Trump’s DOL Fiduciary Rule Action Leaves Advisers and Brokers Hanging
With a stroke of a pen, President Donald Trump on February 3 upended six years of effort behind the Department of Labor Fiduciary Rule. His "presidential memorandum" left advisers, broker-dealers and other financial institutions that work with ERISA-based retirement plans in a state of uncertainty.
The weeks ahead should bring some clarification, but many agree that the DOL Fiduciary Rule, at least in the form that was expected to take effect April 10, will now not see the light of day.
The DOL on February 9 filed a notice with the federal Office of Management and Budget to review the Rule and delay its applicability date, but the length of the delay is not included in OMB’s initial listing. Uncomfirmed media reports said that DOL will delay the Rule by 180 days and establish a new comment period.
Trump’s memorandum – similar to an executive order – on the Rule directs the Department of Labor to "examine [the Rule] to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice" and to "prepare an updated economic and legal analysis concerning [its] likely impact."
"It seems to be the start of a process to unwind the Rule," said Mayer Brown partner Lennine Occhino.
The presidential memorandum goes on to state that if the Department of Labor decides that the Rule is inconsistent with helping Americans make their own financial decisions, save for retirement, or withstand unexpected financial emergencies, it "shall publish for notice and comment a proposed rule rescinding or revising the Rule."
Acting secretary of labor Ed Hugler cleared up the confusion about what lies ahead somewhat when he issued a statement February 3, following the release of Trump’s memorandum, saying that "the Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum."
Even with Hugler’s statement, "there’s no certainty as to what the DOL will do," said Skadden senior counsel Jeffrey Lieberman, although he believes a delay in the Rule’s implementation date is more likely than not. "It seem difficult to enact what the President wants to do without having a delay."
If the Rule is delayed, said Drinker Biddle partner Joan Neri, which she considers likely, the Department of Labor must then undertake a cost-benefit analysis to determine whether to revise the Rule or withdraw it. Further, the timing of the delayed implementation date and the completion of the cost-benefit analysis is difficult to predict given the fact that the Trump nominee for DOL secretary has not yet been approved.
Another possibility, suggested by Occhino, is that the DOL Rule would be dropped, with responsibility for broadening fiduciary status for all relevant financial firms, rather than just those dealing with retirement
accounts, passed to the SEC.
What to do now
As for what advisers and broker-dealers should do given this uncertainty, Lieberman suggested they continue what they had been doing to comply with the Rule until there is more clarity about what the DOL will do.
Further, he noted, changing course now could create "client relations issues if a firm turns around and decides to go back to just doing what it did before the Rule. What would that say to clients? It would be difficult for advisers or broker-dealers to say, if they were asked, ‘We were going to act in your best interest, maybe
reduce fees, and now we are just going back to the way it was before the Rule was passed.’"
In some ways, any decision to postpone, revamp or eliminate the Fiduciary Rule would be akin to closing the barn door after the horses have already escaped. Many in the advisory and broker-dealer community, assuming that a DOL Fiduciary Rule was a done deal, have already spent significant dollars and other resources on compliance. Some may still carry through with those compliance provisions, using them to market the safety of their retirement investments.
"The answer to what advisers and broker-dealers should do now depends to a large extent on the extent to which resources have already been put into the process," said Neri. Many firms have already prepared and are ready to submit transition disclosures under the Rule to retirement investors, she said, and others have already changed their compensation structure away from commissions to an asset-based fee. "At this point, advisers and broker-dealers should stay the course because we don’t yet have anything tangible to point to in terms of delay of the Rule."
It should also be noted that "many are quite happy" with Trump’s presidential memorandum "even considering the time and money they put into compliance," said Occhino, "because many still realize they are not yet prepared. Now they can market their improved compliance actions without necessarily having to worry about failing to meet the technical requirements of the companion Best Interest Contract Exemption."
Advisers, in any event, already are subject to an Advisers Act fiduciary standard, so any change for them will be less jarring than it will be for broker-dealers, who currently are required to meet only a suitability standard.
Presidential road map
In directing the DOL to examine the Fiduciary Rule and prepare an updated economic and legal analysis concerning its likely impact, the Trump memorandum provides the Department with what Neri described as "a road map."
Specifically, the presidential memorandum asks the DOL to consider three specific avenues in terms of the "anticipated applicability" of the Rule:
Whether it "has harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;"
Whether it "has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees;" and
Whether it is likely "to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services."
In the air
Difficult compliance issues involving the Rule involve not simply whether a fiduciary standard applies, but the specific requirements under the BIC exemption, Occhino said – and it is the question of what will happen to those requirements in the weeks and possibly months ahead that has left financial institutions and their legal representatives guessing.
For instance, questions remain related to:
Best Interest Contract Exemption. Whether and when advisers and broker-dealers will continue to need or be able to rely on this companion rule to the Fiduciary Rule is one of the big unknowns. The BIC exemption would allow fiduciaries, under certain conditions, to collect contingent fees that would otherwise be prohibited. It also contains other provisions, such as requiring, in certain circumstances, that fiduciaries create contracts for clients to sign.
Level fees and "BIC Lite." A streamlined version of the BIC exemption, known informally as "BIC Lite," allows advisers with acceptable "level" fees to avoid the more onerous requirements of the full exemption, such as mandatory provisions in contracts with clients; formulating policies that prohibit quotas, bonuses and contracts under certain circumstances; and website disclosures.
"Hire me" exception. This provision to the final Rule allows adviser representatives to talk to potential clients about their firms and the kind of services they provide as part of an effort to market their services without being considered a fiduciary. Representatives are not allowed to offer specific investment recommendations that ultimately result in a fee to the adviser without triggering fiduciary status, however.
Court decision. The U.S. District Court for the Northern District of Texas on February 8 ruled in favor of the DOL on a complaint brought by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and others challenging the Fiduciary Rule. But will this mean anything under a new administration where the government’s position is no longer what it was when the suit was brought?
DOL FAQs. The DOL last month issued a new batch of answers to frequently asked questions about the Fiduciary Rule, but given the uncertain status of the Rule as a result of Trump’s memorandum, whether these and past FAQs are relevant will depend on what the DOL decides to do in terms of a revised Rule, if there is a Rule at all.