As the Calendar Turns, Whither the Fiduciary Rule?
Editor’s note: This is the first of a two-part series in which experts share their insights on some of their expectations for the coming year on issues relevant to retirement plans.
It won’t be long till the champagne corks have been popped, the confetti has fallen and we will have embarked a new year. And quite a new year it will be! In with the new: the Department of Labor’s (DOL) fiduciary rule?
Well, kind of new. It appeared in its first incarnation in 2010 and then reappeared. It wended its way through drafting, release, review, comment, revision, lather rinse repeat. But at long last it’s set to be implemented on April 10 of the year about to begin.
Or will it?
The November surprise of a Trump administration-to-be put the future of the fiduciary rule in some measure of doubt. While the President-elect has not articulated an opinion on the rule, some of his team and proto-administration have. And not all of those views are positive.
Nerd’s Eye View blog publisher Michael Kitces notes that, “With the surprise presidential election victory of Donald Trump over Hillary Clinton, combined with the success of the Republicans holding both the Senate and the House of Representatives, the question arises as to whether the Republican clean sweep in Washington spells an imminent demise for the Republican-opposed Department of Labor fiduciary rule.”
What could happen is anyone’s guess. But while the final outcome may be cloudy, the possibilities are not. Some experts recently shared their insights on what the rule’s fate may be, or at least what considerations are in play that affect its future — and, down the line, those whom the rule itself will affect. R.I.P.?
“With the new Trump administration, the DOL's conflict-of-interest (a.k.a. “fiduciary”) rule as we know it is DOA,” says Christopher Carosa, CTFA, chief contributing editor for FiduciaryNews.com. But the key words here are “as we know it.”
Carosa adds that he does not expect that it will be repealed and that “those opposed to the rule shouldn’t rejoice.” Kitces agrees, saying “I actually do not think that the Republican victory is going to lead to an immediate and total repeal of the Department of Labor fiduciary rule.”
But Carosa and Kitces question whether repeal is even necessary. Carosa says that he thinks “it will effectively be defanged and allowed to die on the vine.” Kitces sounds a similar note: “Of course, the reality is that even if President Trump would have trouble eliminating the rule, he could ‘defang’ it by directing the Department of Labor to only minimally enforce it, akin to the SEC’s similar failure to enforce the existing provisions of the Investment Advisers Act of 1940 that already requires brokers who give substantive investment advice to register as fiduciary investment advisers. Which would mean the fiduciary rule is still on the books. But the Department of Labor wouldn’t be much of a threat for those who didn’t follow it.” Genies and Bottles
Carosa expects that the rule will survive in some form at least in part because “the publicity generated by the DOL’s fiduciary rule (e.g., John Oliver's 20-minute segment devoted to the subject last June), the mass media and the investing public has been exposed to the issue of self-dealing conflict-of-interest fees in a way that ‘the genie cannot be forced back into the bottle.’”
“With major brokerage firms already committing themselves to opposing sides on this issue, we can anticipate marketing campaigns highlighting the fiduciary issue,” says Carosa, predicting that “this will only lead to greater awareness of the issue.”
Kitces makes a similar argument that that snowball has begun rolling down the hill, saying, “the reality is that while the rule will not be enforced until next April — after President Trump takes office — the regulation itself became official this past April. And the President doesn’t have the power to just immediately enact a massive change to an existing regulation. Remember, it took President Obama’s Department of Labor nearly six years just to get the prior fiduciary rule changed to what it is now becoming!”
Carosa and Kitces argue that another reason the rule may survive in at least some form is its potential to generate class action lawsuits. Says Carosa, “Class action attorneys have already prosecuted cases involving investment product producers. Their legal strategy appears to be evolving and is now targeting recordkeepers. With the cat out of the bag, any service provider drawing a revenue stream from commissions, 12b-1 fees, or revenue sharing will find their fiduciary liability has dramatically increased.” Similarly, Kitces says, “the existence of the fiduciary rule’s requirement that consumers must retain the right to a class action lawsuit against a financial institution for breaching its fiduciary duty (across a large number of advisors) means the threat of DOL fiduciary enforcement remains, even if the Department of Labor itself isn’t funded to do it.”
“There is some speculation that the newly appointed DOL could elect to stop defending the rule in the courts,” says Jason Roberts, CEO of the Pension Resource Institute, but he adds that he considers such an approach “unlikely — particularly given the fact that investor advocacy groups are expected to step in to support the current rule.”
Roberts elaborates on the possibility that the rule is here to stay. “By the time we have some finality, there may be less opposition to the rule. Indeed, our clients are telling us that it’s already too late to turn back and that they will proceed with the necessary changes regardless of the outcome. While they may not voluntarily contract for potential class action remedies (as would be the case under the full BICE with respect to non-ERISA plans and IRAs), we believe that many firms will train and supervise to the higher standard of care under the DOL rule,” he says. Defanging
So if the incoming administration and the majority on Capitol Hill want to take the bite out of the fiduciary rule, how might they go about it?
Kitces thinks that “perhaps the most likely Republican ‘fix’ to the rule will simply be to pass a law that eliminates the class action provision, which doesn’t kill the DOL fiduciary rule but does drastically reduce its threat.” He continues, “In addition, while President Trump would be limited in just issuing an Executive Order to kill the DOL fiduciary rule, Congress itself could pass a law to end the rule altogether (as opposed to just its class action provision).”
Still, Kitces expresses misgivings regarding whether this scenario is plausible, adding “it’s not clear how politically feasible this actually is. The Republicans still don’t have enough votes to overcome a filibuster in the Senate.” Roberts adds, “Senate Democrats would likely block any bill to kill or defund the rule, and the Republicans already used their ‘one-bite of the apple’ unsuccessfully.”
Roberts takes a different tack than anticipating legislative action: He expects “some degree of delay with respect the applicability date of the fiduciary regulation.” But he is less certain about what that may mean, saying, “Whether the delay will result in sustentative changes to the regulation and/or the related PTE remains unclear.” Time Is Short
Remember that the rule is already effective — it’s just not enforced yet, and that is coming soon. Which means that there is a small window for taking action to repeal — as well as to be ready to comply.
And Kitces adds that it isn’t even as simple as that. He notes, “with President Trump having already put a lot of other rule changes on his agenda for his first 100 days in office… and the DOL fiduciary rule enforcement beginning just 80 days after the change in power in January… it’s entirely possible that by the time Congress is even ready to take the issue up, it will be a moot point because the Department of Labor’s fiduciary rule will already be fully implemented and enforced!”
Roberts strikes a similar note. “Because the rule is already effective, the administration would need to propose a replacement and that proposal would need to go through the standard notice and comment period before a final rule could be issued.”
Roberts thinks it may be wise to implement just in case. “If this uncertainty persists into Q1, then financial institutions will have to proceed with implementing the required changes or risk being unprepared when the rule ultimately becomes applicable. Given the significant costs of non-compliance, we expect most firms will continue their efforts to restructure their commission business and third-party payments and curtail products and services approved for retirement investors,” he says.