The Department of Labor's (DOL) Fiduciary Rule is set for partial implementation on June 9.
On March 1, the DOL proposed a 60-day delay to the Fiduciary Rule, seemingly setting the stage for its repeal or revision. The rule, which requires financial advisors and brokers to put their clients' investment interests before their financial incentives, was set to start taking effect April 9. The Labor Department’s proposal to push that effective date back 60 days came after President Donald Trump signed an executive action on February 3 asking the acting Secretary of the Labor Department to revise or rescind the rule. The DOL 60-day delay request, in response to Trump’s executive action, came in an official statement, which stated, “The proposed extension is intended to give the department time to collect and consider information related to the issues raised in the memorandum before the rule and exemptions become applicable.”
However, rather than delay the Fiduciary Rule's implementation again, it now appears will forge ahead, with the potential for repeal and replacement further down the road.
On May 23, Alexander Acosta, Trump’s new DOL Secretary, wrote an opinion piece for The Wall Street Journal called Deregulators Must Follow the Law, So Regulators Will Too, where he stated:
“The Labor Department has concluded that it is necessary to seek additional public input on the entire Fiduciary Rule, and we will do so. We recognize that the rule goes into partial effect on June 9, with full implementation on Jan. 1, 2018. Some have called for a complete delay of the rule.
We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input. Respect for the rule of law leads us to the conclusion that this date cannot be postponed. Trust in Americans’ ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule. Under the Obama administration, the Securities and Exchange Commission declined to move forward in rule-making. Yet the SEC has critical expertise in this area. I hope in this administration the SEC will be a full participant.”
The Securities Industry and Financial Markets Association (SIFMA), is the main lobbying group of the U.S. securities industry. It represents the broker-dealers, banks, and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA is the U.S. regional member of the Global Financial Markets Association.
Kenneth E. Bentsen, Jr, SIFMA president and CEO, agreed with Department of Labor Secretary Acosta’s decision not to further delay the fiduciary rule beyond June 9:
“SIFMA has long-supported the creation of a best interest standard for brokers who provide personalized investment advice, and we continue to believe that the SEC is the appropriate regulator to do so. We look forward to working with the Administration and Congress on the creation of a best interest standard that protects all retail investors, while preserving choice and investment services without raising costs.
While we are disappointed that the Department of Labor has chosen not to further delay the rule until the Department has completed a review of the entire rule’s impact on investors, we appreciate Secretary Acosta's recognition of the rule's negative impact and his desire to seek public input.”
What Do These Comments Mean?
Critics say the fiduciary rule is overly burdensome for the financial services industry and would cut small retirement savers off from advice. Proponents say the rule would raise the standard of care on nearly $7 trillion of IRA and other retirement assets (similar to 401-k savers under ERISA) from the previous “suitability standard” applicable under the SEC.
Like the Affordable Care Act (aka Obamacare), the DOL Fiduciary Rule has become a symbol of the Obama Whitehouse, which the Congressional Republican majority has long sought to block and overturn.
In November, we predicted that the DOL Rule would be delayed, defunded, or overturned specifically because of the BICE (best interest contract exemption) clause, which would provide the legal contract for investors to potentially sue financial firms in a court of law for “breach of contract.” In January, I wrote, “We expect the Fiduciary rule in its present form will be delayed and ultimately redirected from the DOL to the SEC; a final version will not include the litigious elements of the BICE.”
Many industry participants do not want BICE, but do in fact want the other elements of the Fiduciary Rule to stand, for several reasons:
- They've already made huge compliance investments across documentation, product development, training, systems, disclosures, and reporting.
- Clients want a fiduciary financial advisor, and controversy has driven the vernacular of the public discussion.
- Those affected expect increased profitability with a fee-based AUM revenue model vs. commission-based revenue model (Morningstar estimates up to 60% more).
- A fee-based revenue model is preferable by both regulators and shareholders (predictability).
While the decision not to delay the Fiduciary Rule further may save it for the time being, given the comments from SIFMA officials and Secretary Acosta, the rules replacement still seems inevitable. It's likely we'll hear more about this in the very near future.