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.)
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.