Fiduciary Rule Roulette
Right now, Washington has become a town built on exciting sagas: investigations into Russian relationships, the ongoing Obamacare repeal-and-replace debacle and the tax reform debate. They are all great examples of potentially titanic developments that could result in fundamental changes to the way we do business.
On the next tier down, we have the ongoing debate regarding whether the Department of Labor’s “fiduciary rule” will take effect and, if so, in what form.
For firms that sell retirement products to individuals or businesses and/or that provide advice related to such investments, the stakes in the fiduciary rule debate are, as the president would say, YUUUGE! The rule imposes a laudable and widely accepted standard requiring advisors to act in the “best interest” of their clients when rendering retirement-related investment advice. “Best interest” is defined as providing advice consistent with what other similarly situated professionals would advise and not being influenced by the advisor’s personal remuneration. But it buttresses that standard with:
- Extensive disclosures (including an affirmative contracting requirement)
- Requisite warranties, which essentially mandate keeping advisor compensation schemes level
- Mandatory policies and procedures to guard against potential conflicts of interest and
- A contracting requirement that subjects advice related to individual retirement accounts (including employer-funded IRA plans like SIMPLE and SEP IRAs) to private rights of action.
Naysayers of the rule, which includes essentially everyone in the industry except those who receive their compensation through fixed-fee arrangements, assert the rule imposes needless expense and uncertainty.
This not only will increase the prospect of extensive litigation but will result in limiting the availability of advisory services and/or increase the price of services and products, particularly to less wealthy households.
In a memorandum issued in February, President Trump directed the Department of Labor to review the rule and to revise or withdraw it if it would result in:
- Decreased access to advisory services, product structures or retirement savings information
- Increased costs for retirement services
- Increased litigation and/or
- Dislocation or disruption within the industry that may adversely affect investors.
In April, the DOL issued a final rule delaying the implementation date of the “best interest” standard component of the rule until June 9 and most of the rule’s other requirements until Jan. 1, 2018. It was widely expected when the new secretary of labor, Alexander Acosta, was confirmed the entire rule would be delayed until the department had the opportunity to review the rule in its entirety (as the president’s memorandum required).
Then on May 23, the secretary changed the plan. Through the simultaneous issuance of frequently asked questions, a temporary enforcement bulletin and a highly unusual op-ed he penned for The Wall Street Journal, the secretary said the June 9 deadline would not be further delayed. However, the DOL would not begin enforcing the rule against any advisor who in good faith is seeking to comply until Jan. 1, 2018. In the interim, he stated, the department will continue the White House-mandated review of all aspects of the rule.
This has been widely received as a death knell to the rule rescission effort. I do not read it that way, though. Secretary Acosta, a lawyer who did a stint at the Department of Justice, argues in his op-ed that the applicable Administrative Procedure Act requirements bar the department from unilaterally delaying or withdrawing the rule at this juncture. At the same time, he noted: “It is important to ensure that savers and retirees receive prudent investment advice, but doing so in a way that limits choice and benefits lawyers is not what this administration envisions.”
And he ended with this: “The Labor Department will roll back regulations that harm American workers and families. We will do so while respecting the principles and institutions that make America strong.”
He is a good lawyer. He is going to respect the normal—and legally mandated—rulemaking process. But if there is a record that shows that this rule does not satisfy the White House edicts, I believe he will revise or rescind it. Our job now is to make that record.
In the meantime, if your firm does engage in these retirement advice activities for anything other than a fixed fee, your fiduciary advisors now must:
- Give investment advice in the “best interest” of their clients
- Avoid making materially misleading statements to their clients with respect to investment advice given and
- Receive only “reasonable compensation.”
Although each of these terms is laden with interpretational questions, the department’s FAQs assert financial institutions and their advisors subject to the rule have leeway to determine how best to comply with the transition period requirements in the absence (for now) of other regulatory obligations taking effect Jan. 1 (e.g., warranties regarding compensation arrangements, disclosures, contracts).
This is not giving many of the broker-dealers and life insurers for whom you distribute these products much comfort, but for your firm’s advisors it should mean they can comply with whatever new process requirements your broker-dealers and life insurers impose. Otherwise, they can pretty much go about their business as usual—at least until January when all the rules will change—or they won’t.
Never a dull moment in our nation’s capital.
Sinder, The Council’s chief legal officer, is a partner at Steptoe & Johnson. firstname.lastname@example.org
Jensen is Steptoe senior associate in the GAPP group. email@example.com