Experts Still Expect Private Enforcement of Fiduciary Standard

During any transition of presidential power between the two predominant American political parties, there is bound to be some operational friction.

The status of the Department of Labor (DOL) clearly demonstrates just how bumpy the transition can be when a wide gulf in policy objectives exists between the former and current president—as is clearly the case with former President Obama and his Republican predecessor, Donald Trump. Nothing embodies the challenge of transition better than the ongoing fight to “repeal” the strict conflict of interest rules implemented late in Obama’s tenure, with compliance deadlines extending well into President Trump’s current term.

The latest news is that DOL has published a proposed extension of the applicability dates of the fiduciary rule and related exemptions, including the best interest contract (BIC) exemption, from April 10 to June 9, 2017. The announcement follows a presidential memorandum issued on February 3, 2017, which directed the department to examine the fiduciary rule to determine whether it “may adversely affect the ability of Americans to gain access to retirement information and financial advice.”

A number of Employee Retirement Income Security Act (ERISA) attorneys have told PLANADVISER that the 15-day comment period allowed for this extension is “extraordinarily short.” Among them is Nancy Ross, a partner in Mayer Brown’s Chicago office and a member of the Litigation and Dispute Resolution Practice.

“It was quite a surprise, frankly, to see the 15-day comment period on a piece of regulation deemed economically significant by the Office of Management and Budget,” she says. “It is going to be such a hardship on the people who are most affected, to get in their comments about what a delay may mean for them. Based on what I have heard, many asset managers and providers really don’t know what to do next.”

Ross agrees that, even with the DOL actively reviewing the fiduciary standard, it will be very difficult to do a wholesale reversal, because the broad regulations were properly established and implemented under the law. 

“One of the potential outcomes is that they could leave the rule or portions of the rule on the books and just decide not to enforce it actively,” Ross speculates. “This might sound attractive to providers, but remember, there is citizen enforcement coded into the rulemaking, and so private litigation is very likely if the rulemaking is left on the books.”

Ross cautions that such an outlook is still pure speculation at this point.

NEXT: DOL Secretary role still wide open 

“Of course we also have questions about how Trump’s effort to fill out his cabinet will proceed, especially regarding the still-empty Labor Secretary post and the role of head of EBSA, which is the position that will oversee any effort to repeal the fiduciary rule,” Ross adds. “It is hard to predict when and how it will all unfold. President Trump’s new choice of Alexander Acosta, former member of the National Labor Relations Board, is in my view a much more traditional and conciliatory candidate than his prior pick.”  

Acosta “has a conservative nature, obviously,” Ross says, being a Bush-era appointee at DOL and NLRB. “He spent a year in the judiciary system and that will help him come to the table with more of an open mind, more of an interest in listening to labor,” she suggests. It stands to reason that he must be willing to lead an attack on the fiduciary rule if he was given the nod. 

PLANADVISER has also heard from Fred Reish, Bruce Ashton and Elise Norcini, all with Drinker Biddle and Reath. As outlined in a helpful client alert, the team of ERISA attorneys points out that the latest rulemaking from the new DOL “is not an extension of the applicability date … just a proposal to extend it. It still needs to go through a regulatory process.”

“To understand the timing of when a delay might actually go into effect, let’s look at the process,” they write. “The first step is a 15-day comment period for interested parties to submit comments on whether a delay is appropriate. The second step is for the DOL to evaluate the comments and decide whether to go forward. We think it’s likely they will do so. The next step is for the finalized rule to go back to the Office of Management and Budget (OMB) for approval, probably around March 24. After OMB approves the DOL’s final rule to extend the date, it is published in the Federal Register. Our best guess is that this will happen during the first week in April, i.e., before April 10.”

The trio then explain that the DOL “can accelerate the effective date of this type of rule for good cause. We expect it will do so and that the justification would be based on the disruptive effect of having an effective date of the delay after the applicability date of the regulation it is designed to delay.”

Again, it is crucial to realize that these steps apply simply to a proposed delay in the implementation of the rulemaking—not an elimination of the rulemaking.

“The DOL has also announced a 45 day comment period on whether the fiduciary rule as currently drafted will adversely affect retirement investors,” the attorneys explain. “This is to enable the DOL to perform the analysis required in the February 3 Presidential Memorandum calling for a review of the fiduciary regulation. So what does all this mean? There are three possible outcomes at the end of the 45 day period. DOL will permit the fiduciary rule and exemptions to become applicable on June 9; begin the regulatory process to revoke the rule and exemptions; or begin the process to modify the rule and exemptions.”

The attorneys conclude it “is possible that the DOL will not be able to make this decision by June 9 and will further delay the applicability date. But in the end, the outcome has to be one of these three.”