With the Office of Management and Budget’s approval of the Labor Department’s 18-month fiduciary rule delay having most assuredly kicked in (approval was anticipated within a week or two at press time in early November), should advisors put the brakes on compliance?
For advice providers, “it’s always been full speed ahead” on compliance with Labor’s fiduciary rule, Erin Sweeney, counsel with Miller & Chevalier in Washington, told IA in a Nov. 8 interview.
“A delay doesn’t mean there will be monumental changes” to the rule, Sweeney continued. Her clients, which include retirement plan investment committees, intermediaries and other advice providers, “are done or nearly done” with their compliance, she added.
Investment committees, however, “are saying press the pause button” on compliance, she explained, because they are “concerned about conflicted advice for plan participants. [They’re] not going to allow their recordkeepers to give advice until [they] know more” about what’s in the final rule.
Some recordkeepers “that used to provide only recordkeeping services are now seeking to provide fiduciary investment advice to 401(k) plan participants,” Sweeney said. “Although the recordkeepers are providing the advice for ‘free,’ plan investment committees are concerned about potential conflicted advice because the recordkeepers may steer the 401(k) plan participants into investments that generate fees for affiliates of the recordkeepers.”
Accordingly, she continued, investment committees “are holding the line on recordkeepers who want to provide fiduciary investment advice until the investment committees analyze the final fiduciary rule.”
Indeed, the 18-month delay as finalized would extend the applicability date of the rule’s best-interest contract exemption, the 84-24 exemption dealing with sales of annuities and Principal Transactions exemptions from Jan. 1, 2018 to July 1, 2019.
The Labor Department filed its proposed rule, titled “18-Month Extension of Transition Period and Delay of Applicability Dates; Best Interest Contract Exemption; Class Exemption for Principal Transactions; PTE 84-24,” with OMB on Nov. 2.
Labor Secretary Alexander Acosta told a Minnesota court in a filing in the case brought by Thrivent Financial for Lutherans against the fiduciary rule, that it would likely take three weeks from the Nov. 2 filing date for OMB to approve the delay. Industry officials anticipated a speedier two-week approval.
But as Fred Reish, partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group in Los Angeles, noted, he wants to see “if any additional conditions are imposed and whether the nonenforcement policy is extended,” under the final rule that’s approved by OMB.
Lisa Bleier, managing director and associate general counsel at the Securities Industry and Financial Markets Association, a fiduciary rule opponent, told IA that a delay “will help provide certainty to investors and avoid confusion and cost associated with continued piecemeal delays.”
While SIFMA’s member firms “have long advocated for the creation of a best interest standard which protects the client and client’s choice,” Bleier added, the Securities and Exchange Commission “should also now take the lead on a broad, principles-based standard of conduct that does not limit the product offerings in the market.”
Indeed, SEC Chairman Jay Clayton told lawmakers in October that the agency is working on its own fiduciary rule and coordinating with Labor. He also said a SIFMA conference in late October that the SEC’s fiduciary rule wouldn’t supplant Labor’s.
Labor has “their process, we have our process. …we have to respect this,” Clayton said, adding that “at the end of the day we’re all going to operate in this” fiduciary space.
“The SEC has a responsibility to be a leader in this space, DOL has a responsibility and the states have a responsibility. We need to cooperate. At the end of the day, hopefully, we’ll end up in a place where the investor is satisfied,” he said.
Lawsuits on Horizon?
Once the 18-month delay is approved, industry officials anticipate lawsuits will be filed against Labor. Micah Hauptman, financial services counsel for the Consumer Federation of America, a staunch fiduciary rule supporter, told IA that CFA would have to see the final rule as approved by OMB “before making any further determinations on next steps.”