On February 3, 2017, President Trump took actions aimed at alleviating some of the regulatory burdens on the financial services industry. Through a Presidential Memorandum, President Trump ordered the DOL to “examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice” and prepare an updated economic and legal analysis concerning the impact of the rule, while taking into account several enumerated considerations. While the Memorandum does not delay the rule or have any immediate effect on affected parties, if the DOL finds that the rule runs contrary to any of the considerations in the Memorandum, the DOL is directed to “publish for notice and comment a proposed rule rescinding or revising the Rule, as appropriate and consistent with law.”
This action is not a surprise as President Trump has characterized the fiduciary rule as a “complete miss.” Although he did not directly take aim at the fiduciary rule during the campaign, Washington insiders had predicted action on the rule to be one of President Trump’s early priorities. The Memorandum comes on the heels of increasingly vocal opposition to the rule from Congressional Republicans. On the other side of the aisle, Senator Elizabeth Warren (D-MA) recently sent a letter to 33 major financial firms asking them to provide information about their compliance efforts to date and whether they would support a delay or change in the rule.
Opponents of the rule maintain that the increased regulation of retirement advisors will result in less choice and fewer lower cost options for individual investors. Notably, the rule has also been challenged in litigation questioning the DOL’s exercise of authority in issuing the rule. Thus far, federal courts have upheld the rule, with the U.S. District Court for the Northern District of Texas scheduled to weigh in next week.
Immediately following the issuance of the Memorandum, the acting U.S. Secretary of Labor, Ed Hugler, responded to the President’s direction through a News Release stating that “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.”
Employers should keep in mind that this action in no way lessens their fiduciary responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA) with respect to employer sponsored retirement plans. Rather, it signals a potential cut back on a regulatory action attributing fiduciary status to certain financial advisors. If the rule is revised or rescinded, many advisors will not be required to act in the “best interest” of their retirement account customers. Part and parcel of the DOL’s attempt to expand who are considered fiduciaries is further delineation of what constitutes a conflict and a move away from commission-based compensation. As a result of ongoing implementation of the rule, many employers have seen changes in the structure surrounding individual investment advice provided to employee/participants in company sponsored 401(k) and 403(b) plans.
While proffered as an effort to remove an unnecessary burden on the financial services industry, it is unclear how much of an effect any delay, revision or rescission of the rule will have. Many financial firms have already spent significant resources on complying with the rule, including revamping products and business models, and are likely to continue on this course.
Moreover, many current and potential retirement account customers are now cognizant of how a “best interest” or some comparable standard applicable to retirement industry professionals would serve their long-term retirement goals. The retirement industry is also aware of the advantages to be leveraged by complying with fiduciary standards — whether those standards are mandated by a DOL rule or simply by competitive forces — in retaining and attracting retirement savings customers.
In a related Executive Order issued the same day on “Core Principles for Regulating the United States Financial System,” President Trump also aimed at loosening regulation of the financial services industry. Though the Executive Order largely states very broad principles and his Administration’s philosophy towards the United States financial system, many believe this is the first step in efforts to scale back parts of the Dodd-Frank Act. Several statements from the Administration have suggested that the tighter controls put into place after the 2008 financial crisis have led to further strangulation of the ability of banks to lend and in an unnecessary limitation on consumer choice.
We will continue to monitor and keep readers apprised regarding the future of the DOL fiduciary rule and any related initiatives.