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The Fiduciary Rule’s Uncertain Future

Last April, President Obama announced a rule aimed at requiring financial professionals who work with retirement plans, whether such professionals are investment advisors or broker-dealers (or in another category), to always act in the best interest of their client. This rule, commonly called the fiduciary rule, was to be phased into effect from April of 2017 through January of 2018, giving the affected professionals time to develop adequate policies and procedures to ensure their compliance. Now, however, it is unclear if the requirements of the fiduciary rule will ever be implemented. A mere two weeks after taking office, President Trump announced an executive order calling for the Department of Labor to conduct a review of the rule. In light of this swift action on the part of the President, retirement plan advisors and broker-dealers are looking for signs on how to proceed: should they continue pouring money and effort into their new compliance initiatives or should they anticipate that the fiduciary rule will no longer take effect?

 

The planned fiduciary rule effectively expands the definition of “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974 to include any professional making a recommendation or solicitation, such as brokers, planners and insurance agents. Typically, only investment advisors, who charge a fee for services such as giving ongoing advice, are considered fiduciaries; broker-dealers, who make recommendations or solicitations, only need to ensure that product offerings are “suitable,” meaning meeting a client’s defined need and objective, unless certain concerns are present which create a fiduciary duty.  The fiduciary rule will level the playing field for those selling or advising as to retirement plans, prevent brokers from being able to promote plans that reap the highest commissions and fees, as opposed to advisors, which must promote plans that are in their clients’ best interest.[1] Since the rule’s announcement, many financial firms that deal in retirement plans have been overhauling their fee and account structures and investing in technologies which can aid in meeting the rule’s new compliance obligations.[2] Some estimates put the cost of compliance for the financial services industry at $2.4 billion; a figure that would hit smaller firms disproportionately hard, potentially forcing some to cease business or search for acquisition options.[3]

 

In light of these potential hardships on the financial services industry, on February 3, 2017, the Trump administration sent a memorandum to the Department of Labor calling for “an updated economic and legal analysis” to determine whether the fiduciary rule is likely to harm investors, disrupt the industry, or cause an increase in litigation and the price of advice.[4] Although, counter to early reports, the memorandum does not go as far as to either direct the Department of Labor to delay the implementation of the rule for six months or to consult with the Department of Justice regarding a stay of the litigation surrounding the rule, it does state that if the Department of Labor concludes that the fiduciary rule does harm investors or firms, it can propose a rule “rescinding or revising” it.[5] Thus, currently, the commencement of the fiduciary rule’s implementation in April is still on the calendar. Furthermore, recurring delays in the Senate hearing for Andrew Puzder, Trump nominee for Department of Labor Secretary, may result in delays for the Department’s review of the fiduciary rule. As of now, the hearing for Puzder has not yet been rescheduled and Senate Democrats are clamoring for Puzder to withdraw his nomination.[6]

 

This past week, the judiciary has also dealt a blow to efforts to kill the fiduciary rule before it takes effect. Multiple cases filed in a Texas district court by the Chamber of Commerce, Indexed Annuity Leadership Council and the American Council of Life Insurers (consolidated into U.S. Chamber of Commerce v. the Department of Labor), sought summary judgment to vacate the fiduciary rule. The February 8, 2017 opinion denied the plaintiff’s motion for summary judgment, and upheld the Department of Labor’s motion for summary judgment. The court held that the fiduciary rule does not exceed the Department of Labor’s authority, specifically noting that the conditions are reasonable and have been deemed workable by many in the industry, stating: “Congress gave the [Department of Labor] broad discretion to use its expertise and to weigh policy concerns when deciding how best to protect retirement investors from conflicted transactions . . . It is reasonable for the [Department of Labor] to incentivize certain compensation models over others to protect plan participants and beneficiaries….The court finds the [Department of Labor] adequately weighed the monetary and non-monetary costs on the industry of complying with the rules, against the benefits to consumers.”[7]

 

This whirlwind of recent developments has left the financial industry holding its breath, with uncertainty regarding the fiduciary’s rule’s future prompting an array of reactions. Many larger financial firms have been aggressively planning to meet the April deadline and are for the most part already prepared for the fiduciary rule to take effect; if the rule disappears they can utilize the changes they have made to their business as a marketplace advantage, highlighting their values and services in comparison to their competitors[8]. As such, prominent financial firms may move to align themselves closer with the tenets of the fiduciary rule regardless of the actual rule’s fate. Smaller firms, on the other hand, seem to be taking a wait-and-see approach rather than absorb costs and spend resources in preparation for a mandate that may never come.[9]

[1] See, Heather Long, New Obama Rule Goes After Shady Investment Advisors, CNN Money, April 6, 2016.

[2] See, Roger Wohlner, How the New Fiduciary Rule Will Hit Broker-Dealers, Investopedia, May 27, 2016.

[3] Id.; DOL Fiduciary Rule Explained, Investopedia, February 3, 2017.

[4] Presidential Memorandum on Fiduciary Duty Rule, Office of the Press Secretary, February 3, 2017.

[5] Id.

[6] Michael Collins, Democrats, labor leaders call for Labor nominee Andrew Puzder to withdraw, USA Today, February 9, 2017.

[7] Ashley Ebeling, Texas Court Ruling Backs DOL Fiduciary Rule, Despite Trump And DOJ Appeal For Delay, Forbes, February 9, 2017; Sarah N. Lynch, U.S. court upholds Obama-era retirement advice rule, Reuters, February 8, 2017.

[8] Kapin Vora and Matthew Berkowitz, The Obama-era fiduciary rule: what happens next?, The Hill, January 17, 2017; Brian O’Connell, Trump’s Move On DOL Fiduciary Rule: A Game Changer For Advisors?; InsuranceNews.Net, February 9, 2017.

[9] Vora and Berkowitz, 2017.