Years in the making, the Department of Labor’s April 2016 “Fiduciary Rule” augured a sea change in the way investment products and advice are provided to ERISA plan fiduciaries and IRA holders. The Rule generated major criticism followed by restructuring plans within the retirement services industry, challenges by Congressional Republicans, and numerous lawsuits. January 2017 will bring President Donald Trump and Republican majorities in the Senate and the House. Can they jettison the Rule?
The Fiduciary Rule (used here to include the final regulation defining “fiduciary” and related prohibited transaction exemptions, including the Best Interest Contract exemption) has been called the most consequential change to the rules governing retirement plans since the passage of ERISA in 1974. It expands the universe of those who are subject to fiduciary responsibility under ERISA and the Internal Revenue Code for providing investment advice for a fee or other compensation. Contrary to the general understanding of most practitioners and advisers before the Rule’s promulgation, the Rule treats receipt by a (now-fiduciary) adviser of compensation paid by a plan, participant or beneficiary, or IRA, or the adviser’s receipt of commissions, sales loads, 12b-1 fees, revenue sharing, or other payments from third parties that provide investment products, as prohibited transactions banned without an exemption, because the amount of the fiduciary’s compensation would be affected by the investment advice it provides. The Rule became effective in June 2016, but by its terms most of the relevant changes were delayed until April 10, 2017 (and some conditions of the exemptions are delayed until January 1, 2018).
If the new administration wants to, how can the Rule be scrapped? Both the new Congress and a Trump DOL have options. Legislative alternatives include:
A Trump DOL has other opportunities:
Several lawsuits challenging the Fiduciary Rule are pending against the Secretary of Labor, alleging violations of the APA and the First Amendment, among many other claims. In one, National Association for Fixed Annuities v. Perez, the District Court for the District of Columbia granted DOL’s motion for summary judgment; plaintiffs have appealed and asked the Court of Appeals to stay implementation of the Rule. In another, Market Synergy Group v. Department of Labor, the District Court for the District of Kansas has denied the plaintiffs’ motion for a preliminary injunction staying implementation of the Rule. Another group of consolidated cases is pending in federal court in Texas. If a court enjoins the implementation of the Rule in any of these cases, the Trump Administration would have some breathing room to choose its course of action on the Fiduciary Rule. The new administration could also choose not to defend these actions. Victories in any case, however, would only be binding within that court’s jurisdiction, which could cause significant compliance issues for plan fiduciaries.
In anticipation of the April 10, 2017 effective date, the financial services industry is making significant changes, some of which can be easily unwound, and some that cannot. Some providers, such as Merrill Lynch, announced
that they would stop offering commission-based IRAs in 2017, while others are reorganizing personnel and compensation. Level fee and robo-advisors are ramping up in anticipation of increased business. Most are undertaking technological upgrades to ensure compliance with the regulation and the exemptions’ conditions. These changes, and the pending litigation, will create pressure on the new administration to choose its approach to the Fiduciary Rule quickly.
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