Views on the integrity of global capital markets
19 December 2016

DOL Fiduciary Rule — What’s Happening Now and Its Possible Future

When the DOL “fiduciary rule,” as it’s been labeled, was adopted in April 2016 (with an implementation deadline of 10 April 2017), many investment and financial advisors quickly started working through the great deal of work that would be required to come into full compliance with the regulation.  Several firms (e.g., Merrill Lynch Wealth Management) even announced the end of their commission-based practice, rather than subject themselves to scrutiny under the rule.

Given the pending legal actions that have been filed to overturn the rule and the upcoming change in the US presidency many are speculating on the future of the rule — whether it will actually come into effect, and if so, when.

Actions By, and Against, the DOL

A number of organizations (resulting in six consolidated lawsuits) were quick to file suit against the DOL following passage of the rule. Plaintiffs in these suits allege, among other things, that the rule has an overly broad definition of “investment advice,” there is a lack of authority to extend a private right of action, and it’s a violation of advisors’ first amendment rights.

On 4 November 2016, a Washington, DC court denied the National Association for Fixed Annuities’ request to block the rule and rejected its six challenges to the rule. Then on 28 November 2016, a federal court in Kansas denied a request by Market Synergy Group for a preliminary injunction to block the rule. Three consolidated lawsuits remain to be heard by a federal judge in Texas, and a remaining case is pending in Minnesota. Although the courts have been unsympathetic to plaintiffs so far, a win in federal court for challengers in either of the remaining suits could set up a split among federal court circuits regarding the enforceability of the DOL rule.

As lawsuits make their way through the court system, the DOL is taking action of its own in anticipation of the April 2017 deadline. In late October, the DOL issued its first set of FAQs that provide answers to 34 questions to help advisors prepare their compliance program. The DOL says it plans to provide additional guidance through two more sets of FAQs.

Advisors Get Ready, But Election Raises Issues

A recent survey by SEI Advisor Network showed that although 41% of advisors indicated they are almost ready for the 10 April 2017 deadline, 11% indicated that they are lagging behind; 30% of advisors are thinking of outsourcing compliance and legal functions.

A hallmark of President Obama’s administration, the DOL rule was hotly contested in the US Congress prior to its passage. But the incoming President-elect’s sentiment that he will not support the rule in its entirety has left the industry questioning the future of the rule and whether to continue preparations. However, opinions differ on the ultimate fate of the DOL rule.

There are those who think President-elect Trump will move quickly on the rule. For example, prior to the election, Trump adviser Anthony Scaramucci, who compared the DOL rule with the Dred Scott decision, proclaimed that “we’re going to repeal it.” And the US Chamber of Commerce has announced that it is working with the future administration to “undo” the rule.

But most believe it is unlikely that the rule will be dramatically different by April. Had the rule come into effect through an executive order, President-elect Trump could rescind it through his own executive action. But because the rule came about through agency regulation, overturning the rule will require the drafting and introduction of a new rulemaking (including a public comment period) — a lot to ask of a new DOL head, who is yet to be confirmed. In fact, even substantive changes to the rule by April is unlikely.

And Now…

Regardless of the ultimate outcome of the court cases or changes made by the Trump administration, Phyllis Borzi, assistant secretary of Labor for DOL’s Employee Benefits Security Administration, believes the rule has already established itself. She has said, “We know that once these market forces have been unleashed, we’re not really going back to the old days.” Through the debate and resulting publicity around the DOL rule, average investors have become more aware of the term “fiduciary” and what it may mean to them. To the degree investors use this knowledge to ask pertinent questions, become more involved in their investing, and take more responsibility for managing their accounts, the rule has already been a success.

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Photo Credit: ©Getty Images/Robert Daly

 

About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, is a director of capital markets policy at CFA Institute. She focuses primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

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