Where Are We Now?
Summary paragraph: The ledge on which the fiduciary rule now sits.
Art by Joseph CiardielloAs we go to print, the Office of Management and Budget (OMB) is reviewing the U.S. Department of Labor (DOL)'s proposed rule "Definition of the Term 'Fiduciary' - Delay of Applicability Date." We believe the proposed delay will contain an expedited "request comments" on whether the DOL should postpone application of its finalized regulations, which specify the circumstances under which someone will be acting as a fiduciary by providing investment advice under the Employee Retirement Income Security Act (ERISA) or the Internal Revenue Code (IRC). If the proposed delay does not take effect, the fiduciary rule will become applicable on April 10. If the delay does take effect, it is unlikely that the rule will survive in its current form.
The last 12 months have contained bursts of activity as the rule has lurched toward implementation. Two recent developments illuminate the ledge on which the fiduciary rule now sits.
On February 3, President Donald Trump issued a memorandum directing the DOL to study the fiduciary rule and related exemptions and, if it concludes the move is warranted, to rescind or revise them. Under the memorandum, the agency is directed to consider three economic and legal points. These are:
* Whether the anticipated applicability of the fiduciary rule has harmed or will likely harm investors due to a reduction of Americans' access to certain retirement savings offerings, retirement product structures, retirement savings information or related financial advice;
* Whether the anticipated applicability of the rule has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and
* Whether the rule will likely lead to increased litigation and higher prices that investors and retirees must pay to gain access to retirement services.
* In response to the memorandum, acting Secretary of Labor Edward Hugler announced that the DOL would explore options for delaying the applicability date. Now, the proposed delay is undergoing final review, necessary before it can be published in the Federal Register. These actions suggest that the White House and DOL are currently working in tandem to delay the rule's implementation. Notwithstanding challenges posed by the Administrative Procedures Act and the proximity of April 10, the DOL appears to be on track to delay the date.
District Court Affirmation
On February 8, Judge Barbara Lynn of the U.S. District Court for the Northern District of Texas issued a summary judgment ruling in Chamber of Commerce of the United States, et al. v. Hugler. The court granted summary judgment to the DOL, affirming its authority to promulgate the fiduciary rule. Judge Lynn's opinion represented the third district court to uphold the DOL's rule as validly issued. In Judge Lynn's 81 pages of analysis, not only did she methodically reject each of the plaintiffs' arguments but, in several instances, observed that the rule appeared more consistent with the statutory text than did its predecessor.
If the DOL does go forward with delaying application or with amending or rescinding the rule, the district court decisions could provide the basis for legal challenges by consumer groups seeking to have the department's action voided so the rule would become applicable.
At this point, it is difficult to predict what will happen next. When the DOL published the final rule last April 8, it appeared that the agency was at the beginning of the end of its effort to more broadly regulate investment advice. After the election and these recent developments, it may be that the rule's publication merely signaled the end of the beginning of the DOL's battles.
We think the most likely outcome will be a 180-day delay of the applicability date, followed by a re-proposal of the rule. Of course, there is also a decent chance the rule will be revoked in its entirety. If there is a re-proposal, we would expect to see the DOL address some of the retirement services industry's criticisms, and possibly include a seller's carve-out from fiduciary status or allow financial institutions, under the Best Interest Contract (BIC) exemption, to require arbitration in all cases. -Stephen Saxon and Kevin Walsh