Executive Summary
Given the party-lines debate that has revolved around the Department of Labor's fiduciary rule for the past year - ever since President Obama put the full force and backing of the White House behind the final rule - it was widely believed that once President Trump won the presidential election, it would just be a matter of time before he issued an Executive Order to delay the rollout of the regulation this April. And yesterday morning, the White House circulated a draft version of the coming Executive Order, to be signed that afternoon, that would impose a 180-day delay to the rule.
Except as it turns out, the final version of the Memorandum that President Trump signed did not actually include a provision to delay the fiduciary rule after all, despite wide media reporting to the contrary! Instead, the Secretary of Labor was merely directed to conduct a new "economic and legal analysis" to assess whether the fiduciary rule and its looming applicability date is causing harm to investors by limiting access, triggering dislocations in the retirement services industry, or likely to cause increased litigation and increased costs for consumers. And if that is the case, then the Department of Labor would undertake yet another proposed rulemaking process, with a Notice and Comment period, before proceeding. A direct Executive Order from the President to delay, though, is off the table (though notably, many had pointed out it wouldn't have been legally permissible to delay that way in the first place).
Given barely 2 months until the applicability date, it's still unclear whether the new economic analysis requirement and subsequent rulemaking process will be able to successfully delay the rule, especially since President Trump's Labor Secretary nominee Andrew Puzder hasn't yet been confirmed, and is now reportedly being delayed indefinitely due to ongoing questions about his ethics and financial disclosures paperwork. Nonetheless, a delay is still possible - and indeed, President Trump's Memorandum effectively directs the DoL to try to find some way to do so - whether by inviting a stay in one of the lawsuits, going through a "hasty" rulemaking process to at least get some delay in the applicability date on the table (and then expand into further rule changes thereafter), or getting Congress to intervene (and overcoming a Senate Democrats filibuster).
But for the time being, the fact remains that it's still "game on" for the Department of Labor's fiduciary rule. The President's Executive-Order-that-wasn't may still ultimately facilitate a delay in the rule, and/or start the process of making changes to the fiduciary rule's long-term provisions after the rule takes effect (but before any real enforcement and legal exposure kicks in). But that remains to be seen in the steps that acting Labor Secretary Ed Hugler does or doesn't take in the coming days and weeks to quickly push the required economic analysis and the start of a new rulemaking process! At a minimum, though, it's looking increasingly likely that the DoL fiduciary rule will be here to stay in some form... the only question is exactly what provisions last in the truly-final version, and when it will truly take full effect!
President Trump's Executive Order To Delay The Fiduciary Rule... That Wasn't
Yesterday (Friday) morning, Reuters broke the "news" - based on a draft version of the memo that had been circulating around - that President Trump would be signing an executive order directing the Department of Labor to implement a 180-day delay to the looming fiduciary rule. And at 1:18PM that afternoon, the President did in fact sign a "Presidential Memorandum" on the Department of Labor's fiduciary rule.
However, it turns out that the final draft signed by the President did not match the originally circulated draft! In fact, the final issuance was not an Executive Order at all, but a Presidential Memorandum (though in this context, that may be a distinction without a difference). The key difference that did matter, though, was the section that would have proclaimed a 180-day delay for the fiduciary rule... which was eliminated, along with any direct guidance to the Department of Labor about seeking a stay to the rule given the ongoing lawsuit. Instead, the actual text of the Presidential Memorandum was as follows:
Presidential Memorandum on Fiduciary Duty Rule
MEMORANDUM FOR THE SECRETARY OF LABOR
SUBJECT: Fiduciary Duty Rule
One of the priorities of my Administration is to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies
One of the priorities of my Administration is to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies
Term "Fiduciary"; Conflict of Interest Rule Retirement Investment Advice, 81 Fed. Reg. 20946 (April 8, 2016) (Fiduciary Duty Rule or Rule), may significantly alter the manner in which Americans can receive financial advice, and may not be consistent with the policies of my Administration.
Accordingly, by the authority vested in me as President by the Constitution and the laws of the United States of America, I hereby direct the following:
Section 1. Department of Labor Review of Fiduciary Duty Rule. (a) You are directed to examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice. As part of this examination, you shall prepare an updated economic and legal analysis concerning the likely impact of the Fiduciary Duty Rule, which shall consider, among other things, the following:
(i) Whether the anticipated applicability of the Fiduciary Duty Rule has harmed or is likely to harm investors due to a reduction of Americans' access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
(ii) Whether the anticipated applicability of the Fiduciary Duty Rule has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and
(iii) Whether the Fiduciary Duty Rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.
(b) If you make an affirmative determination as to any of the considerations identified in subsection (a) or if you conclude for any other reason after appropriate review that the Fiduciary Duty Rule is inconsistent with the priority identified earlier in this memorandum then you shall publish for notice and comment a proposed rule rescinding or revising the Rule, as appropriate and as consistent with law.
Sec. 2. General Provisions. (a) Nothing in this memorandum shall be construed to impair or otherwise affect:
(i) the authority granted by law to an executive department or agency, or the head thereof; or
(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.
