With deregulation seemingly high on the agenda for President-elect Donald Trump, the fate of the Department of Labor’s “fiduciary rule” is now unclear. The rule became effective in April 2016, and the first round of compliance is due to start in April 2017.
The rule expands the definition of who qualifies as a fiduciary under ERISA (the Employee Retirement Income Security Act of 1974) to include financial advisors and other professionals who provide investment advice to individual retirement accounts and ERISA plans outside of the institutional market. While financial advisors have been held to a “suitability” standard, the new rule requires them to not only meet ERISA’s broader “best interest” standard but also comply with ERISA’s broad anti-conflict rules; these would effectively prohibit a financial advisor from selling any product unless the sale meets the many conditions for exemption.
The fiduciary rule was designed, in part, to mitigate certain perceived potential conflicts of interest that the Department of Labor claimed could lead to overcharging for “advice” related to retirement assets. Banks and brokerage firms have to bear the costs of compliance and the litigation risk.
While it is unclear what action will be pursued, many expect that addressing the DOL rule will be a priority for the Trump administration in 2017 – especially given that Trump’s nominee for secretary of labor, Andrew Puzder, has been a vocal opponent of regulation in general.
TRUMP’S POSSIBLE APPROACHES TO THE DOL RULE
If the new administration decides to target the rule, what could it actually do? We see three possibilities as the most likely:
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The new secretary of labor could delay implementation of the rule. Some legal experts believe this would be as easy as announcing a delay in the compliance dates (although likely for a short period), while others argue that the labor secretary would have to seek public comment to announce the intention of delay. Either way, delaying implementation – while not a long-term solution – is likely the most straightforward option.
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Congress could strike down or suspend the rule or even amend ERISA, but this would take time and would be difficult to do given the current composition of the Senate. Republicans do not have a large enough majority to prevent a filibuster by Democrats, many of whom support the rule. There has been some discussion that Republicans could modify the filibuster rules to allow a repeal to pass, but doing so would break from decades of Senate precedent and seems unlikely.
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The Trump administration could potentially use litigation that has already been brought against the DOL rule to its advantage by declining to defend the rule in these lawsuits or, more likely, by failing to defend it vigorously. This could lead a court to vacate the rule.
How the Trump administration will proceed probably won’t be clear until Secretary of Labor nominee Andrew Puzder is confirmed (although some clues may emerge during his confirmation hearing in the Senate), along with (possibly) a new assistant secretary with jurisdiction over ERISA matters. Assuming Puzder gets confirmed and wants to address the DOL rule before its April 2017 compliance deadline, he will have to move quickly: While most labor nominees have been confirmed in late January, President Obama’s first secretary of labor was not confirmed until late February, which would give Puzder just over a month to act.
Libby Cantrill is PIMCO’s head of public policy and a regular contributor to the PIMCO Blog.
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