Goodbye Fiduciary Rule? Department of Labor Delays Implementation Until June

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in Asia and is currently researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as scribbles occasional travel pieces for The National.

Last week, the Department of Labor (DOL) formally announced it would delay implementation of the “fiduciary rule”– previously promulgated in 2016 and due otherwise to come into effect on Monday, April 10– until June 9. By that date, the DOL may elect to implement the rule as written, revise it, or torpedo it entirely.

What is the fiduciary rule and why does it matter?

Permit me to quote from my February post on this topic:

[On February 3], Trump issued a Presidential Memorandum on Fiduciary Duty Rule, in which he directed the Department of Labor (DoL) to conduct an examination of the a new fiduciary rule, due to come into effect on April 10. This rule would impose a basic fiduciary duty standard on investment advisors, requiring them to act in a client’s best interest.  The fiduciary rule replaces the previous suitability standard, which consumer advocates have criticised for allowing investment advisors to provide conflicted advice, motivated by fees. This suitability standard imposes costs estimated at $17 billion annually on investors and depresses investment returns on retirement savings by a percentage point. Brokerages and insurance companies rely heavily on commission-based compensation.

What Is the Impact of the DOL Action?

The latest delay does not necessarily spell the death knell for some form of the rule.  As I noted in my February post– relying on reporting in The Wall Street Journal, “Procedures for complying with such a complicated framework are not developed overnight, and many investment advisers had already taken steps to conform theirs to the new framework that was slated to come into effect in April.”

Further reporting from Saturday’s Wall Street Journal, New Retirement Rule Is Delayed, but Not Its Impact  further expands on this point, describing steps already undertaken by many investment advisers to comply with the rule as promulgated, under the assumption that the rule would be implemented according to the original schedule. When Trump issued his February memo, many measures were either in place, or in the process of being implemented, and these are not easily reversed:

The rule would have required brokers who oversee $3 trillion in tax-advantaged retirement savings to act in their clients’ best interest. That is a stricter standard than many brokerages were using. After the rule was unveiled in April 2016, some brokerages moved clients from commission-based accounts that could run afoul of the rule to fee-only accounts.

Among firms that disclosed their plans after the fiduciary rule was announced, Merrill Lynch— Bank of America Corp.’s wealth-management unit—and J.P. Morgan Chase & Co. say they are still moving most clients to fee-based accounts. A J.P. Morgan spokesman said the bank would push back its deadline to track the Labor Department’s actions. Other brokerages including Morgan Stanley and Edward Jones have said they would keep some previously announced changes, such as lower commission charges and some sales restrictions.

Other industry groups— including the Financial Planning Association and the National Association of Personal financial Advisors– supported adoption of the new fiduciary rule. It’s well and widely understood that the 1974 Employment Retirement Security Act (ERISA) framework is long overdue for an overhaul (and indeed, the latest reform efforts date to 2010).

Will the Rule Survive?

Despite the steps such firms have already taken, the current consensus is that the rule as promulgated will not survive– and will at least in some respects be watered down before it becomes effective, especially with respect to the legal liability provisions. Allow me to quote from a Forbes piece from last week, Under Trump, The Future Of Fiduciary Rule Is Uncertain As DOL Delays Rule:

So where does the delay leave the future of the rule? The short answer is no one knows yet. Uncertainty remains king today. It is possible that the current rule that is set to “go live” on June 9, 2017, still survives. However, very few people expect the rule that was passed back in 2016 to ever see the light of day. Either the rule will be repealed completely, or the ability to qualify for an exemption to the rule will be significantly loosened, allowing more financial advisors to avoid compliance.

Given the compliance steps already undertaken, I’m less certain than is Forbes that the fiduciary rule will be completely gutted.  Yet even if a  weakened version of the rule survives, its legal liability provisions– which allow consumers to sue investment advisers and the financial firms with which  consumers hold their retirement accounts for breach of the new fiduciary standards– will almost certainly be scaled back. Republicans control the executive branch and Congress, and they are extremely unlikely to allow any significant expansion in the ability of private actors to sue to enforce this or for that matter any other rule that would expand corporate legal liability to proceed.

Recall further that congressional Republicans are intent on further weakening the already-listing class action litigation framework, as Russ and Pam Martens reported in March in Republicans Plan a Coup Today in the House, Gutting Established Class Action Law.  (This is a longstanding trend. One significant step was taken in President George W. Bush’s 2005 Class Action Fairness Act– which I should point out, was passed with the assistance of some Democrats, including the vote of a certain junior Senator from the state of Illinois. But what had a far greater impact on class action litigation than this statutory change was a series of business-friendly legal decisions that have seriously constrained the ability of plaintiffs to recover significant punitive damages– citing constitutional grounds.  Sadly, I don’t expect the newest Supreme Court Justice– Neil Gorsuch– to do anything that might arrest, let alone reverse, this trend.)

