Fiduciary Rule Double-Take Leaves Retirement Industry Perplexed

Late last week rumors started to swirl that Republican President Donald Trump would directly order the Department of Labor (DOL) to delay the effective implementation date of the fiduciary rule reform championed by the previous Democratic administration.

There were even reports written directly from a draft version of a presidential memorandum that would have done just that—citing a specific 180-day delay in the effective date of the rulemaking. Many reporters and businesses evidently saw this draft, because even before a final version of the memo was officially shared by the White House, scores of industry providers had already written to PLANADVISER expressing their varying opinions about what the 180-day delay meant, and about what could come next.

In the end it would have been best to wait to see the final copy, as the 180-day delay, which was interpreted by many to be the key action-point coded into the memorandum, was removed. This left many in the industry wondering exactly what would come out of the memo, which in the end only ordered a review of the rulemaking to determine what its impacts on investors might be.    

It was particularly telling to see trusted Employee Retirement Income Security Act (ERISA) attorneys have to re-adjust commentary that had been written based on the draft memo. One firm, the Wagner Law Group, captured the unexpected change well.  

“We would like to update the ERISA LAW ALERT sent earlier today. In the Alert, which was based on a draft version of the Executive Memorandum, we stated that the DOL Fiduciary Rule would be delayed for 180 days. The final version of the Executive Memorandum, like the draft, directs the DOL to review the Fiduciary Rule, but unlike the draft, does not specify the time period for review or the length, if any, of the delay. In other words, the 180-day delay period was specifically removed. We understand that interested trade groups are working to obtain clarification from the White House as to what this means,” the law firm explains. “As it stands, the final version of the Executive Memorandum does not, in and of itself, repeal, revise or delay the Fiduciary Rule.”

As the Wagner Group attorneys explain, the DOL will have to determine whether and how a delay may or should be implemented. “This leaves financial services firms in the difficult situation, for the moment, of not knowing with 100% certainty if there will be an extended applicability date or not.”

If the DOL determines that the fiduciary rule is inconsistent with Trump Administration policy, it may issue for notice and comment a proposed rule rescinding or revising the DOL fiduciary rule and the best-interest contract (BIC) Exemption. Wagner attorneys predict the DOL may also take action to stay the litigation currently challenging the DOL fiduciary rule and its exemptions, but again all this is left up in the air right now.

On the Wagner attorneys’ interpretation, one possible effect of a delay would be that the Securities and Exchange Commission (SEC) becomes more involved in the process, so that there would be a uniform definition of fiduciary and a uniform standard enforced by both the DOL and SEC.

“It is worth noting that a bill known as the Financial CHOICE Act, passed by the House Financial Services Committee in September 2016, proposes the incorporation of the DOL Fiduciary Rule into the Retail Investor Protection Act (a bill passed by the House in 2016) and requires the SEC to take the driver’s seat on fiduciary rulemaking,” the attorneys observe. “Before the review process has even commenced, it is premature to speculate as to the conclusions that the DOL will reach, although it is highly unlikely that the DOL fiduciary rule and related exemptions such as BIC will survive in their current form, in light of President Trump’s clear willingness to dismiss government officials unwilling to conform to his agenda.”

NEXT: Some still pushing for the rule 

Seth Rosenbloom, associate general counsel at Betterment for Business, an integrated 401(k) advice and recordkeeping provider, says his firm “views the fiduciary rule as an important protection for American investors.” He is very critical of the argument that implementing the rule would necessarily damage investor choice and provider flexibility—although even with the delay still to be determined, he thinks the fiduciary rule reform is most likely on the way out.

“We’re disappointed that the administration is targeting the rule, but we will continue to be an active voice in favor of it, and in favor of investors’ rights to honest investment advice more broadly,” Rosenbloom says. “There is no merit to the claim that the rule would limit investors’ choices by forcing all advisers to all recommend the same low-cost index funds.”

The text of the rule itself is clear on this point, Rosenbloom argues, suggesting the rule “simply requires advisers to make an investment recommendation that they can demonstrate is in an investor’s best interest. That may be the lowest-cost option, but not necessarily. If advisers are not able to defend the investments they are recommending, including their cost, investors will not suffer from their absence.”

Rosenbloom suggests that, if the rule is not implemented, there are a few questions that investors can ask financial professions to ensure that they are receiving sound advice: “They can still ask, are you a fiduciary and are you a fiduciary across all my accounts? How are you compensated? How am I paying you and who else is paying you? What conflicts do you have?” These all remain important even if the DOL rulemaking is stopped outright.

“Even if the rule is rolled back, the publicity around the rule over the past year has had positive impact,” he concludes. “Investors are paying attention to fees and conflicts, asking important questions, and holding financial providers to higher standards. That should continue even if the administration delays or halts the rule. In the long run, investors are going to demand fiduciary advice and we're optimistic that it will also become a legal requirement.”

Given the previously voiced concerns of the insurance industry in particular as it pertained to complying with the fiduciary rule’s prohibited transaction exemptions, it’s no surprise the Insured Retirement Institute (IRI) is in the camp applauding Trump’s attack on the rule. But even such supporters of the rule delay were left in the dark by the fiduciary double-take. Writing to PLANADVISER in advance of the final memorandum’s release, IRI President and CEO Cathy Weatherford clearly expected the memo to establish a 180-day delay. She suggested the IRI “strongly supports President Trump’s decision to delay implementation of the Department of Labor’s fiduciary rule and initiate a thoughtful and comprehensive review of the rule’s likely impact on retirement savers.”

“The rule makes sweeping changes to the existing regulatory framework that will ultimately make it harder for savers to plan for retirement by depriving them of access to affordable holistic financial advice and a wide range of investment options,” Weatherford said. “These concerns, which drove us to pursue our pending legal challenge to the rule, are further exacerbated by the overly aggressive compliance deadline provided by the DOL.” Again, as it stands Trump has not provided the relief sought by IRI and others. 

With some much lingering uncertainty around where the DOL fiduciary rule actually stands, those in the retirement industry will be eagerly awaiting nomination hearings for Andrew Puzder. Unless a major regulatory reform effort will be led by the interim secretary, Puzder will have to lead the effort to gut the rule, and first he will have to be confirmed.