The election of Donald Trump and the retention of Republican majorities in both houses of Congress has led many to question whether or not the "DOL Fiduciary Rule" can survive. The Rule was harshly criticized by some of Trump's advisers and, earlier this year, Congress passed legislation that would have blocked implementation of the Rule had the legislation not been vetoed by President Obama. As discussed in this Note, while the ultimate fate of the DOL Fiduciary Rule is far from clear, we believe there are significant obstacles to a quick repeal. As a result, broker-dealers, advisers, and banks should continue to plan for implementation of the Rule.

Background

On April 10, 2016, the U.S. Department of Labor ("DOL") adopted the DOL Fiduciary Rule, which expands the category of person who would be deemed a fiduciary when dealing with retail retirement accounts. Under the new Rule, a brokerdealer or other financial intermediary ("Financial Institution") could be deemed a "fiduciary" based on a single instance of making a suggestion to a retail retirement account regarding investments or investment strategies. As a fiduciary, the Financial Institution would be required to act in the "best interest" of the client. Moreover, as a fiduciary, the Financial Institution would not be allowed to receive commissions or other variable compensation in connection with transactions effected for a retail retirement investor unless the Financial Institution complies with one of two new exemptions adopted by the DOL: the Best Interest Contract Exemption ("BIC Exemption") or the Principal Transactions Exemption ("Principal Exemption"). Both exemptions pose substantial compliance burdens for Financial Institutions and the Principal Exemption is only available for a limited class of securities. In addition, neither exemption would permit a Financial Institution to underwrite the distribution of investment products issued by an affiliate.

The DOL Fiduciary Rule became effective on June 7, 2016. However, the rule includes a transition period that allows Financial Institutions to delay implementation until April 10, 2017, with some provisions not becoming applicable until January 1, 2018.

What Lies Ahead?

The DOL. Under new leadership, the DOL could propose rules that would modify, supersede, and/or repeal the current DOL Fiduciary Rule. However, because the current rule is already in effect, this would require going through the full notice and rulemaking process as set forth in the Administrative Procedure Act ("APA"), and DOL would be required to undertake a full cost-benefit analysis. This process could take many months. The new secretary of labor would not have the authority to unilaterally revoke the DOL Fiduciary Rule. Alternatively, the DOL might invoke the "good cause" exception in the APA to further delay the implementation dates, thereby buying itself time to go through a more considered rulemaking process. Any action taken by DOL under the good-cause exception could be subject to judicial challenge.

Congress. More than 60 legislative days have passed since the DOL Fiduciary Rule was submitted to Congress. Therefore, the Congressional Review Act is no longer available to block the rule. Congress could pass new legislation intended to kill the DOL Fiduciary Rule. One example of such legislation is the Financial Choice Act introduced by Representative Hensarling in September 2016. Any such legislation might run afoul of a filibuster in the Senate, which could only be overcome with the support of some Democrats.

The Courts. The DOL Fiduciary Rule has been challenged by half a dozen lawsuits filed by various industry groups. The initial rulings in the two cases thus far decided were in favor of DOL. To the extent the pending cases continue beyond January 20, 2017, the Trump administration could decide not to defend them. In such event, it is possible that the courts would permit others to assume the defense of the new rule.

The White House. No doubt the course of events will be significantly influenced by policy decisions made in the White House. In this regard, it is not clear whether President-elect Trump is prepared to spend significant political capital to repeal a rule ostensibly intended to protect middle-class retirement investors. In any event, repeal of the DOL Fiduciary Rule does not appear to be a top priority for the incoming administration, which has more than a full plate awaiting it.

The Industry. While some Financial Institutions remain adamantly opposed to the DOL Fiduciary Rule, a number of leading firms have indicated that they have moved too far toward implementation to stop the process. Moreover, a number of Financial Institutions seem reconciled to the concept that they will be required to act in the "best interest" of their clients, although relief from some of the more draconian provisions of the BIC Exemption and the Principal Exemption would no doubt be appreciated.

Conclusion

There are simply too many moving pieces and too many unknowns to accurately forecast the future of the DOL Fiduciary Rule. Under these circumstances, it would be prudent for Financial Institutions to proceed with their implementation planning, while keeping a close watch on political and judicial developments.