Recent Developments on DOL Fiduciary Rule
Although portions of the Department of Labor’s Fiduciary Rule went into effect on June 9, it remains under constant attack on multiple fronts – from legislators, industry leaders, and even the Department of Labor itself.
There have been several attempts to kill the Fiduciary Rule in recent months. On June 8, The Financial Choice Act (H.R. 10), which overhauls the Dodd-Frank Act and in the process repeals the Fiduciary Rule, passed by a vote of 233 to 186 in the Republican-led House. It now goes to the Senate for consideration.
In an attempt to hit the Fiduciary Rule where it really hurts, on July 19, the House Appropriations Committee approved a Labor, Health and Human Services and Education spending bill for fiscal year 2018 that not only reduces the Department of Labor’s budget, but blocks enforcement of the Fiduciary Rule. The bill passed by a vote of 28 to 22.
On July 31, the U.S. Circuit Court of Appeals for the Fifth Circuit, one of the most conservative in the country, heard oral argument in a consolidated lawsuit led by the U.S. Chamber of Commerce and various investment and insurance trade groups, including the Securities Industry and Financial Markets Association. The litigation challenges the Department of Labor’s statutory authority to regulate individual retirement accounts. If the Fifth Circuit agrees – and some hostile questioning from the panel suggests that it might – it could be the final nail in the Fiduciary Rule’s coffin.
And on August 9, the Department of Labor submitted to the Office of Management and Budget proposed amendments to three important exemptions, including the controversial best-interest contract exemption, that extend the transition period and delay enforcement for an additional 18 months from January 1, 2018 to July 1, 2019. Such a delay would give legislative and court challenges more time to play out. The Department of Labor’s move comes right after the period for public comment in response to its request for information closed on Monday. It sought feedback on whether the January 1, 2018 compliance date should be delayed, as well as a series of 18 questions on ways to revise the Fiduciary Rule.
The U.S. Securities and Exchange Commission’s Michael Piwowar took advantage of this opportunity and filed a public comment letter with the Department of Labor highly critical of the Fiduciary Rule. He emphasized the efficacy of disclosures to avoid potential conflicts of interest, and encouraged the Department of Labor to work with the Commission and to draw from its decades of experience with multiple disclosure-based regulatory regimes. Piwowar also expressed concern that the Fiduciary Rule will in practice extend beyond providing financial advice on retirement accounts, blur the distinction between advice and selling activities, and ultimately disrupt the broker-client relationship.
Piwowar is not the only one who thinks that the Commission’s regulatory expertise in this area should trump that of the Department of Labor. On July 13, Rep. Ann Wagner (R-MO) introduced to the House Financial Services Committee a draft bill that places responsibility with the Commission to develop a uniform best interest fiduciary standard to cover both investment and retirement accounts. Under this bill, accepting commission-based compensation and recommending proprietary products would not violate the best interest standard, and brokers would not be required to recommend the cheapest products to be in compliance.
A similar bill is also making its way through the legislative process. On June 8, Rep. David Roe (R-TN) introduced the Affordable Retirement Advice for Savers Act (H.R. 2823). It repeals the Fiduciary Rule by amending the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986, and replaces it with a disclosure-based best interest advice standard to mitigate conflicts of interest. Brokers and financial advisors would have to acknowledge a duty to provide advice in their clients’ best interest, but would be allowed to contractually disclaim fiduciary duties and limit the responsibility to monitor investment performance. Significantly, recommendations on proprietary products would not trigger a prohibited transaction as under the Fiduciary Rule. The House Committee on Education and the Workforce, chaired by Rep. Virginia Foxx (R-NC), approved the bill by a 22-17 vote on July 19. It now moves to the House floor.
It has been a hot summer for the Fiduciary Rule, and that is not likely to change any time soon. Those impacted by its requirements will continue to be left without clear guidance as uncertainty about the fate of the Fiduciary Rule persists.