by Carol I. Buckmann
Changes are coming so fast it is hard to process them. Since I wrote about President Trump’s Executive Order directing the Department of Labor to re-evaluate the Fiduciary Rule (as a guest blogger published by Pen Checks), the Department of Labor proposed a 60 day delay in the effective date of the Fiduciary Rule. In response to concerns that the delay might not be final until after the Fiduciary Rule’s April 10 compliance date, the Department also issued FAB 2017-1 indicating that it will not enforce the Rule during any such gap period.. We have also had a chance to analyze the February 8 decision by a district court judge in Texas that upheld the Obama administration’s regulations in all respects. This is particularly significant since the challenge to the Fiduciary Rule was filed in Texas on the assumption that a court in Texas would be more sympathetic to the business interests fighting the Rule.
So far, all three cases challenging the Fiduciary Rule have upheld it without reservation. You would think that a 3-0 win record would have some impact on the new analysis to be performed by the Trump Department of Labor, particularly since the courts have reviewed the same issues the Department of Labor has been directed to re-evaluate. The Trump directive simply copied language used by challengers to the Fiduciary Rule in their failed court efforts to derail it. However, that isn’t necessarily the case. And the Trump directive also has a catchall at the end allowing changes to the Rule for other reasons the Department of Labor deems valid. Given the focus of this Administration, I view the language in the directive as an instruction to the Department of labor as to where it should come out. A total repeal of the Rule is still a real possibility.
Even though the Trump Department of Labor is not bound to follow the reasoning in the court decisions, it IS required to hold new hearings on its proposals with respect to the Rule. Proponents will have another chance to go through the exercise of expressing their views. And even though the court decisions aren’t binding, the bar may now be higher for the Trump Department of Labor to credibly justify a different conclusion than the courts when it moves forward on the Rule.
Can Others Step Forward to Defend the Rule? It is an interesting question whether a contrary determination by the Trump administration could be challenged as “arbitrary and capricious” given the court decisions, assuming that private parties have standing to raise this argument. If this Administration cannot get stays in pending litigation and stops defending the Rule, we may have the possibility of a future decision invalidating the Rule by default unless others are allowed to step in. Private parties may claim standing to try to step in to defend the Rule to avoid this result.
Of course, the Fiduciary Rule could still be repealed by legislation. However, Congress may well be far too busy right now dealing with issues such as replacing the Affordable Care Act to focus on repealing a rule that is extremely likely to be scaled back or eliminated anyway.
What a Mess! But the genie is already out of the bottle. Those firms that have prepared to comply with the Rule must decide how to proceed, and there have been indications that at least some of them are not rolling back their changes. This could be a good thing for retirement plan participants generally, as conflicted advice and the limits of the suitability standard that applies to brokers have been brought to the public’s attention in the years during which the Fiduciary Rule was developed. More options for fiduciary advice can only be a good thing for investors. It could also be a good thing for those who have chosen to comply voluntarily, as they can ignore the chaos caused by the Executive Order for the time being and proceed to pay attention to business.