(b) This memorandum shall be implemented consistent with applicable law and subject to the availability of appropriations.
(c) This memorandum is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.
(d) You are hereby authorized and directed to publish this memorandum in the Federal Register.
DONALD J. TRUMP
What President Trump's DoL Fiduciary Memorandum Says (And Doesn't Say)
Notably, nothing in the final version of this Memorandum actually delays the Department of Labor's fiduciary rule. It appears that the "original" plan had been to rely on the authority of 5 USC 705 to postpone the effective date of the rule... except that in reality, the final rule already went effective last year (technically on June 7th of 2016, after the requisite 60-day review period under the Congressional Review Act had closed). The looming April 10th, 2017 date is merely the "Applicability" date on which key provisions of the rule will be enforced. But once implemented and effective, there is no legal authority to delay the rule, as the White House seems to have recognized at the last minute.
Instead, what the Memorandum actually directs is for the Labor Secretary to undertake a new "economic and legal analysis" to evaluate whether the looming applicability date of the Fiduciary Rule has harmed investors through to a reduction of Americans' access to retirement products and advice, whether it has resulted in dislocations of the retirement services industry (that may adversely affect investors), or whether the Fiduciary Rule is likely to cause an increase in litigation and the prices that investors must pay to gain access to retirement services. To the extent that the new analysis reveals problems, the Labor Secretary is directed to "publish for notice and comment a [new] proposed rule rescinding or revising the Rule."
In other words, all President Trump has actually done with this Memorandum is to direct the Labor Secretary to begin a new rulemaking process, taking the existing (and already-effective) Fiduciary rule as a baseline, to either rescind or revise once the new analysis, new proposal, and new notice-and-comment phases have been completed.
Yet Another Proposed Fiduciary Rule To Come From Department Of Labor?
Yet the reality is that conducting such an analysis, and issuing a new proposal, and running a notice-and-comment period, is no small feat! Bear in mind that the Department of Labor itself issued in April of 2015 its Proposed version of what ultimately became the final rule, and took almost exactly a full year to complete the Notice and Comment period, gather the feedback, and issue a final rule. And that Proposed rule had been developed over the preceding 4.5 years, since the original Proposed rule that first came out in the fall of 2010 (which in turn had its own Notice and Comment period at the time).
In other words, it took the Department of Labor about 5.5 years, across multiple phases of proposed rules, to issue a final rule. In this case, the Department of Labor has almost exactly 2 months. And President Trump's Labor Secretary nominee, Andrew Puzder, still hasn't even been confirmed, and in fact the Wall Street Journal reports his confirmation hearing has been delayed "indefinitely" due to ongoing questions about his ethics and financial paperwork. And at the same time, the advisor reportedly closest to Trump, who was also advocating against the fiduciary rule - Anthony Scaramucci - is also no longer expected to get a role in the Trump Administration. Which means not only is the timeline very tight, but it may not even be clear who's leading the charge.
Fiduciary Rule Delay Options That Still Remain (By April 10th?)
Notwithstanding this challenge, Acting Secretary of Labor Ed Hugler did issue a brief statement just hours after President Trump signed the official Memorandum, stating that the DoL "will now consider its legal options to delay the applicability date".
Still, as it stands today, the Department of Labor's fiduciary rule still has not been delayed, and the White House appears to have directly acknowledged that it doesn't have the authority to delay the rule at this point, given its decision to remove the 180-day delay language from the final version the President signed.
Nonetheless, there are still a few potential tactics that could result in at least a partial delay from here.
1) Invite a stay from the court on one of the pending lawsuits. The first option, initially reported by RIABiz the day after President Trump's inauguration, is that the Department of Labor, given the lawsuits against it that are currently underway, could invite the court to stay the case - and potentially the rule - for a period of time, ostensibly while it further formulates its legal "defense" and/or begins to go through the proposal and notice-and-comment periods. The end result of which might be at least a temporary delay in the applicability of the rule. However, there is still some debate about whether this could actually delay the applicability date (or just the legal proceedings up until the applicability date hits), and this legal tactic could not be used indefinitely; in some "reasonably" timely manner, the courts would still expect the case to resume. And while the tactic might still be attempted, at this point it's virtually the only known tool left in the toolbox for the new Department of Labor leadership, and it's still unclear whether the stay could last long enough to actually undertake the requisite new economic and legal analysis, to draft a new proposed rule, to complete the Notice and Comment period, and actually finalize a new alternative version of the rule (or rescind it altogether). In addition, a ruling is expected in the coming week on what is arguably the biggest DoL fiduciary lawsuit, a consolidation of those filed by the U.S. Chamber of Commerce, SIFMA, ACLI, NAIFA, and more... and obviously, requesting a stay in the case is a moot point once the ruling is issued!
