DOL Move to Delay Fiduciary Rule by 60 Days May Be Just the Beginning
Will the Department of Labor’s Fiduciary Rule bite the dust before it even applies to the financial institutions it is meant to cover?
The DOL on March 1 proposed extending the applicability date of the Fiduciary Rule by 60 days while, by order of President Trump, it reconsiders the Rule and whether revisions, further delays or its rescission are needed. The public has 15 days from its March 2 publication date in the Federal Register to comment on the proposed 60-day delay, and 45 days to comment on the overall impact of the Rule and its related exemptions.
The Fiduciary Rule’s current applicability date is April 10. The Rule, in broad terms, would extend fiduciary obligations to broker-dealers and other financial institutions that work with clients on ERISA-based retirement plans. Once subject to a fiduciary duty, those broker-dealers and financial institutions would need to make certain that their recommendations always put clients’ interests first.
Exemptions offered alongside the Fiduciary Rule, such as the Best Interest Contract Exemption, would also be subject to the proposed 60-day delay.
President Trump on February 3 issued a presidential memorandum that directed the DOL 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." Following the President’s directive, 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 (ACA Insight, 2/13/17) – which resulted in the DOL’s March 1 proposal to do just that.
"Analysis of the effects of the rule, including cost analysis, as directed by the President’s memo is very complex, and it isn’t clear whether the DOL can fully comply within the 60-day delay period," said Skadden senior counsel Jeffrey Lieberman. "It’s hard to say precisely where the DOL will be in the analysis when the 60 days come to an end, and whether the Department would extend the delay."
"The necessary next step will be for the DOL to issue a final rule that extends the applicability date from April 10 to June 9," said Wagner Law Group partner Stephen Wilkes. "A deferral for 60 days is really about the DOL taking more time to consider, substantively and politically, how to address the long-term impact and viability of the Fiduciary Rule for the retirement industry, as ordered by the executive branch."
A further delay or the beginning of the end
But is this 60-day delay the beginning of a further delay, or perhaps the beginning of a death cycle for the Fiduciary Rule?
"Many believe that a thorough study and debate will require more than 60 days, and that this is really the first step of an inevitable process that will lead to a delay of perhaps 180 days or longer," said Wilkes. "From there, the possibilities range from 1) no change and allow the Fiduciary Rule and exemptions to stand as is, to 2) minor revisions to 3) a major overhaul or even revocation. As of the publication date in the Federal Register, however, April 10 is still the official applicability date and firms are rightfully asking what happens in the unlikely event the date holds."
There is no way to know for sure, but certainly the DOL has left the door open for further delays, revisions or rescission. Consider the following statements made by the DOL in its commentary to the proposed rule seeking the delay:
"The President directed" that if the DOL finds, after its analysis of the Fiduciary Rule, that the Rule would harm investors or cause an increase in litigation "then the Department shall publish for notice and comment a proposed rule rescinding or revising the Final Rule."
"This proposed 60-day extension …would make it possible for the Department to take additional steps (such as completing its examination, implementing any necessary additional extension(s), and proposing and implementing a revocation or revision of the Rule) without the Rule becoming applicable beforehand."
"The Department’s examination of the Final Rule and exemptions pursuant to the presidential memorandum, together with possible resultant actions to rescind or amend the Rule, could require more time than this proposed 60-day extension would provide. What costs and benefit considerations should the Department consider if the applicability date is further delayed for six months, a year, or more?" This question was one of a list of questions for which the DOL invited public comments.
Open for comment
The DOL invited comments on 20 different groups of questions on its proposal for a 60-day delay. Some of the questions asked seek to assess changes in the investment retirement marketplace, while others would appear to mirror the governing philosophy held by the Trump administration, as well as Republicans in Congress.
Drinker Biddle partner Joan Neri noted that the DOL invited a number of comments that hint at a possible "bifurcated approach" to the applicability of the Rule. "The DOL explained that the extension will allow it time to assess and examine the potential reduction in costs to financial institutions as compared to the potential losses to investors if the Rule is delayed." The DOL indicated that such an evaluation could, for instance, result in delaying one part of the Rule (for example, its notice and disclosure provisions), while permitting another (for example, the impartial conduct (i.e., fiduciary) standards) to become applicable April 10, she said. "Even if this bifurcated approach is adopted," Neri said, "it will be a relief to many in the advisory community who are currently struggling with having their notice and disclosure processes in place by April 10."
Here are some of the questions the DOL is asking the public to consider:
Are firms making changes to their line-up of investment products, and/or to product pricing?
Are firms making changes to their advisory services, and/or to the pricing of those services?
Has implementation or anticipation of the Rule led to increases or reductions in commissions, loads or other fees?
Has implementation or anticipation of the Rule led to changes in the compensation arrangements for advisory services surrounding the sale of insurance products?
For firms that intend to make use of the Best Interest Contract Exemption, what specific policies and procedures have been considered to mitigate conflicts of interest and ensure impartiality? How costly will those policies and procedures be to maintain?
What innovations or changes in the delivery of financial advice have occurred that can be at least partially attributable to the Rule? Will those innovations or changes make retirement investors better or worse off?
Have market developments and preparation efforts since the final Rule and [prohibited transaction exemptions (PTEs)] were published in April 2016 illuminated whether or to what degree the final Rule and PTEs are likely to cause an increase in litigation, and how any such increase in litigation might affect the prices that investors and retirees must pay to gain access to retirement services?