Labor Department to Delay and Revisit Fiduciary Rule

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By Sean Forbes

President Donald Trump’s Department of Labor moved one step closer to putting the brakes on the agency’s fiduciary rule for retirement investment advisers late Feb. 9.

The agency sent to the White House’s Office of Management and Budget a proposal to delay the rule’s applicability date, one week after Trump ordered the agency to review the Obama-era rule that aims to protect retirement investors from conflicted advice.

The proposal won’t be publicly available until it clears the OMB, but it’s expected to delay the rule by 180 days and open a short public comment period. The move by the DOL came just one day after a federal judge in Texas upheld the rule and refused to delay its implementation, which is scheduled for April 10. Three federal courts have now upheld the rule.

Industry groups have attempted to kill the rule since it was in its infancy in 2010 when the DOL originally proposed it. Many of those groups hailed Trump’s Feb. 3 memorandum that the DOL review the rule before moving forward, so it’s likely that the agency will be flooded with comments to delay the regulation.

Litigation Risks

Trump’s memo listed three factors for the DOL to consider: whether the rule would eliminate consumers’ choice of products, cause disruption in the retirement market to the detriment of consumers or cause an increase in litigation. A positive finding on any one of those factors would result in cause for a proposal to rescind or revise the rule, the memo said.

The rule gets its teeth by allowing individual customers to pursue class actions, so the third factor alone may be a reason to kill or change it. Currently, disputes between customers and firms are handled through arbitration on an individual basis.

Although the DOL’s estimated average costs for the entire broker-dealer industry is in the “right ballpark,” it’s probably underestimated for the very largest firms, Michael Wong, a senior equity analyst at Morningstar Inc., told Bloomberg BNA.

“Our estimate of baseline ongoing compliance costs plus our downside scenario class action settlement at the firm-level for some of the largest wealth management firms can be over 15 times higher than the Department of Labor’s $1.8 million ongoing cost estimate for large broker-dealers,” Wong said in an e-mail.

But the DOL may find it a challenge to conclude that the rule will result in higher litigation costs because of the high hurdle that clients have to jump over to join a class action, Barbara Roper, director of investor protection for the Consumer Federation of America, told Bloomberg BNA in an e-mail.

“The class action remedy will only be successful where a firm is systematically violating the rules across its 401(k)" or individual retirement account platform, Roper said.

Roper highlighted the importance of the class action provision.

Without that provision, “you greatly reduce the incentive for compliance, particularly when the Administration appears to be far from enthusiastic about providing direct enforcement.”

And if the DOL did underestimate the costs for the very largest firms? “Assume Morningstar is correct, that is not enough to scare large firms into walking away from advising the trillions in retirement accounts,” Roper said. “On the other hand, it may be enough to incentivize them to take compliance seriously.”

Morningstar also said the financial industry is unlikely to walk away from working with retirement investors.

“Some financial industry participants have argued that wealth managers will just step away from serving retirement investors because of the impact from the Department of Labor fiduciary rule,” Morningstar said in a report. “We don’t think that’s possible. Total assets in private pension plans and IRAs totaled nearly $16 trillion at the end of 2015, while IRA assets typically constitute from 20% of client assets at wirehouses to 50% at independent firms.”

To contact the reporter on this story: Sean Forbes in Washington at sforbes@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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