Time may not be running out on the Department of Labor’s fiduciary rule as quickly as first assumed when the Trump administration issued its February 3 memorandum calling for a review of the rule, one requiring that advisors on retirement accounts put their clients’ interests ahead of profits.
In an 81-page ruling, a Dallas federal judge this month dismissed industry objections to the DOL rule after also ignoring administration requests to postpone the issuance of her decision. Some lawyers have also pointed out that the DOL rule has, in fact, been legally binding since last June and not easily cast aside.
There’s still the question of whether the rule’s April 10, 2017 “applicability” date will be pushed back. Several ERISA lawyers believe it will be because the administration seems determined to delay the applicability date while it decides how to confront the rule. “The DOL will now consider its legal options to delay . . .,” Acting DOL Secretary Edward Hugler said this month.
Could the delay be delayed?
In addition, the Trump administration would probably need to hold a comment period before it could call a time-out on the applicability date, Micah Hauptman, financial services counsel at the Consumer Federation of America, said in a recent interview with Bloomberg BNA. A formal rulemaking process would be the “most conservative” way of delaying the rule through regulation, Hauptman said.
Hauptman, whose group supports the fiduciary rule, added that a formal rulemaking process would be necessary because the rule is already in effect, even if it doesn’t apply until April 10. The way the law was written, he said, it became effective shortly after it was promulgated last spring.
“The DOL rule has long been effective—no real dispute there,” added Mercer Bullard, a University of Mississippi law professor who gave Congressional testimony in favor of the rule last year.
Also in agreement is ERISA attorney Marcia Wager. “The DOL . . . can’t change the rule without engaging in the regulatory process,” she said.
In fact, an announcement of delay may come any day, according to prominent Philadelphia law firm Drinker Biddle. The firm believes that the delay will be six months to a year, enabling service providers to retirement plans and IRAs to freeze plans already constructed to comply with the new regulation.
This does not mean that the new rule will ultimately survive, however.
Fiduciary Rule Inconsistent with Trump Administration Policies
Once a delay kicks in, according to ERISA attorney Jason C. Roberts of the Pension Resource Institute, it will be a “slam dunk” to show that the rule is inconsistent with Trump administration policies because it fails one of the three tests described in Trump’s February 3 memorandum.
That test asks “whether the Fiduciary Duty Rule 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,” Roberts said. He believes that it clearly does. “The path of least resistance may be for the [Trump] DOL to focus on [that issue],” he wrote in an essay on LinkedIn.
Should the fiduciary rule ultimately die, another unfortunate prospect is that most of the costs of complying with the rule have already been incurred by financial services firms. In other words, at least part of the horse is out of the barn.
“Changes in the industry over the last year have radically changed the economics of compliance,” Roberts wrote, referring to the various internal costs of complying with the rule.
On the flip side, Bullard suggested that consumer advocacy groups with adequately deep pockets, such as Public Citizen, Better Markets or unions, might sue the DOL to prevent the discarding of the rule. “I expect the DOL will be sued if it amends the rule,” he said. In fact, another consumer advocacy group, the Consumer Federation of America, is said to already be weighing the prospects of a lawsuit.
The grounds for such a suit, according to Hauptman and Wagner, would be a violation by the Trump administration of the Administrative Procedures Act. “We will be watching whether the Administration violates the Administrative Procedure Act or otherwise violates the law,” Hauptman said.
No Matter What Happens, the Trend Toward Fee-Based Advice Will Grow
Regardless of the future of the DOL fiduciary rule, many believe that the trend toward fee-based advice and web-centric offerings of low-cost financial services will continue. Some even think that the DOL rule was merely just a formal endorsement of stronger, technology-driven trends in financial services.
“Even if the DOL concludes that the best course of action is to return to the rules in effect prior to the enactment of the DOL fiduciary rule, it would not necessarily be the best course of action to undo all of the compliance steps that have already been taken,” Wagner said. “Some of the actions that have been accelerated by the rule reflect an industry trend toward an advisory platform rather than a brokerage- based platform.”
In the interim, however, a mini brouhaha continues. Bill Harris, a fiduciary rule supporter and the CEO of robo-advisor Personal Capital, frowns on a comment by White House National Economic Council Director Gary Cohn that the fiduciary rule is “a bad rule for consumers.”
In his criticism, Cohn said: “It’s like putting only healthy food on the menu because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”
Harris thereupon issued this retort in a press release: “Encouraging people to die younger is one way to solve our retirement crisis. But we think a better way is to encourage people to save responsibly and invest well, so that they will be able to live a long life in financial security.”
What will be the ultimate fate of the DOL fiduciary rule? Stay tuned. What seems increasingly clear already is that how it ultimately plays out will run counter to the expectations of the investment advisory industry and its patrons.
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