March 03, 2017
On March 1, 2017, the Department of Labor issued a proposed rule that, when finalized, will delay the applicability date of its “fiduciary rule” and related exemptions to June 9, 2017, which is 60 days from its original applicability date of April 10, 2017. The DOL has opened a 15-day comment period on its delay proposal that will end on March 17, 2017.
In addition, the DOL has opened up a 45-day comment period on questions posed in the February 3rd directive from the White House that mandated further study of the effects of the fiduciary rule on the retail retirement market. This comment period will end on April 17, 2017.
According to the Office of Management and Budget, the proposed extension of the applicability date is an economically significant regulatory action because it would likely have an effect on the economy of $100 million in at least one year.Prior to finalizing the delay, the DOL is asking for comments as to whether benefits of the delay justify its costs.
In addition, the DOL invites comments as to whether it should delay applicability of all, or only a part, of the final rule’s provisions and exemption conditions. By way of example, the DOL suggests it could delay the notice and disclosure provisions while permitting the impartial conduct standards of the related prohibited transaction exemptions to become applicable on April 10th.
On February 3rd, the White House issued a Memorandum that directs the DOL to prepare an updated economic and legal analysis of the fiduciary rule to determine whether, among other things, it may adversely affect the ability of Americans to gain access to retirement information and financial advice.
The Memorandum provides that in preparing its updated economic and legal analysis, the DOL must consider:
If the department makes an affirmative determination as to any of the above considerations or if it concludes for any other reason that the fiduciary rule is inconsistent with the priority of the Administration 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 lifetimes expenses…”, then the DOL must publish for notice and comment a proposed rule rescinding or revising the rule.
With respect to these considerations, the DOL requests comments that might help inform its analysis, including any issues with the DOL’s regulatory impact analysis (“RIA”) of the fiduciary rule. In addition, comments are requested on how the market has reacted to the fiduciary rule and the costs and benefits of those reactions.
Any rule revising or repealing the “fiduciary rule” will be subject to the Administrative Procedures Act (“APA”), which requires that action can only be taken “[a]fter consideration of the relevant matter presented” during a period of public comment. As promulgation of the rule included four days of public hearings, over 3,000 individual comment letters, over 300,000 submissions made as part of 30 separate petitions and an extensive and detailed regulatory impact analysis, a full repeal of the fiduciary rule would most likely have to be a lengthy process in order for the DOL to avoid a court determining that its decision was “arbitrary and capricious.” In addition to challenging the findings that led to the promulgation of the rule, the DOL will have to justify any full repeal in light of the fact that many financial advisors have already invested heavily in compliance. Whether or not this can be accomplished by June 9, 2017 remains to be seen.
The DOL has in fact already received what may be considered its first comment letter. On February 7, 2017, Senator Elizabeth Warren sent a letter to Acting Secretary of Labor Edward Hugler summarizing responses she received from 21 leading finance companies to her request for information on “their commitment to helping workers save for retirement, their support for the DOL fiduciary rule and their preparedness to comply with the rule in April.” According to Senator Warren, “Their overall message was clear: this rule is good for workers saving for retirement and companies are prepared to meet the compliance deadlines.”
Congress may weigh in directly on the rule through legislation, and the resulting delay could be viewed as a strategic move to give Congress time to do just that. Earlier this year, Congressman Joe Wilson introduced a bill to delay the rule’s implementation date by two years from enactment of the legislation. A separate bill, the Financial Choice Act (“FCA”), would eliminate the fiduciary rule and prevent the DOL from promulgating a new rule until the date that is 60 days after the SEC issues a final rule relating to standards of conduct for brokers and dealers pursuant to Section 15 of the Securities Exchange Act of 1934. The FCA, which passed the House Financial Services Committee last September, is expected to be reintroduced shortly. The revised version of the bill will provide, among other things, that any rule promulgated by the DOL must adhere to a substantially similar standard to the standard promulgated by the SEC.
The fiduciary rule has been upheld in three separate court decisions. Although notices of appeal have been filed and a challenge is still pending in Minnesota, it is becoming apparent that a judicial outcome in favor of the rule’s opponents is less likely.
