The Department of Labor (DOL) has delayed the new fiduciary rule until June 9, but the final rule publication included a curveball that prompted the Wall Street Journal to describe the DOL’s bureaucracy as being “in open rebellion” against the president.
First, the entire rule and all of the associated prohibited transaction exemptions (PTEs) are delayed until June 9. Second, the DOL expects that the rule itself, as well as the impartial conduct standards, will become effective June 9, i.e. no further delays will be implemented as to these aspects. Third, the filing postpones until Jan. 1, 2018, the applicability of all conditions of the exemptions other than the impartial conduct standards, such as requirements to make specific disclosures and representations of fiduciary compliance in written communications with investors. Fourth, the DOL expects to have completed its review of the fiduciary rule’s economic and legal analysis that the president ordered in his Feb. 3 memorandum by Jan. 1, 2018, although the rule also mentions the possibility of future delays if necessary.
In short, the fiduciary rule (i.e. the new fiduciary definition) will apply as of June 9 and the BIC and Principal Transactions Exemptions will be available as of June 9, but those exemptions will only require fiduciaries to adhere to certain Impartial Conduct Standards: (1) providing advice in retirement investors’ best interest; (2) charging no more than reasonable compensation; and (3) avoiding misleading statements. The applicability of other requirements of those exemptions, such as representations of fiduciary compliance, contracts and warranties about firm’s policies and procedures will not become applicable until Jan. 1, 2018 while the DOL performs the review mandated by the president.
This approach is different than what was expected, which was a 60-day delay of the applicability of the entire rule and PTEs, to be followed by additional delays of the rule and PTEs. As we detailed, one of the legal difficulties in delaying the entire rule repeatedly was the Obama administration regulatory impact analysis of the Fiduciary Rule, which caused the DOL to estimate that the net cost to society of a 60-day delay would be over $100 million. The DOL argues that allowing parts of the rule to become applicable on June 9 “provides retirement investors with the protection of basic fiduciary norms and standards of fair dealing, while at the same time honoring the President’s directive to take a hard look at any potential undue burdens.” The DOL defended this partial implementation by arguing that making the fiduciary definition and Impartial Conduct Standards applicable would cause most of the benefits the Obama administration predicted to accrue to investors while still saving firms from having to make rushed compliance decisions and from incurring costs related to transitional disclosures.
Further delay of the June 9 applicability date
It is not inconceivable that, despite the plan announced in the final delay rule, the June 9 date will also be delayed. The likeliest path to this delay is that the Senate confirms Alexander Acosta to be secretary of Labor and that, as he and the political leadership at the Department of Labor get settled, they decide that any part of the rule becoming applicable in June is inadvisable. While this possibility exists, it is best to act as though the rule will become applicable on June 9 so that firm compliance systems are ready to go.
This is true not just because it is unclear whether Acosta will get immediately involved in the fiduciary rule, but also because the final delay rule contained some surprising statements that will complicate any further delay of the rule beyond June 9. For example, the DOL wrote that the broad, indefinite delay of the whole rule would be “inappropriate” given its “previous findings of ongoing injury to retirement investors.” Additionally, such a longer delay “cannot be justified” because investor losses from a delay of longer than 60 days would quickly overshadow any compliance savings.
The DOL also found “little basis” to conclude that advisers need more time to give advice in retirement investors’ best interest and cheekily noted that financial institutions claim to already be doing that: “Indeed, financial institutions and advisers routinely hold themselves out as providing just such advice.” In short, not only does the rule filing announce that the DOL expects the fiduciary definition and the Impartial Conduct Standards to become applicable on June 9, but the rule also went beyond that expectation and made statements that will make further delay more difficult.
The future of the DOL Fiduciary Rule
President Trump’s Feb. 3 memorandum ordered the DOL to rescind or revise the fiduciary rule if warranted by its new economic and legal analysis. Complete repeal seems unlikely now. The rationale to delay the applicability date was to avoid requiring firms to “engage in costly compliance activities to meet requirements that the [DOL] may ultimately decide to revise.” In this context, the decision to allow the fiduciary rule and the Impartial Conduct Standards to become applicable is particularly significant because it suggests they are unlikely to be rescinded or revised as part of the DOL’s review.
Indeed, the final rule notes that the DOL expects firms to implement procedures to comply with the Impartial Conduct Standards, “such as changing their compensation structures and monitoring the sales practices of their advisers to ensure that conflicts in interest do not cause violations of the Impartial Conduct Standards” as well as “maintaining sufficient records to corroborate” their compliance. In short, it would appear that most of the DOL’s new legal and economic analysis will focus on the enforcement mechanisms of the Impartial Conduct Standards and some of the other details of the various PTEs because the question of whether a fiduciary standard is necessary seems to be settled by this delay rule.
In that vein, the DOL suggested that it was responding to one of the chief concerns about the initial rule by delaying until Jan. 1“provisions requiring written representations and commitments about fiduciary compliance, execution of a contract, warranties about policies and procedures, and the prohibition on imposing arbitration on class claims” because the delay would minimize the risk of litigation, including class action litigation. This litigation risk corresponds to the third specific consideration the president ordered the DOL to consider: “Whether the Fiduciary Duty Rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.” Perhaps the plan at the DOL – assuming there exists one plan rather than various plans – is that the rule revision will be about enforcement mechanisms and minimizing litigation rather than the underlying rule itself.
What to do now
While the DOL conducts the review of the rule mandated by the president’s memorandum, and while some of aspects of the regulatory regime have been delayed until 2018, the expanded fiduciary definition and the Impartial Conduct Standards are now slated to become applicable in under two months. Even though advisers will not have an explicit obligation to tell their clients in writing that they are now fiduciaries, they will be as of June 9, and any disputes that arise will emphasize that.