Peering Through the Fiduciary Rule Uncertainty

It is more or less standard practice that an incoming U.S. President will move to halt or delay a predecessor’s unfinished regulatory projects—particularly when there is a shift in the party controlling the executive branch.  

What is less clear is how much power a newly minted president has to overturn straggling regulations that already went through the full proposal/comment/finalization process under the previous POTUS—which are simply waiting on staggered implementation deadlines to fully take effect. Further complicating the picture will be the millions, if not billions, of dollars that the affected industry will have spent to meet the hurdles established by the fully finalized regulation.

This is just the environment overhanging the Department of Labor’s (DOL) longstanding effort to strengthen the fiduciary standard as applied under the Employee Retirement Income Security Act (ERISA). The new fiduciary rule was finalized in June 2016, but it includes implementation deadlines stretching out into 2018, with the first roughly 10 weeks away. 

Since President Donald Trump finished his transition into power in the last week, many industry experts—attorneys, lobbyists and advisers—have opined that the fiduciary rule is most likely doomed. This is despite the fact that the advisory and investment industries have spent significant sums to bring business models, investing tools, sales practices and more into compliance.

The latest move in the more-than-decade-long fiduciary rule saga came Friday, when Politico published a copy of a White House memo issued January 20 by Reince Priebus, assistant to the President and chief of staff. The order has caused some conflicting interpretations among ERISA attorneys and others focused on the subject matter in that it clearly orders federal agencies to halt their work on rules that have not yet been made effective by being published in a finalized version in the Federal Register—at least until a Trump-appointed agency head grants a review and approval. It also seeks, “with respect to regulations that have been published [in final form] … but have not taken effect, as permitted by applicable law, to temporarily postpone their effective date for 60 days from the date of this memorandum.”

The order to executive agency heads continues: “Where appropriate and as permitted by applicable law, you should consider proposing for notice and comment a rule to delay the effective date for regulations beyond that 60-day period. In cases where the effective date has been delayed in order to review questions of fact, law, or policy, you should consider potentially proposing further notice-and-comment rulemaking.”

NEXT: Memo sees various interpretations 

Some have suggested this should be taken to include the DOL fiduciary rule, given the first compliance deadlines do not apply until April 2017. But as explained by David Levine, principal with Groom Law Group, it is important to note that the memorandum uses the term “effective,” not “applicable.”

“To me it is not at all obvious that this new memo would apply to the DOL fiduciary rule,” Levine tells PLANSPONSOR. “However, as you know, policy in our industry often circulates first as rumor or speculation, so I do agree that a delay in the rule’s implementation remains likely. But I don’t think this memo establishes that.”

Levine suggested it is likely that a direct order from President Trump regarding the fiduciary rule could be forthcoming imminently, and that this is likely what it would take for the fiduciary rulemaking to truly be paused or killed outright at DOL.

“Important to keep in mind is that under the Administrative Procedures Act, you can’t just say the rule is dead because you don't like it,” Levine observes. “The new administration needs a good reason and an effective process to do it. You can’t just get rid of the rulemaking without further rulemaking, in other words. Congress could do it outright, but given that it’s not a revenue item and it's not part of reconciliation, as far as I have heard, you would need 60 votes in the Senate, most likely.”

And so Levine puts a conservative bet on the likelihood that the Trump Administration will move directly, and soon, to re-propose a final rule that would substantially alter or even dismantle the rulemaking.

“The legal angle remains somewhat unclear, but there is also the business reality and the marketing angle of the fiduciary rule implementation,” Levine observes. “People have invested a lot of time and money in preparing for the rule and very few will want to just turn away from that. Some have already sold portions of their business or forged new partnerships to prepare. And so I still believe there will be a wide range of how people move forward. The vast majority will be in the middle, embracing some aspects of the fiduciary rule while resisting others.”

The full White House memo is available here on Politico’s website.