I should mention two other areas of uncertainty.  First, as I mentioned in my February post, litigation challenging the fiduciary rule as promulgated in April 2016 is pending.  I won’t hazard a guess as to how these suits could proceed, except to say any of them could upset the apple cart– effectively preempting what the DOL would be able to do.

And second, the 2010 Dodd–Frank Wall Street Reform and Competitiveness act authorizes the Securities and Exchange Commission (SEC)  to issue its own new fiduciary standards– which would extend beyond the narrow area of retirement accounts to cover brokerage accounts more generally.  The agency has yet to act on this authority. The SEC is unlikely to forge ahead on this issue at this point, since with only two of five sitting commissioners in place, agency activity is effectively stymied. That is particularly so on the issue of expanding fiduciary standards for brokers, as acting chairman Michael Piwowar has denounced the DOL’s existing rule, and would be extremely unlikely to support any expansive  SEC rule-making in this area (and even if the SEC were to proceed, it would take a minimum of years rather than weeks to develop new rules in this area.)

Bottom Line

So, for the moment, it looks like the DOL efforts on the fiduciary rule will remain the only game in town– and we’ll need to wait until June, to see what the agency decides to do next.

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  1. pebird

    Maybe they can change the regulation to an optional fiduciary requirement, but require clear disclosure such that advertisements would have to state either “We act in our client’s fiduciary interest.” or “We do NOT act in our client’s fiduciary interest.”

    Make watching TV fun again.

  2. Vatch

    This whole situation seems strange to me. Republican voters are more likely to have investment advisors than Democratic voters are, because the Republicans are, on average, richer than the Democrats (of course there are individual exceptions). A person won’t even bother to think about consulting an investment advisor unless she or he has a non-trivial amount of money saved. Republican voters should be up in arms contacting their Senators, Representative, and the White House switchboard about this. Why isn’t it happening? Is it hubris? Are Republicans too proud to admit that they can be tricked by an investment advisor?

      1. Vatch

        From the article:

        Independent registered investment advisers, which have largely supported from the start the idea of requiring fiduciary responsibility when managing retirement account assets, could be set up for a big win if the rule fades away or falls way behind the April enactment schedule.

        Are they required by law to follow a fiduciary standard? The article appears to indicate that there is some leeway.

    1. Jim Haygood

      Republican voters should be up in arms

      Watching the R party sell out its base is about as exciting as watching the sun rise. It literally happens every day.

      To put it in slightly hyperbolic terms, the D party is quite honest and upfront about its intent to wreck the economy with war, taxes and over-regulation. Whereas the R party flat out lies about its sole raison d’être, running a government of, by and for Big Business.

      That’s the only reason the D party has soldiered on this long — typically it takes less than a year for the utter hypocrisy of a new R administration to become apparent. This time we got ‘er done in less than three months. ;-)

  3. Jim Haygood

    “Dodd–Frank … authorizes the SEC to issue its own new fiduciary standards – which would extend beyond the narrow area of retirement accounts to cover brokerage accounts more generally.”

    Can you say “regulatory capture”?

    Wall Street’s “suitability rule” [meaning in practice that clients can be screwed silly with astronomical fees, when dirt-cheap equivalents are available] is as antiquated as the bucket shops that were shut down a century ago, frustrating ol’ Jesse Livermore’s most profitable wheeze.

    So-called “financial professionals” who want to continue fleecing serving clients under a suitability standard really ought to work under ornate gaslights in three-piece suits with stand-up collar shirts and ornate watch chains, to project historical authenticity.

    Ultimately the fiduciary rule will be instituted by informed customers, followed by the useless appendage of the SEC scurrying behind them on its tiny mouse legs, squeaking “Me too! Me too!

  4. lyle

    But all one has to do is ask if the advisor is following the fiduciary rule and if not say thanks but no thanks, goodbye.
    If companies supplying 401ks provide information about the definition of a fiduciary and explain that one should ask, then it would also help.

  5. Collin

    Bank of America/Merrill Lynch had planned to make lemonade from lemons, using the rule to tell clients “we’re forced into changing your retirement account to a fee based system by the gov’t”, with some ML brokers already securing contracts with their predominantly elderly clients for a fee based structure at 2.2% per year. I have personal knowledge of this.

