rule … for now.