Where to in 2017 with Trump and the DOL Rule?
Once the Department of Labor unveiled its long-awaited fiduciary rule in April, the media and other industry commentators spent most of the subsequent months deconstructing the rule to ascertain its implications for FAs, custodians, fund providers and investors alike.
But since November 9, with Donald Trump’s somewhat unexpected election win, talking heads and news media pivoted dramatically to provide blow-by-blow speculation on “will he, won’t he” repeal, amend or ignore the rule which forces advisors to put their clients’ interests first when dealing with retirement accounts.
As one FA-IQ reader, “Tim,” commented below one such speculative story: “Trump won’t kill the rule, he will kill the rule, he won’t kill the rule ... he will ... What excitement will tomorrow bring?”
But many commentators agree that with a wide variety of players able to influence the rule’s future – the president elect, federal courts, lobbyists, new DOL administrative appointees, to name a few – this speculation is likely to continue for the foreseeable future.
Regardless of the fate of the rule, its chief architect believes the client-first principle has already taken hold in the advice industry, ThinkAdvisor wrote earlier this month.
The rule “is already effective,” Phyllis Borzi, the assistant secretary of labor for employee benefits security, said at a Consumer Federation of America conference in November.
Advice firms aren’t going back on the fiduciary principle, she said, regardless of what President-elect Trump's administration does to the rule, ThinkAdvisor wrote. Borzi also said she refuses to speculate on what Trump’s administration would do, according to the publication.
While Trump himself has yet to take a stance on the fiduciary rule, one of his advisors who’s now a member of the presidential transition team has called for its repeal. The rule also faces pressure from the GOP-controlled Congress, with one senator calling on DOL Secretary Thomas Perez last month to stop its implementation on the grounds that Trump would repeal it anyway.
And an influential conservative Republican coalition also wants Trump to kill the rule, which is among more than 200 regulations the House Freedom Caucus is urging the president-elect to overturn. The caucus, which counts about 40 conservative GOP lawmakers now led by Rep. Mark Meadows, R-N.C., argues in a report that the rule will cost from $7 billion to $11 billion to implement as well as hamper low- and middle-income households from saving for retirement.
The rule also still faces legal challenges from several industry groups. However, the DOL scored two major victories last month, with a Kansas judge rejecting a request for a preliminary injunction and a Dallas judge denying a request in a separate lawsuit to delay the rule’s implementation. And on December 15, the D.C. Circuit federal appeals court ruled against the National Association for Fixed Annuities and refused to block the rule.
The trade group had urged the court in November to put a 10-month freeze on the rule, arguing it would cause “irreversible and costly” alterations to the way brokers, advisors and insurance agents do business, according to the National Law Journal.
But the Justice Department stepped in, urging the D.C. Circuit court against enjoining a regulation that’s gone through “six years of public comment and consideration,” arguing that investors face greater harm from “conflicted advice” than from the economic costs to the industry, the publication writes. The court subsequently ruled that NAFA failed to satisfy requirements for an injunction, according the National Law Journal.
In any case, the industry is already preparing to operate under a fiduciary standard, according to Borzi. She said the rule has led several firms to lower their fees even ahead of the April implementation date, InvestmentNews wrote earlier this month. Fund firms such as BlackRock and Fidelity, meanwhile, are cutting the costs of their products as well, she said. In addition, Borzi cited recent announcements by wirehouses and independent broker-dealers that have decided to stop offering commission-based individual retirement accounts, InvestmentNews writes.
In fact, many industry experts say Trump won’t kill the rule. For starters, Trump never mentioned the rule during his campaign, according to Robert Lawton, president of the RIA Lawton Retirement Plan Consultants, who wrote a column on the subject in Employee Benefit News. What’s more, Trump is simply too busy with other matters, such as picking his cabinet and a Supreme Court justice nominee, as well as figuring out how to fulfill numerous campaign promises such as voiding treaties, to trim the fiduciary rule, he writes.
And if Trump is open to the idea of an alternative to the rule from the House and Senate, that could take a very long time despite the GOP majority in both chambers, according to Lawton. However, the rule will likely become less stringent under a new DOL secretary, he writes.
In addition, even if Trump were opposed to the rule, it’s already law, Jean-David Larson wrote in Advisor Perspectives earlier this month. The rule went into effect this summer. Advice firms have until April to prepare for the rule and until January 2018 to comply with its more complex aspects, according to Larson, director of regulatory and strategic initiatives at Russell Investments. Trump can’t use an executive order to kill or delay the rule and isn’t likely to waste political capital to push an interim rule instead, he writes.
Furthermore, even if the DOL itself decides to not enforce the rule come April, plaintiff lawyers can still bring suits under the rule’s private right of action, according to Larson.
Meanwhile, there isn’t enough bipartisan support in Congress to delay the rule, he writes. And while the rule will likely be softened or modified prior to the January 2018 deadline, it won’t be repealed, according to Larson.
Yet fans of the rule should not cry victory just yet. Trump’s DOL Chief pick, Andy Puzder, could spell trouble for the agency’s fiduciary rule, although Puzder hasn’t made his intentions clear thus far, the Wall Street Journal wrote earlier this month.
Analysts point to Puzder’s overall criticism of government regulating business and his close ties with financial firms as cause to believe the rule could be in jeopardy, the paper writes.
Puzder, who currently heads CKE Restaurant Holdings, the parent company of fast-food chains Carls’ Jr. and Hardee’s, has a history of opposing regulation implemented by President Barack Obama specifically, Edward Mills, an analyst at FBR & Co., wrote in a research note, according to the Journal.
According to Mills, Puzder will first delay the rule through an administrative action and then alter or repeal it.
There hasn’t been any clear indication that Puzder will target the fiduciary rule, as he has yet to make any public statements on it.
Yet Puzder has sided with retirees in the past. In the 1980s, he served as a lawyer to a St. Louis pension fund suing investment companies over bad investments and excessive fees, according to the Journal.
And so into 2017 the speculation continues.