  6. seabos84

    I’m scratching my head. Since 1992, we’ve had 8+ years of Bush-Cheney-Heil-Herr-Trump thieving, and 16 years of Clinton-Obama sell outs to thieves. It is all VERY sim[le – the MORE rules & the MORE complicated the rules, the MORE crap they’re pulling. ta da. Why weren’t the bandits of Wall Street shipped more spun gold foam … ummm … ooops … I mean locked up for 10 year minimum sentences, decades ago? Bill & Hill & Darth & … wouldn’t have been living as large!

    Haygood at 12:49 nails it. I think Las Vegas is more honest.


  7. MLS

    I don’t see why this needs to be an either/or situation. Give clients the option of enforcing a Fiduciary standard whereby the FA would have to abide by the rules and put their client’s interests first. These accounts would be charged based on assets under management and such fees would need to be clearly disclosed (including product fees, loads, 12(b)-1 charges, etc.).

    Some people, however, are savvy enough to make their own decisions and don’t need or want advice – they want execution of a trade and occasionally a conversation with their FA about a particular idea. Such accounts would not need to be managed under the Fiduciary standard and the FA could recommend whatever he/she likes, including investments with rip-your-face-off upfront and ongoing costs if they so choose. These accounts would be charged under the old structure on a per-trade basis.

    Trying to fit everyone into one box when they may not want it is what the government does because they refuse to accept that plenty of people are capable making their own, well-informed decisions in their own best interest.

    1. Lyle

      Go a step further and do as Vanguard (at least) does no advice unless you ask for it, just an execution platform. Of course you could always decide that advice from a non fiduciary advisor is fit only for the bit bucket, not to be acted on for any reason. Basically you replace the FA with a website where you enter your trades. No human involved.

      There is lots of free advice on various forms of media. however you need to decide which makes sense for you.

    2. JTMcPhee

      Of course, that formulation you suggest “normalizes” the kinds of moral-hazard behaviors that have turned “investing” into “exposed to risk.” Risk On!

      Glad you are a Promethean, maybe even successful, player in the casino — somebody has to win, and there have to be fools and suckers, muppets and mopes, to lay bets on the other side of all those trades. At least, if the present scammery is to continue…

      And of course it would not be possible to segregate the “rip your face off” FAs (and stop calling them that, it confuses the issue, call them “commission salespeople”) as a marketing division, at least, where you and “sophistcated” gamblers can get your bits of talk-it-over and pay whatever fees you can be boltered into, from actual sets of financial advisers who should be bound to that fiduciary standard. Which, of course, is a prudential standard, tested against that most elastic of legal standards, reasonableness. Even though there’s this definitional frame,

      A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other asset for another person. One party, for example a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to the other one, who for example has entrusted funds to the fiduciary for safekeeping or investment. Likewise, asset managers—including managers of pension plans, endowments and other tax-exempt assets—are considered fiduciaries under applicable statutes and laws.[1] In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice or protection is sought in some matter.[2] In such a relation good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts. ,

      That “highest standard of care” does not saddle the fid with the burden of perfection, of course. “Future performance may not reflect past results.” And there’s this interesting discussion on the distinction between the “suitability” category, and the little changes that the Reds have now forestalled in implementation of regulation over FIRE salespeople.

      Maybe there are enough people who still have a moral compass that points somewhere other than in the direction of their own neoliberal me-first-screw-you interest, who can offer actual useful fiduciary-quality advice on how to place one’s money to ‘earn and honest return’ without the looting. I personally think the whole thing is part of the whole thing — that FIRE is what helps fuel the whole thing that is so erroneously called “capitalism.”

      But hey, what do I know? I got cleaned out, following “financial advice,” three times now — guess I am just not smart enough to be an “investor,” or wily enough to play Liar’s Poker… So like all losers, I get the sh!tty end of the stick… As Walter Cronkite used to say in closing, “and that’s the way it is.”

      Meanwhile, the short quick bits jump over the minuscule time gap between the market makers, and the Goldman basement HFT machinery. Ka-ching, ka-ching, ka-ching…

  8. Ken

    A fiduciary rule is very important, but not the DOL’s rule. It is a contraption. It is very expensive to implement to do little or nothing more than the rule the Registered Investment Advisors already follow. The DOL rule is so bad that some parts require reasonable fees, but those are yet to be determined…by future court judgements! Millions of dollars are being spent to comply with the record keeping requirements that is duplicating other record keeping requirements.

    Scrap the DOL fiduciary rule. Put in place the rule used by RIAs or something very close.

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