Art by Joseph CiardielloOn November 9, Americans across the country woke up to the realization that Donald Trump had been elected president of the United States. This surprising turn of events may lead to the reversal or modification of many of President Obama’s policies in the area of retirement. Specifically, one that should bear particular scrutiny is the Department of Labor (DOL) fiduciary rule, which expands the types of activities deemed provision of investment advice under the Employee Retirement Income Security Act (ERISA). Since the fiduciary rule was published this past April, financial institutions have taken significant steps to implement it, making key business decisions and changing key service offerings made to plan sponsors.
Thus, the future of the rule is of paramount importance to those who serve the retirement benefits community.
There are several possibilities for the future of the rule.
The final version was published on April 8, became effective on June 7 and set an “applicability” date of April 10, 2017—the date that changes actually go into effect. Similarly, the Best Interest Contract (BIC) exemption has a transition period lasting from April 10, 2017, to January 1, 2018. While the Obama administration did what it could to lock in the effective date of the rule, both it and the BIC exemption are in a unique position—technically effective but possibly not applicable.
Mr. Trump will have several opportunities to eliminate the rule if he chooses to make it a priority. One of his advisers has indicated that, despite running on a populist platform and not mentioning the fiduciary rule during the campaign, he believes the rule needs to be pulled back. Moreover, the new administration may work with members of the Republican Party, some of whom in Congress have already attempted to legislate it out of existence.
We think that, as early as January 20, 2017, the new administration will seek to delay the rule’s applicability date. Beyond that, we believe that substantive changes to it are a distinct possibility. Changes could happen in one of several ways. First, Mr. Trump could direct the DOL to delay the applicability date. Under the Administrative Procedures Act, if we assume the rule was legally effective, the new administration will have to demonstrate why it is replacing it. However, because of the short time frame the new administration will have to make changes to the rule, we think the most likely result will be that the DOL will simply issue an interim final rule that delays the applicability date, and then open a period of notice and comment, permitting itself to reconsider the rule, perhaps in its entirety.
Separately, Congress could act. As mentioned, Congressional Republicans made efforts this past year to kill the rule. These efforts included a Congressional Review Act challenge, which was vetoed by President Obama. Under this approach, if reattempted, Congressional Republicans’ main challenge would be to obtain sufficient Democrat support to avoid a filibuster. If they were able to succeed, Congress could either expressly revoke the rule, refuse to fund its implementation, or give another federal agency—such as the Securities and Exchange Commission (SEC)—the power to promulgate a rule instead of the DOL.
The rule may be defeated in litigation. Currently, cases are pending in four courts where plaintiffs are seeking to challenge it. The Obama administration is defending the rule against these challenges, but the Trump administration may decide to withdraw its defense of it. If the latter occurs, the likelihood of the plaintiffs’ success in having all or some portion of the regulatory package eliminated would significantly increase.
While nothing in Washington these days is a sure bet, we expect that the applicability date of the rule will be delayed. Even so, there is a possibility that the rule will not be revoked in its entirety and that some semblance of it will remain. For example, if the definition of “fiduciary advice” continues to include recommendations to roll over a plan distribution to an individual retirement account (IRA), then some kind of exemption will be needed. In this case, the BIC exemption could be retained in a more workable structure—that is, without the “contract” requirement and the related warranties. This would mean that a failure to satisfy the “best interest standard” would result in the assessment of an excise tax but no liability from class action lawsuits.
Regardless of what happens legally, change may occur because many financial institutions have already announced they are adopting the best interest standard or have adopted a fiduciary approach with their plan sponsor clients. Plan sponsors will need to be flexible when working with service providers affected by the rule, as we likely are stepping into a period of uncertainty.
Stephen Saxon is a partner with Groom Law Group, Chartered, headquartered in Washington, D.C. George Sepsakos, an associate with Groom, contributed to this article.