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Late Friday, the White House issued a Presidential Memorandum requiring the Department of Labor to take a second look at its “fiduciary rule.”[1] The Memorandum directs the DOL to prepare an updated economic and legal analysis of the rule to determine whether, among other things, it may adversely affect the ability of Americans to gain access to retirement information and financial advice. Following the completion of the analysis, the Memorandum states that the DOL is to consider whether it is appropriate to publish for notice and comment a proposed rule rescinding or revising the rule.
The Memorandum does not specifically require the DOL to delay the rule’s April 10 applicability date. However, some delay seems inevitable. Following the release of the memorandum, President Trump’s acting Secretary of Labor, Ed Hugler, issued the following statement: “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s Memorandum.”
The Memorandum provides that in preparing its updated economic and legal analysis, the DOL must consider:
The Memorandum requires the DOL to publish for notice and comment a proposed rule rescinding or revising the rule if it makes an affirmative determination as to any of the above considerations. A proposed revision or rescission is also required if the DOL concludes for any other reason that the rule is inconsistent with the administration’s stated priority of empowering Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses and to withstand unexpected financial emergencies.
The Memorandum does not provide a deadline by which the DOL must complete its analysis, and it is unlikely that the DOL could complete its review before April 10 or release its findings before a new Secretary of Labor is in place. Therefore, we expect the DOL will delay the applicability date on its own accord. One avenue to delay would be through a proposed rule subject to notice and comment. The DOL may determine, however, that the President’s Memorandum requiring an updated economic and legal analysis provides the department with “good cause” to avoid notice and comment.
Congress may also 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, 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.[2]
In addition to the pending legislation, there are also a number of court cases pending against the rule. In the most high-profile case, Judge Lynn of the Northern District of Texas notified the parties Thursday that she expects to issue an opinion on the cross-motions for summary judgment no later than February 10th.[3] It is likely, however, that any action in this case, as well as cases pending in Kansas, Minnesota and Washington DC, will be stayed pending a final determination on the rule’s fate.[4]
Regardless of its fate, the fiduciary rule has already had a tremendous 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. Most 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 President’s Memorandum is unlikely to be the last chapter in the long history of reform in the retail retirement market.
[1] 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.
[2] 15 USC § 780(k).
[3] Chamber of Commerce of the United States of America et al. v. DOL et al, Docket No. 3:16-cv-01476 (N.D. Texas, February 2, 2017).
[4] See National Association for Fixed Annuities v. DOL et al, Docket No. 16-05345 (D.C. Cir. Nov. 28 2016); Market Synergy Group, Inc. v. DOL et. al., Docket No. 5:16-cv-04083 (D. Kan. Jun. 8, 2016); Thrivent Financial for Lutherans v. Perez et al, Docket No. 16-cv-03289 (D.Minn. Sept. 29, 2016).