2) An "expedited" proposed rule that suspends/extends applicability date. The second option is that the Department of Labor could try to hurry through its economic and legal analysis as speedily as possible, and then quickly proposed a "revised" rule making perhaps just minor changes... including pushing back the applicability date. This would still appear to require the Department of Labor to issue public notice and complete a comment period, and then get a final rule issued, all by April 10th, which may not be administratively feasible. Or at least, to complete its legal and economic analysis (perhaps focusing on the "easiest" point of contention, which is the third clause about the Fiduciary rule causing an increase in litigation), issue a proposed rule for notice and comment, and then try to delay the applicability date of the "old" rule pending completion of the notice and comment period of the newly-proposed rule. Pushing through a rule change so quickly, though, even if "just" for a change as minor as an adjustment to the applicability date, invites at least the potential of a legal challenge from the fiduciary advocates that the change was too hasty, arbitrary, and capricious, and in violation of the Administrative Procedures Act; after all, many industry companies are suing the Department of Labor claiming that its 5.5 year rulemaking process since 2010 was "too hasty"... so it would be more than a little ironic for the Department of Labor to now complete a rule-change process (which includes a delay) in barely 2 months! Expect a lot of people on both sides of the issue to be scrutinizing the Administrative Procedures Act this weekend, trying to figure out exactly how far into a new rulemaking process the DoL has to go in order to "legitimately" delay the applicability date of the already-effective rule.
3) A legislative fix from Congress. The only other viable option to entirely halt the rule would be an Act of Congress, which has the authority to override an existing regulation created by the Department of Labor and the executive branch (either by eliminating the regulation, or at least instituting an extended 2-year delay). However, the Democrats still have enough votes in the Senate to filibuster the legislation. And with Senator Warren both issuing a letter to banks asking whether any have proceeded far enough in their fiduciary implementation that they'd like it to move forward without delay, and re-issuing its report cataloguing the "salacious" sales incentives/prizes offered to annuity agents selling into retirement accounts, it appears that notwithstanding the amount of fighting already currently happening between the Democrats and Republicans on a wide range of issues in Washington, the Democrats are still prepared to fight to keep this particular rule on the books (especially since there's a clear endgame - they just have to make it to the April 10th applicability date, and then all firms will have had to comply, and legislation to delay the applicability date will be a moot point).
Overall, the biggest problem to delaying the rule remains that all of these strategies take time, and with the final applicability date just two months away, Financial Institutions have to continue to fully prepare for the possibility that the rule won't actually be stopped. And of course, the closer we arrive towards the applicability date, and the more actual compliance processes and systems are implemented, the less relevant it is to actually delay the rule anyway... because at some point, all the firms will have fully implemented their new compensation structures and compliance procedures anyway, which can't be turned off quickly (in the same way that it's taken a full year of intense development work at many firms just to get those systems up to speed in time).
Confusion Reigns On The Fiduciary Rule's Path Forward From Here
The irony of how President Trump's intervention has played out is that his delaying-Executive-Order-that-wasn't has angered the fiduciary advocates (and much of the mainstream media) who are characterizing the potential rollback as a consumer loss, while the firms that have opposed the rule find themselves facing even more uncertainty above whether the Trump administration is really aiming to stop or delay the rule, or simply begin a rulemaking process to alter it at some point in the future.
Certainly, at a minimum, if the rule is not delayed, the groundwork is clearly being laid to at least alter the rule later. In fact, the guidance in the Presidential Memorandum to "rescind or revise" (emphasis mine) already clearly contemplates the potential that the end game will be making adjustments to the fiduciary rule after it becomes applicable. And from that context, there will still be another battle wages between those for and against the fiduciary rule, about this next round of potential changes, from whether the extent of conflict-of-interest disclosures might be lessened, to a potential widening of the Best Interests Contract exemption, and especially the possibility that the DoL eliminates or at least alters the provision requiring that firms using the Best Interests Contract Exemption must have agreements that leave the door open to a class action lawsuit against them (whereas the industry would likely want to revert this to the existing "industry standard" of mandatory arbitration in all scenarios, which dramatically reduces the legal liability risk for the Financial Institution, but would alas also result in the loss of an important consumer protection that was created by having the class action clause).
In any event, though, the bottom line is simply this: notwithstanding Friday's headlines, it's still game on when it comes to the Department of Labor's fiduciary rule. Of course, even if the rule is fully implemented, there is now a material risk that it will be altered and "watered down" later (and still potentially before its full enforcement date at the start of 2018). And there's still the possibility that it won't even make it to the April 10th finish line before a new rulemaking process begins to replace it with something less threatening to the industry, as there are tactics that its opponents can still deploy between now and then, which should become evident when we see the haste (or not) with which the Department of Labor pursues its new "economic and legal analysis". Nonetheless, the one most popular option to stop the rule from rolling out - for the President to simply intervene and delay the rule - appears to be definitively off the table now (though as discussed previously on this blog, it really never was a viable option), and while the other options remain, they will take time to implement... when there just isn't much time left.
So what do you think? Should the fiduciary rule still proceed by April 10th? Is a delay necessary or appropriate? What do you think will happen over the next two months, and the coming year, to the fiduciary rule? Please share your thoughts in the comments below!
