President Donald Trump has taken actions aimed at alleviating some of the regulatory burdens on the financial services industry. Through a Presidential Memorandum, issued on February 3, 2017, he ordered the Department of Labor 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.” The Memorandum also directed the DOL to prepare an updated economic and legal analysis concerning the impact of the rule, while taking into account several enumerated considerations. (For details of the rule, see our article, Overview of Department of Labor’s Final Fiduciary Rule.)
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, however, 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 Trump has characterized the fiduciary rule as a “complete miss.” Although he did not take direct aim at the fiduciary rule during his presidential campaign, Washington insiders had predicted action on the rule to be one of 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-Mass.) had 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. The rule also has 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 soon.
Immediately following the issuance of the Memorandum, Acting U.S. Secretary of Labor, Ed Hugler stated in a News Release responding to the President’s direction, “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 cutback 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 already have spent significant resources on complying with the rule, including revamping products and business models, and likely will continue on this course.
Moreover, many current and potential retirement account customers are 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 also is 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, “Core Principles for Regulating the United States Financial System,” issued the same day, Trump also aimed at loosening regulation of the financial services industry. Although the Executive Order largely states 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 Wall Street Reform and Consumer Protection Act. 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 unnecessary limitations on consumer choice.