Views on improving the integrity of global capital markets
21 December 2015

Labor Fiduciary Rule Proposal Safe … for Now

Front seats in a state Senate or House of Representative chamber, reserved for the Speaker of the House/Senate President and clerks.

Despite attempts to gut, or at least delay, the Labor Department’s best interests — aka, fiduciary duty — rule, other priorities ultimately ruled the day for congressional opponents. Consequently, it is expected that Labor soon will issue a mildly revised version of its original proposal, with some concessions to industry concerns, forsaking a wholesale rewrite of the proposal. That means that come the New Year, the issue is settled.

Or is it? It isn’t clear what shape it will take, but a challenge is expected in some form. One possibility is a legal challenge along the lines of a flawed cost analysis, as was used to stop Labor’s 2011 fiduciary duty proposal. Indeed, this article in Forbes makes the case that the economic analyses used by Labor to justify its $17 billion annual cost to investors are more than a decade old and therefore don’t reflect current practices.

From the perspective of those of us who supported Labor’s proposal, this turn of events is a mixed bag. While we strongly supported the goal and purpose of Labor’s proposal of raising the standard of care for retirement investment advice, we also saw its approach as overly complex and flawed. Sadly, it likely will remain that way for the foreseeable future.

That is because the Obama Administration’s late start in addressing such a complex issue — April of its penultimate year in office — means it won’t have time to try to improve the rule much. Depending on how much is changed, the Administrative Procedure Act could come into play, requiring a whole new round of public consultations. Remember the last one ended in August, with revisions still in limbo.

So it is unlikely Labor will waste time adopting that mildly revised rule. Likewise, implementation is likely to get rushed so as to make the issue un fait accompli come January 2017, by making it difficult for any new president, particularly a Republican one, or Congress to unwind the rule. By then, the industry will have invested months of strategic planning, financial capital in new systems, and perhaps even massive changes in human capital.

The administration’s implicit strategy, then, would be to get a rule out sooner rather than later, and rely upon future administrations to fix the complexity issues later. The same was seen as possible for Dodd-Frank, as well. But for nearly five years, that flawed legislation has sat virtually unaltered — and yet to be implemented in cases such as the SEC’s obligation to adopt and implement its own fiduciary rule — not achieving its goals, while raising the costs for investors in an already low-return environment. Supporters of that law have blocked attempts at even simple revisions to wording and punctuation out of fear that even that might lead to more massive and fundamental changes.

It is not unreasonable, therefore, to fear the same for this rule. Once in place, it will become “sacred” text that is defended against any revisions, regardless of merit or lack thereof, simply to ensure the bill’s existence.

In the meantime, the brokerage industry challenge is expected to begin in earnest. It is not inconceivable it will win delays that last into 2017, after which a new Congress and new president would have their say on the matter.

There remains a slim possibility that the budget bill won’t pass and everything will go back to the drawing board. More likely, however, is that the rule has survived the great budget battle of 2015. Nevertheless, its future remains uncertain.

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Image credit: E Rodriguez

About the Author(s)
Jim Allen, CFA

Jim Allen, CFA, is head of Americas capital markets policy at CFA Institute. The capital markets group develops and promotes capital markets positions, policies, and standards.

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