By: Joseph P. Yonadi, Jr. and Shaylor R. Steele
This morning, the Office of Management and Budget (OMB) concluded its review of a proposed regulation entitled “Delay of Applicability Date” that would effectively delay the implementation of the Fiduciary Duty Rule (Rule). However, an odd turn of events took place when the OMB changed the designation of the delay to “economically significant.” This higher designation could potentially mean a longer comment period. The Department of Labor (DOL) is expected to delay the Rule for 180 days. Please stay tuned…
The President’s Memorandum
On February 3, 2017, President Trump issued a Memorandum, directing the Department of Labor to review the new Fiduciary Duty Rule. Most retirement industry spectators, expected the Memorandum to delay the Rule’s April 10 effective date; however, the Memorandum does nothing to officially delay the Rule’s April 10th compliance deadline, it merely directs the DOL to study the Rule and its related exemptions, and, if warranted, to rescind or revise them.
Under the Memorandum, the DOL is directed to consider three economic and legal points: (1) whether the Rule is harmful to investors due to a reduction of Americans’ access to certain retirement products; (2) whether the Rule will adversely affect investors or retirees because of the disruption within the retirement services industry; and (3) whether the Rule will cause an increase in litigation or an increase in costs to investors and retirees for retirement services.
As a response to the Memorandum, Acting Secretary of Labor Hugler announced the DOL would explore options for delaying the applicability date of the Fiduciary Rule.
Current State of Fiduciary Rule
The Rule, in its current state, sets forth that an individual is a fiduciary under the Employee Retirement Income Security Act if such individual, for a fee, makes a recommendation to a retirement plan, plan fiduciary (i.e., investment committee), or retirement plan participant or beneficiary regarding:
- the purchase of investment products,
- when to take a distribution from the plan, or
- whether the distribution may be rolled over to an IRA.
There are several prohibited transaction class exemptions that permit investment advice fiduciaries (i.e., financial advisor) to receive compensation that would be prohibited, including the Best Interest Contract Exemption (BIC). The BIC exemption services to allow investment advice fiduciaries to continue to receive variable fee compensation provided his or her advice is in the best interest of the plan or participant.
Court Challenges to the Fiduciary Rule
The DOL has its third victory in as many tries with a federal judge in Texas upholding the Rule against groups such as the U.S. Chamber of Commerce in U.S. Chamber of Commerce of the U.S, et al. v. Hugler, No. (N.D. Tex. 2016). Judge Barbara Lynn of the U.S. District Court for the Northern District of Texas issued and eighty-one page summary judgment analysis that rejected each of the Plaintiff’s ultimately concluding the Rule was validly promulgated. As the decisions mount in its favor, we should expect the DOL to continue to point to them in future potential enforcement actions. We expect both the Department of Justice and the DOL to seek an official delay of the Rule in the coming weeks.