Labor reveals balanced approach to reviewing fiduciary rule in proposed delay
March 2, 2017 by Nick Thornton
In the Labor Department’s proposal to delay the April 10 implementation date of the fiduciary rule by 60 days, the agency is killing two birds with one stone.
Labor has issued a 15-day comment period to determine the potential cost and benefits of delaying the rule, which it says are “highly uncertain.”
But the proposal also opens a 45-day comment period for input on the new economic and legal analysis of the rule ordered by President Trump in a presidential memorandum.
Stakeholders will be able to give their 10 cents on whether the entire rule should be delayed, or just aspects of it.
Under one hypothetical scenario in the proposal, Labor could delay implementation of the rule’s disclosure requirements, while keeping the April 10 implementation for the rule’s impartial conduct standards established in the rule’s Best Interest Contract Exemption.
DOL taking a ‘balanced approach’
The fact that Labor issued a 30-page proposal for a mere 60-day delay of the rule demonstrates that the Department is taking a balanced approach to reviewing the rule, says Seth Safra, a partner in the employee benefits practice at Proskauer.
“It’s clear Labor is taking a serious look at this regulation,” said Safra. “It is not a foregone conclusion that they are going to rescind it,” said Safra.
In the proposal, which was signed by Timothy Hauser, the Deputy Assistant Secretary in Labor’s Employee Benefits Security Administration, the Department says the new review ordered in the presidential memorandum may not be concluded by the April 10 implementation date.
One justification for delaying the rule is that a new analysis may result in a proposal to change or rewrite the rule.
“The Trump administration doesn’t have a Labor Secretary yet, let alone a head of the EBSA,” noted Safra. “How can they be expected to finish a new analysis by April 10?”
Speculation varies among stakeholders as to the intentions of the Trump administration, and whether the rule will ultimately be killed, or merely amended.
Micah Hauptman, an attorney with the Consumer Federation of America, which lobbied for a strong fiduciary standard throughout the six-year rulemaking process, expects the rule to be scrapped altogether.
“Industry opponents have made it clear that they want to kill this rule at all costs,” said Hauptman. “And the highest levels of the Trump administration have also made that objective clear.”
But Safra is skeptical that outcome will be the case.
“I don’t think the Trump administration is that predictable,” he said. “I think it’s very possible Labor ends up proposing a new regulation that has a more flexible path to compliance.”
The proposed delay lays out 20 questions to industry that will support its new economic and legal analysis.
Labor is looking to better understand the compliance measures and costs already incurred by industry, whether firms expect to abandon or deemphasize services to small IRA investors, and how the rule will affect demand for investment advice and investment products.
The questions also explore how the rule is impacting pricing on services and investments, and whether or not the rule will increase litigation.
One question seeks comment on the costs and benefits of further delaying the applicability date by six-months, one year, or more.
Stakeholders that want to see changes to the rule would be advised to present nuanced arguments to Labor, said Safra.
“I’m not sure it would be a good strategy to go for broke and repeat the same arguments regulators have heard for years,” he said.
Moreover, Safra says stakeholders would be wise to appreciate the depth of the proposal’s inquires, and not presume it is a legally required administrative process masking a motive to dismantle the rule.
“Even in Republican administrations, the Labor Department takes prohibited transactions and conflicts of interest very seriously,” he said. “I don’t think this process is politically motivated, or that the administration is in the pocket of interest groups, though some people that will continue to try to advance that narrative.”
Don’t have to be for conflicts to be against the rule
The rule that is scheduled to be implemented April 10 creates compliance requirements that are problematic, even for stakeholders that favor a fiduciary standard, says Safra.
He cites broker-dealers who provide self-directed IRA platforms. Under the rule, those broker-dealers are engaging in a fiduciary act by providing the platform, even though no advice is given.
“The consequences of that from a compliance standpoint are drastic,” said Safra.
The new private right of action created by the rule allows investors to bring class-actions claim under the BIC Exemption.
That will be a big, if not the biggest point of contention stakeholders raise in comment letters, expects Safra.
He also thinks Labor will have to consider the merits of a so-called sellers’ exemption in a potential new rule.
That would create a disclosure-based standard that would allow fund companies and brokers to market products without putting themselves out as fiduciaries.
The original proposed rule promulgated by the Labor Department in 2010 had a sellers’ exemption.
“I think it is possible, but difficult, to write an enforceable seller’s rule,” said Safra. “Labor has historically been skeptical about the usefulness of disclosures. The Department would have to buy into the idea that some amount of disclosure is suitable and functional to protect against conflicts of interest.”
