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Prospects of fiduciary rule taking root slowly fading

David Levine
David Levine calls the situation ‘a bit of a nail-biter for many.’

The landmark fiduciary rule is being delayed until early June, with the prospect of indefinite limbo increasingly likely.

“What this means to plan sponsors is that they don't have to rush,” said Lynn Dudley, senior vice president of global retirement and compensation policy for the American Benefits Council in Washington.

Sponsors and service providers have been reviewing and adjusting their compliance processes ahead of the rule's original deadline of April 10, with more monitoring of fund menus, costs and interactions between defined contribution participants and service providers. That all takes time, Ms. Dudley said.

“Since no one knows the final outcome, employers and providers are going to likely keep moving forward to make sure they are in compliance at the end of the day,” Ms. Dudley said.

“It's feeling like a bit of a nail-biter for many,” said David Levine, a partner at Groom Law Group, Washington, who advises plan sponsors and service providers. “Because of all the procedural steps involved, they can't be sure it will be delayed. And some people have already made fundamental business changes. Each one is a little bit different.”

The Obama administration spent nearly six years developing an updated standard of fiduciary duty that had been unchanged for 40 years. Formally called the conflict-of-interest standard, it requires anyone giving retirement investment advice to act in their client's best interests. Critics have challenged the rule as too broad and beyond the scope of the Department of Labor, but several courts have upheld it.

The prospect of delay came March 1, when the Department of Labor proposed extending the implementation date to June 9, and gave the public 15 days to comment. The Office of Management and Budget, which approved the proposal, also is expected to approve that extension. But regulatory experts say the more telling part of the proposal was allowing 45 days for public comment on a Feb. 3 memorandum from President Donald Trump that told DOL officials to reconsider the rule — period.

Mr. Trump's memorandum, which ordered an updated economic and legal analysis, gave Department of Labor officials plenty of grounds to revisit the rule. He instructed them to consider not only whether it is likely to harm investors saving for retirement but also if it has led to “dislocations or disruptions within the retirement services industry,” and could lead to more litigation or increased costs.

If any of those concerns is raised, Mr. Trump said, the department should rescind or revise the rule. Citing the risk that “advisers, retirement investors and other stakeholders might face two major changes in the regulatory environment rather than one,” the DOL said the 60-day delay until June 9 “would make it possible for the department to take additional steps,” including a review, additional extensions, revising or even revoking the rule. The proposal also noted the review ordered by Mr. Trump “may take” more than 45 days.

Unlike a draft version of the presidential memorandum that called for a 180-day delay, the final one left the time open-ended.

Supporters of the fiduciary rule see it as much more than a delay. “It is ultimately designed to kill the rule,” said Rep. Maxine Waters, D-Calif., the ranking member of the House Committee on Financial Services.

“The new administration is working for Wall Street firms and other corporations. They don't really give a hoot about retirement savers,” said Kathleen M. McBride, a founder of the Committee for the Fiduciary Standard and an accredited investment fiduciary analyst. Still, she said, “I do think investors have gotten wiser, and the firms that have put plans in place will do well.” Investor advocates, she promised, “are not going to be silent.”

Regardless of what ultimately happens to the fiduciary rule, “sponsors must be attentive to changes in record-keeper policies,” said Stephen McCaffrey, president of the Plan Sponsor Council of America, Chicago. “A lot of the providers were giving plan sponsors new contracts. It might be the type of thing that could be very beneficial for plan sponsors.

“In a lot of respects, the cat is out of the bag,” said Mr. McCaffrey. “I just can't see them doing away with it entirely.”

Andrew Oringer, head of the Dechert LLP law firm's national fiduciary practice in New York, agreed the concept could endure.

“It's very possible that this administration will ultimately conclude that some kind of "best interest' regulation would be appropriate. A standard applicable to all types of accounts could have the broader effect of rationalizing the market regarding these matters. And the market has been generally moving more toward a "best interest' standard anyway. You've got alternatives that would be more principle-based.”

Kurt Schacht, New York-based managing director for standards and advocacy with the CFA Institute, noted “the industry has been forced to prepare for it, and most of them are pretty far along. There's nothing to prevent a firm from imposing it themselves.”

Mr. Schacht, who chairs the Securities and Exchange Commission's investor advisory committee, thinks a likely replacement for the rule will be “an SEC-first approach. Maybe in the final analysis, we get a more comprehensive rule,” he said.

Seth Safra, a partner in law firm Proskauer Rose LLP's employee benefits and executive compensation group in Washington, does not see full rescission as a foregone conclusion. The DOL “could very well come out and say, "We are going to change it.'

“The statute hasn't changed in over 40 years. There are a lot of ways they could lead with this, with a lot more nuance,” said Mr. Safra, who noted it took the previous administration many years to produce its rule. “Realistically, it is going to take longer than 60 days to figure this out.”

David Tittsworth, a lawyer with Ropes & Gray LLP and former president and CEO of the Investment Adviser Association in Washington, sees more drama ahead. “There could be legislative or judicial developments in the coming days and weeks that affect the rule. To say the least, the status of the DOL's rule is a moving target and interested parties need to stay tuned.”

This article originally appeared in the March 6, 2017 print issue as, "Prospects of fiduciary rule taking root slowly fading".