Over the past three weeks, the Trump administration has taken steps to reassess, and potentially rescind, a rule passed in the waning months of the Obama Administration−the Fiduciary Rule. The Fiduciary Rule (“Rule”) was established by the Department of Labor (“DOL”) in April 2016, and was set to take effect April 10, 2017. The new regulation will require financial advisers and brokers handling individual retirement and 401(k) accounts to follow the “fiduciary standard” and act in the best interest of their client. Currently, brokers are generally required only to recommend “suitable” investments, meaning they can promote more expensive investments that offer high commissions.
Under the Rule, a broader group of professionals would be required to act as “fiduciaries,” requiring customer interests be put first and prohibiting investment firms from offering advisers financial incentives to act in a way that would hurt investors. The Rule would also require investment firms to disclose how they make their money, and charge only “reasonable compensation.” The Rule only covers tax-advantaged retirement accounts and does not apply to other investments.
On February 3, 2017, President Trump issued a memorandum directing DOL to determine whether the Rule adversely affects the ability of Americans to gain access to retirement information and financial advice. Specifically, President Trump instructed DOL to prepare an updated economic and legal analysis of the Rule, focusing on the following:
(i) Whether the anticipated applicability of the Rule has harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, products, information or related advice;
(ii) 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
(iii) Whether the 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.
While this memorandum appears to leave regulation in place, it does instruct DOL to undertake a new review process for the finalized Rule, and engage in another cost-benefit analysis.
The Rule−six years in the making−faced significant opposition from industry groups that expressed concern over the cost and hardship of complying with the regulations, the possibility of passing costs on to investors, and the risk of lawsuits from investors under a heightened standard. The Rule has already been challenged, unsuccessfully, by industry groups asking the court to vacate the new rules in their entirety. See, e.g., Chamber of Commerce of the United States of Am. v. Hugler, 2017 WL 514424 (N.D. Tex. Feb. 8, 2017) (Ruling in favor of DOL on all counts and holding DOL rules were not arbitrary and capricious so as to violate the Administrative Procedures Act, that DOL conducted a reasonable cost-benefit analysis, and DOL had authority to promulgate the Fiduciary Rule).
A day after the district court in the Northern District of Texas issued its decision, DOL sent a proposal to the Office of Management and Budget (“OMB”) to delay the April 10 compliance date for another 180 days. The proposal will need to be submitted for publication in the Federal Register. Once it is published, the proposal will have a comment period and DOL will again review and evaluate comments before it submits a final rule to OMB to adopt a new applicability date. Until then, it is unclear what will happen.
To add another layer of uncertainty, Andrew Puzder, President Trump’s original pick for DOL Secretary, withdrew his nomination a day ahead of his confirmation hearing. Although President Trump has announced Alexander Acosta as his new nominee, his confirmation process is likely to conclude in March. Without a secretary, DOL staff is playing a large role in the fate of this Rule.
While these events place the Rule on unstable ground, it also creates a high level of uncertainty for industry groups who spent the last year preparing to comply with the Rule’s April 10 compliance date. Industry groups will need to closely monitor the next steps for the application of the Rule, and the actions of the new administration, to be prepared in the event a new applicability date is established.
For more information contact our Banking group or call 208.344.6000