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President Trump Issues Executive Memorandum Directing The Department Of Labor To Delay The Implementation Of The Fiduciary Rule

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  • Posted on: Feb 6 2017

Last month, this Blog wrote about the uncertainty surrounding implementation of the Department of Labor’s (“DOL”) fiduciary rule.  On February 3, 2017, that uncertainty was reinforced with the issuance by President Trump of a memorandum directing the DOL to determine whether the fiduciary rule should be revised or rescinded. The memorandum directs the DOL to delay the implementation date of the rule by 180 days.

What is the Fiduciary Rule?

The regulations in question expanded the universe of persons who would be considered a fiduciary under the Employment Retirement Income Security Act of 1974. (Click here for this Blog’s discussion of the fiduciary rule.) In general, these regulations, which were to become effective on April 10, 2017, would have imposed a fiduciary duty on registered brokers, financial advisers, and other investment professionals (collectively, “Financial Advisors”), who provide investment recommendations for retirement accounts, such as 401(k)s, IRAs and health savings accounts.

Currently, Financial Advisors have no legal obligation to act in their client’s best interest, except for those professionals who are registered as investment advisers with the Securities and Exchange Commission (“SEC”) or in individual states. Instead, Financial Advisors only have to recommend investments that are “roughly suitable” for their customer. This means, for example, that a Financial Advisor, who has a choice between two similar mutual funds, can put a customer in the higher commission and fee investment even though the other fund has lower fees and could generate higher returns.

While commissions and other fees are permissible under the regulations, Financial Advisors must commit to charging “reasonable compensation” and cannot receive financial incentives to make inappropriate recommendations. This commitment is set forth in a contract provided to the client in which the advisor promises to put the client’s interests first — the “best-interest contract exemption”. Firms that employ the Financial Advisors would also have to disclose their compensation and incentive arrangements.

Conflicted advice costs retirees approximately $17 billion a year, according to a 2015 report from the Obama administration. Notwithstanding, the Trump administration has indicated that it wants to keep the old system in place, arguing that the fiduciary rule will limit investment choices and burden the industry with unnecessary regulations.

The President’s February 3, 2017 Memorandum:

In addition to directing the DOL to delay implementation of the fiduciary rule, the memorandum directs the DOL to review and analyze the rule and prepare an economic and legal analysis “concerning the likely impact” of the rule on, among other things:

  • “access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice”;
  • the retirement services industry and whether the rule “has resulted in dislocations or disruptions … that may adversely affect investors or retirees”; and
  • litigation and the costs borne by investors and retirees “to gain access to retirement services”.

If the DOL finds any of the foregoing points to be impacted by the rule, or if it concludes “for any other reason” that the rule “is inconsistent with the priority identified” in the memorandum, then the DOL is to issue a new proposed rule that revises or rescinds the fiduciary rule.

Political and Industry Opposition to the Rule:

Republican lawmakers, Financial Advisors and some financial advisory firms have maintained that the fiduciary rule will restrict investment options for investors and retirees. President Trump echoed this sentiment in the memorandum, stating: “One of the priorities of my Administration is to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses.…” Republican lawmakers have also argued that the SEC, not the DOL, should oversee and regulate any changes related to financial firms.

Many Financial Advisors and financial advisory firms have been opposing the fiduciary rule since the DOL’s approval of the final regulations, arguing the regulations could raise the costs of compliance and the costs of providing advice, thereby making it more difficult to serve lower-income clients. Some have also argued that the increase in costs will price out smaller Financial Advisors who will not be able to service smaller accounts. The Securities Industry and Financial Markets Association, the industry’s top lobby group, estimated the fiduciary rule would cost Financial Advisors and their financial service companies $5 billion to implement and another $1.1 billion annually to maintain.

Additionally, business groups, including the U.S. Chamber of Commerce, the National Association for Fixed Annuities, and American Council of Life Insurers have sued to try to block implementation of the rule. (This Blog discussed these and other lawsuits here and here.)

Industry Best Practices:

Despite the industry’s opposition to the regulations, representatives of some financial service companies have publicly stated that they plan to change their practices to meet the standards contained in the regulations even if the rule is rescinded.  For example, Bill Morrissey, managing director of business development at LPL Financial Holdings Inc., said before the President signed the memorandum, “What investors want is more transparency and lower fees.” On January 26, 2017, Morgan Stanley said that it plans to continue with changes designed to comply with the rule, despite uncertainty over whether the regulation will be implemented. Insurers, including American International Group Inc. and Principal Financial Group Inc., previously stated that they would continue to operate as though the regulations would be implemented.

Takeaway:

Given the new administration’s position on regulations, it seems likely the DOL will decide to modify or rescind the fiduciary rule. To do so, however, will require new rule making – a process that could take years not months, according to some observers. In the meantime, as noted above, some financial advisory companies recognize that best practices demand compliance with the rule even if it never gets implemented. As these firms note, a fiduciary standard of care is good for the industry despite the costs, because clarity and transparency around compensation builds faith and credibility with investors and retirees. Consequently, the President’s memorandum may prove to be much ado about nothing.

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