How the Republicans Could Unwind the DOL Fiduciary Rule


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:

  • Amending ERISA to define “fiduciary” to exclude the advisers added into the definition by DOL, and thus obsoleting the Rule; or  
  • Repealing and/or amending major provisions of Dodd-Frank. The Financial CHOICE Act, which passed the House Finance Committee by a party line vote in September would, in addition to many other changes, eliminate the Fiduciary Rule and require the SEC to move first on fiduciary rulemaking on a standard of conduct for brokers and dealers before the DOL can act. SEC Chairman Mary Jo White has announced that she will step down before the inauguration, and that the SEC’s uniform fiduciary standard will not be completed by then.   
  • The Congressional Review Act, much discussed in the news since the election, cannot be used to overturn the Fiduciary Rule.  The CRA allows Congress to repeal any major regulatory action adopted within the prior 60 legislative days.  Reflecting the flexibility of Congress’ schedule, the Congressional Research Service has concluded that regulations submitted after May 20, 2016 will fall within the time limits for Congressional action following the inauguration in January 2017.  The Fiduciary Rule, finalized in April 2016, falls outside Congress’ CRA window.  (Note that two other EBSA regulations, a final amendment to the Claims Procedure Regulation for disability plans, and a final regulation on retirement savings arrangements established by political subdivisions for non-governmental employees are pending final review at the Office of Management and Budget.  If they are released before the inauguration, they could be subject to repeal under the CRA.)  

A Trump DOL has other opportunities:  

  • DOL could delay the Rule’s effective dates, through an interim rule or an immediate direct final rule.  These actions do not require that a new Secretary of Labor have been confirmed.    
  • Repealing the Fiduciary Rule would require full notice and comment rulemaking under the Administrative Procedures Act. If the effort is considered a significant regulatory action under Executive Order 12866 (as the Fiduciary Rule was), the Department will have to engage in cost/benefit analysis, which will take further time (and will be presumable directly contrary to the cost/benefit analysis that accompanied the Fiduciary Rule).  Finalizing such rulemaking would require a confirmed Secretary of Labor.  
  • DOL could announce that it will not be enforcing the Rule.  The Best Interest Contract exemption, however, creates a private right of action for retail investors, so advisers relying on the exemption would still be at risk of lawsuits from the private bar.  

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 

[http://www.investmentnews.com/article/20161006/FREE/161009942/merrill-lynch-eliminates-commission-ira-business-in-response-to-dol]  

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.