Just as broker-dealers and advisors were ramping up their compliance with the Department of Labor’s fiduciary rule, the surprising win by Donald Trump could throw the rule’s viability (and applicability) into question.
Advisors, lawyers and industry officials wasted little time after the election results in early November in surmising what measures a Trump administration — as well as a GOP-controlled Congress — could take to derail DOL’s rule or delay its two compliance dates (April 2017 and January 2018). Anticipated moves include the rule being halted or repealed in early 2017, to some parts of the rule being “gutted,” to others predicting little to no changes.
Trump’s win coupled with the Republican takeover of both chambers of Congress comes on the heels of DOL releasing in late October its first batch of frequently-asked-questions guidance about the rule.
While at least one of the legal challenges to torpedo the DOL’s fiduciary rule — or cause a delay in its April compliance date — failed as of press time in mid-November, advisors were still wading through the FAQ guidance to get a better handle on how to comply with the rule.
Fiduciary expert Don Trone, founder and CEO of 3Ethos, a vocal opponent of DOL’s rule, said that while it takes more time to take a regulation off the books than it does putting one on, the DOL rule is “going to require funding and enforcement support. If funding and support is withheld, the rules will begin to slip into the background.”
Michael Kitces, director of wealth management and partner of the Pinnacle Advisory Group, added that because DOL’s rule was so “unpopular” with Republican lawmakers, he can’t imagine that it will remain totally intact. Under a President Trump, “we’re going to see the rule get gutted. We’re going to see some of the tough line items get killed.”
The No. 1 item will be the industry lobbying Congress “to kill that class-action lawsuit provision” and allow financial institutions to “bind people in arbitration, which is what the industry has always done,” Kitces said.
Still others, like attorney Brian Hamburger of the regulatory consulting firm MarketCounsel, go even further, predicting that a new Labor chief appointed by Trump will be eager to halt the rule’s implementation or issue an “interim final rule” overturning the existing one. Hamburger opined that the current rule will be “repealed” before its April effective date.
Meanwhile, Back in Court …
In late October, Judge Randolph Moss denied the National Association for Fixed Annuities’ request for a preliminary injunction to stay DOL’s rule in his U.S. District Court for the District of Columbia courtroom. Moss’ 92-page ruling instead favored Labor on the merits in upholding its conflict of interest rule.
Opponents of DOL’s rule are still holding out hope that the cases brought in Kansas by insurer Market Synergy, as well as the one brought by nine plaintiffs in Texas, stand a chance of halting the rule’s progress. As of press time Judge Daniel Crabtree in Kansas had not yet rendered a decision in the Market Synergy case, and oral arguments were to be heard Nov. 17 in the Texas court of District Judge Barbara M.G. Lynn.
[Editor's Note: After press time, Lynn heard two of the eight amicus briefs filed in the court, and one observer reported the judge "gave DOL a very hard time."]
NAFA acted quickly in saying that it would appeal Moss’ decision denying the annuity group’s request to block DOL’s fiduciary rule. The only catch: NAFA must first get Moss’ permission.
Pamela Heinrich, NAFA’s general counsel, said in a Nov. 7 interview that NAFA’s attorneys will likely ask Moss for a preliminary injunction pending the appeal. “We can’t go right upstairs” to the appeals court with the motion, Heinrich said. “We may ask for a status conference so that we could get this before [Moss] with the other party [DOL] and move this along. We’re feeling the pull of time.”
Should Moss deny NAFA’s request to appeal his decision to a higher court, “then that opens the door to essentially filing a motion to the D.C. Court of Appeals to request a stay [of Moss’ decision] pending the appeal of the underlying” decision, according to Heinrich.
Chip Anderson, NAFA’s executive director, noted that while NAFA was “obviously disappointed” by Moss’ decision, “we have always assumed this case would get decided by a higher court and we are pleased the issues will get de novo review by the Circuit Court.”
NAFA’s request for a “de novo review” means the appellate court will consider the case without being bound or influenced by the lower court’s decision. NAFA is also seeking an expedited review.
Anderson added that NAFA “remains optimistic” that the courts “will ultimately find the rule to be an overreach by Labor that is inconsistent with existing tax and financial services laws,” and that NAFA believes DOL’s rule “will disrupt the distribution and availability of fixed annuities and have a particularly adverse impact on the low- and middle-income consumers.”
Erin Sweeney, of counsel at the Washington-based law firm Miller & Chevalier and a former DOL attorney, said in an interview that NAFA’s goal with an expedited appeal is to “get a split in the circuits to get an appeal to the Supreme Court.”
While Moss’ decision was made in favor of DOL, Judge Crabtree in the District of Kansas, who heard oral arguments on Sept. 23 in the second case against Labor’s rule brought by Market Synergy, “appeared sympathetic to Market Synergy’s arguments that independent marketing organizations (IMOs) and independent agents will suffer irreparable harm” unless DOL “is enjoined from enforcing Revised PTE 84-24 with respect to fixed indexed annuities,” Sweeney observed while at the hearing.
Labor FAQs Answer Some Questions, Raise Others
As expected, the first batch of Conflict of Interest Exemption FAQs, released by DOL in late October, did not revise or alter the rule, but some concerns and lingering questions remain about complying with it. DOL has said more FAQs will be coming in the months ahead.
For instance, the DOL’s guidance on recruitment bonuses tied to “back-end” sales targets is causing some stir, said Joshua Waldbeser, of counsel with Drinker Biddle & Reath.
“DOL says that they’re not allowed, but that there will be relief for arrangements in existence on the date the FAQs were issued,” Waldbeser said, “but what happens if they’re entered into soon after the FAQs were issued?”
For instance, “firms could have had offers out to advisors that were then signed soon after the FAQs, and it’s hard to see how firms wouldn’t be bound to follow them,” he explained. “Basically, if the relief really is just intended for pre-existing arrangements on the exact day of the FAQs, that’s a pretty abrupt stop, and might not be realistic in all cases. We hope the DOL will provide more flexibility here.”
A lingering issue that still isn’t completely resolved, Waldbeser continued, is whether the “lite” best interest contract exemption (BICE-lite) “can be used for IRA rollover and IRA transfer recommendations where commissions and similar amounts are received, but where the fee the investor pays is offset by these amounts.”
According to the FAQs, BICE-lite’s “definition of a ‘level-fee fiduciary’ does not include level-commission models, but whether it might include commission offset models is not squarely addressed.”
— Read SEC’s White: No SEC Fiduciary Rule Coming Before January on ThinkAdvisor.