The fiduciary rule has already had a major impact on the retail retirement market. A number of financial organizations have revised their product line-ups, their approach to compensating client-facing advisers and their relationship with product providers. Financial organizations have spent a tremendous amount of time and dollars to prepare for full compliance, and proponents of the rule and other consumer advocates are not likely to allow the rule to die without a meaningful replacement or a meaningful fight. All of that suggests that the next 60 days will be a crucial period in the DOL’s long history of trying to expand ERISA’s coverage to IRAs and other retail products.
 The proposed rule can be found at: https://www.gpo.gov/fdsys/pkg/FR-2017-03-02/pdf/2017-04096.pdf. The fiduciary rule can be found at: http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=28806. For a complete overview of the final rule, you may wish to refer to our client publication: “The US Department of Labor’s Final ‘Fiduciary’ Rule Incorporates Concessions to Financial Service Industry but Still Poses Key Challenges,” available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/04/The-US-Department-of-Labor-Final-Fiduciary-Rule-Incorporates-Concessions-to-Financial-Service-Industry-CGE-041416.pdf. For a discussion of the disclosure requirements of the new prohibited transaction exemptions, you may wish to refer to our client publication: “The DOL’s New Fiduciary Rule: The Details on Disclosure,” available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/05/The-DOLs-New-Fiduciary-Rule--The-Details-on-Disclosure-CGE-05052016.pdf. For a discussion of how the final rule differentiates between investment advice and education, you may wish to refer to our client memo: “The DOL’s New Fiduciary Rule: The Thin Line Between Advice and Education,” available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/05/The-DOLsThe-Thin-LineEducation-and-Advice-CGE-051116.pdf. For a discussion of the application of the final rule to rollovers, you may wish to refer to our client publication: “The DOL’s New Fiduciary Rule: Capturing the Apparent Conflict at the Moment of Rollover,” available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/06/The-DOLs-New-Fiduciary-Rule-Capturing-the-Apparent-Conflict-at-the-Moment-of-Rollover-CGE-060816.pdf.
 The DOL would treat Interpretative Bulleting 96-1 as continuing to apply during the extension period.
 The Presidential Memorandum, issued on February 3, 2017, can be found at: https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-memorandum-fiduciary-duty-rule. For a discussion of the memorandum, you may wish to refer to our client publication: “President Trump Mandates Reconsideration of DOL’s ‘Fiduciary’ Rule,” available at: http://www.shearman.com/en/newsinsights/publications/2017/02/reconsideration-of-dol-fiduciary-rule.
 See Executive Order No. 12866. We note that the rule delaying the applicability date is also a ‘major rule’ under the Congressional Review Act (“CRA”). A ‘major rule’ may not take effect until at least 60 days after the date on which the rule is published in the federal register and this would be early May.
 The DOL’s RIA is available at: https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/conflict-of-interest-ria.pdf.
 The DOL’s questions with respect to the fiduciary rule can be found in Part C of the proposal.
 See 5 USC § 553(c). Although the APA contains a “good cause” exception to the notice and comment requirement, an agency must find that the use of these procedures is “impracticable, unnecessary, or contrary to the public interest” (5 USC 553(b)(B)). These exceptions have been narrowly applied by the courts and are unlikely to apply with respect to the fiduciary rule.
 See RIA, supra note 5.
 See 5 USC § 706(2)(A).
 See Letter from Senator Elizabeth Warrant to Edward Hugler, Acting Secretary of Labor, dated February 7, 2017, available at http://www.warren.senate.gov/files/documents/2017-2-7_Warren_Ltr_to_DOL.pdf.
 See id. The complete set of responses received by Senator Warren is available at: http://www.warren.senate.gov/files/documents/DOL_Fiduciary_Rule_Letters.pdf.
 See Market Synergy Group, Inc. v. US Department of Labor, et al., 2017 BL 49586 (D. Kan. Feb. 17, 2017); Chamber of Commerce of the US, et. al. v. Hugler, et al., 2017 BL 38365 (N.D. Tex. February 8, 2017) and The National Association for Fixed Annuities v. Perez, et. al., 2016 BL 369523 (D.D.C. Nov. 4, 2016).
 See Thrivent Financial for Lutherans v. Perez et al, Docket No. 16-cv-03289 (D.Minn. Sept. 29, 2016).