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DOL’s Fiduciary Rule Faces Uncertain Future
Although regulators are motivated to finalize the rule, it will likely face litigation, according to Capital Group’s senior counsel.
The Department of Labor’s fiduciary rule faces a “rocky road” ahead due to expected litigation, despite regulators pushing to finalize the rule, according to Jason Bortz, the Capital Group’s senior counsel, at the firm’s webinar, “Washington Update: Legislative and Regulatory Changes for the 401(k) industry,” on Tuesday.
The new DOL regulation defines when a person is acting as a fiduciary investment adviser in dealing with a plan or an individual retirement account. To a large extent, the rule will not impact workplace retirement plan advisers, who already operate as fiduciaries following the Employee Retirement Income Security Act, Bortz noted. The Capital Group owns American Funds, the fifth largest defined-contribution-investment-only asset manager in the country, according to PLANADVISER’s 2023 DCIO survey.
The proposed rule would, however, have an impact on the broader advising community in terms of individual retirement account rollover guidance and the sale of annuities as retirement income products. While the DOL and the administration of President Joe Biden seem focused on getting the amendments passed, the road to approval will be paved with potholes, according to Bortz.
Second Run
The legislative expert pointed to prior history as a key example of what might slow the proposal down: A prior rule instituted during the administration of former President Barack Obama was voided by the U.S. 5th Circuit Court of Appeals in 2018. The appellate decision stated that the DOL rule was “an arbitrary and capricious use of regulatory power.”
“This is [the DOL’s] second run at it, and I will just say it is very similar to their prior iteration. It is not dramatically different,” Bortz said.
The rule will apply to investment professionals and those who work for a broker/dealer or an investment adviser. When they make a recommendation to an IRA owner, a plan fiduciary or plan participant, they “will now be held to a fiduciary standard,” Bortz noted.
“Your broker/dealer firm or RIA will have to have conflict-of-interest-mitigation policies in place,” Bortz said. “I usually get asked, ‘How big a deal is this?’ I’d say it’s still a big deal, but it’s not as big a deal as it was back in 2015, 2016. … The world has evolved enormously since then.”
In institutional retirement, the vast majority of advisers are either doing business in an advisory capacity or, if acting as a broker of record, they are getting level compensation, meaning the compensation does not vary based on the investment menu. Bortz said firms have also adopted sophisticated policies to appropriately govern rollover recommendations.
Bortz is not particularly “worried about institutional retirement. There are issues, and I wouldn’t say it’s nothing,” he said. “But the biggest impacts are more on the wealth side of the fence. They’re picking up anything that’s commissionable investment advice, like annuity recommendations as a particular focus. It’s not quite the size it once was, but it is a big change if it gets to the finish line and goes live.”
Litigious Future
Will the regulation reach the finish line? The answer is complicated, Bortz said.
He expects the rule will get finalized, as it was rolled out in the White House with Biden giving a speech about its importance. In addition, the administrations is going through an “incredibly accelerated regulatory process compared to usual,” showing its desire to get something passed.
“The proposal was released on Halloween, and we’re already having a hearing,” he said. “I’ve never seen an agency having a hearing before comment letters are due in my entire career. It has never happened, so that’s kind of wild.”
Bortz said comment letters are due by January 2, 2024, and regulators are going to be very motivated to finalize rules by May 2024 because of legislation that creates an easy path to revoke an agency rule. He predicted the package will be finalized in April or May but noted that there is a consensus that the rule will be challenged.
“It’s going to the courts, and did they really do enough to sort of change the facts they lost last time?” he asked. “Why wouldn’t they lose this time? Then you throw on top of that, there’s an election. If there’s a new administration, it’s hard for me to see them not reopening this rule. There are a lot of reasons to think it faces an ‘iffy’ future. No guarantees, but it’s got a rocky road ahead.”
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