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The Future of DOL Fiduciary Rule is Uncertain at Best

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  • Posted on: Jan 11 2017

What is the fate of the fiduciary rule under the Trump Administration?

In May of last year, this Blog wrote about the Department of Labor’s fiduciary rule, which requires financial advisors to put their clients’ interests first when making investment recommendations for retirement accounts, such as 401(k)s and IRAs. The rule, designed to prevent conflicts of interest, has strong support from the Obama administration and investor advocates who argue that inappropriate recommendations cost retirement investors $17 billion a year.

While legal challenges have been brought based on claims that the Labor Department failed to adhere to regulatory procedures when promulgating the rule (discussed here and here), two federal courts have already disagreed, while a consolidated case in Texas is still pending. In any event, as of now, the rule is effective and advisory firms must be in compliance by April 2017. However, the provision requiring financial advisors to acknowledge their role as a fiduciary in a contract with investors does not become effective until 2018.

At the same time, some observers believe the incoming Trump Administration could roll back the fiduciary rule. To do so, however, there are a number of regulatory hurdles to clear. The rule is actually under the purview of the DOL’s Employee Benefits Security Administration, which is headed by an assistant secretary.  As of now, this slot has not been filled, so immediate action on the rule is not likely. Though, it is important to note that Trump’s nominee for secretary of labor, Andrew Puzder, is a vocal opponent of the regulation.

Also, changing or replacing the rule means undoing what was a 6-year effort by the Labor Department. This would essentially require new rule making – a process that could take years not months, according to some observers. In light of the fact that the compliance deadline is fast approaching, however, it is possible that this date will be delayed until incoming officials have the opportunity to evaluate the measure. Nonetheless, many financial firms have already started preparing for the new rule by devising new policies and procedures.

Moreover, the Trump administration could seek to repeal the rule through congressional action. However, that option, while having the support of the Republican controlled Congress, would have to overcome likely opposition from Democrats, especially in the Senate.

Finally, the Trump administration could stop defending the regulation in the pending lawsuits. By doing so, the new administration would be conceding the cases to the rule’s opponents. Readers may recall, the Obama administration took this approach with the Defense of Marriage Act in 2011.

The Takeaway

Given the time and money already spent to meet the deadline, it may be in the best interest for these firms to proceed as the fate of the fiduciary rule is uncertain at best. In the meantime, investment advisors should seek the advice and counsel an experienced securities attorney for developments regarding any changes to the DOL fiduciary rule.

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