President Trump Issues Memorandum Delaying Fiduciary Rule
Friday, February 3, 2017 - The waiting and speculation as to the actions that the Trump Administration might take with respect to the DOL Fiduciary Rule ("Fiduciary Rule") has ended. This afternoon, President Trump issued an Executive Memorandum that delays the implementation of the Fiduciary Rule for 180 days while the DOL conducts a review and determines whether and how it should go into effect. If the DOL determines that the DOL Fiduciary Rule is inconsistent with Trump Administration policy, it may issue for notice and comment a proposed rule rescinding or revising the DOL Fiduciary Rule and the BICE Exemption. The DOL may also take action to stay the litigation currently challenging the DOL Fiduciary Rule and its exemptions. There may be legal challenges to this action that will be brought by proponents of the DOL Fiduciary Rule under various theories, such as a possible violation of the Administrative Procedures Act.
One possible effect is that the SEC becomes more involved in the process, so that there would be a uniform definition of fiduciary and a uniform standard enforced by both the DOL and SEC. It is worth noting that a bill known as the Financial CHOICE Act, passed by the House Financial Services Committee in September 2016, proposes the incorporation of the DOL Fiduciary Rule into the Retail Investor Protection Act (a bill passed by the House in 2016) and requires the SEC to take the driver's seat on fiduciary rulemaking.
Before the review process has even commenced, it is premature to speculate as to the conclusions that the DOL will reach, although it is highly unlikely that the DOL Fiduciary Rule and related exemptions such as the Best Interest Contract Exemption ("BICE") will survive in their current form, in light of President Trump's clear willingness to dismiss government officials unwilling to conform to his agenda.
So...what are the appropriate actions for entities to take that have already devoted considerable time and resources to meeting the April 10th implementation date?
Even if the DOL concludes that the best course of action is to return to the rules in effect prior to the enactment of the DOL Fiduciary Rule and BICE, it would not necessarily be the best course of action to undo all of the compliance steps that have already been taken.
To the extent that the analysis of the processes, protocols, and procedures necessitated by the DOL Fiduciary Rule have shown areas of inefficiency, there is little reason to discontinue the implementation of these corrections. Examples of this would include the on-boarding process and the documentation that clients are required to review and execute. Also, if reducing the size of the investment platform makes it more efficient and easier to monitor the system, that process should continue as well, as should the training and education of financial advisors with respect to fiduciary responsibility and acting in the best interest of their clients.
Some of the actions that have been accelerated by the DOL Fiduciary Rule reflect an industry trend towards an advisory rather than a brokerage based platform. Moreover, the move towards more transparent fee disclosures may reflect new industry standards for "best practices."
Focusing more narrowly upon compliance issues, transition-period documentation should be retained, although its final form may need to be modified to reflect any future DOL action.
Finally, it is important to keep in mind that the primary enforcer of violations of the DOL Fiduciary Rule and BICE was to be the private tort bar, rather than the DOL or IRS. Even if BICE is repealed, the tort bar will seek and exploit various causes of action. For example, compensation grids that have the effect, even if unintended, of incentivizing investments in particular funds may be challenged.
As the regulatory process continues, we will keep you posted. Stay tuned...