Department of Labor issues proposal to delay Fiduciary Rule

On Thursday, March 2, 2017, the Department of Labor published a proposal that would delay the Fiduciary Rule by 60 days; comments will be accepted until March 17, 2017

Introduction

On February 3, 2017, President Donald J. Trump issued a memorandum (the “Presidential Memorandum”) directing the Department of Labor (DOL) to examine its “Conflict of Interest Rule” on fiduciary investment advice (the “Rule”) and related prohibited transaction exemptions (PTEs) to “determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.”1 The Presidential Memorandum also raised concerns that the Rule “may not be consistent with the policies of [the] Administration.”

The Presidential Memorandum did not directly delay or order a delay in the Rule’s initial April 10, 2017 applicability date, but directed the DOL to prepare an “updated economic and legal analysis concerning the likely impact” of the Rule.

If the DOL makes an affirmative determination pursuant to these considerations or if it concludes for any other reason that the Rule is inconsistent with the priorities outlined in the Presidential Memorandum, it is directed to publish a proposed rule to rescind or revise the Rule, as appropriate and consistent with law.

On March 2, 2017, the DOL published in the Federal Register a proposed rule that would extend the applicability date of the Rule and PTEs for 60 days (i.e., until June 9, 2017) to allow the DOL to “address questions of law and policy.”2

Comments on the proposal to extend the initial April 10, 2017 applicability date of the Rule and PTEs are due by March 17, 2017 (the proposal would not amend the full compliance date of January 1, 2018).  The proposed 60-day delay would be effective on the date of publication of a final rule in the Federal Register.

Notably, in addition to seeking comments as to whether the benefits of the proposed 60-day delay justify its costs, the DOL also invites comments on “whether it should delay applicability of all, or only part of the [Rule’s] provisions and exemption conditions.”3 For example, the proposal notes that, under an alternative approach, the DOL could delay certain aspects (e.g., notice and disclosure provisions) while permitting others (e.g., the impartial conduct standards set forth in the PTEs) to become applicable on April 10, 2017.  Finally, the DOL seeks comments on whether a different delay period would “best serve the interests of investors and the industry.”4

timeline-3-2-2017

Analysis

The DOL believes that it may not complete the examination required by the Presidential Memorandum before April 10, 2017.  Accordingly, in order to prevent market participants from facing “two major changes in the regulatory environment rather than one,” which the DOL argues “could unnecessarily disrupt the marketplace,” it maintains that a 60-day delay could “guard against this risk.”5

In addition, the extension could allow the DOL to take additional steps—such as completing its examination pursuant to the Presidential Memorandum, implementing any necessary additional extension(s), and proposing and implementing a revocation or revision of the Rule—without the Rule becoming applicable.

Pursuant to Executive Order (EO) 12866, the DOL determined that the proposed extension is an “economically significant” regulatory action because it would have an effect on the economy of over $100 million in at least one year.  As required by the EO, the DOL considered the costs and benefits of the proposed delay, and concluded that, using the inputs and methods that appear in its April 2016 regulatory impact analysis (RIA), a 60-day delay in the applicability date could reduce investor gains by $147 million in the first year.6 However, the DOL found that a 60-day delay could provide the industry with an estimated $42 million in savings from compliance costs.7

Noting that it considered the impact of a longer extension of the applicability date, the DOL found that a 180-day delay in the applicability date could reduce investor gains by $441 million in the first year, but could provide the industry an estimated $126 million in savings from compliance costs.

Comments invited on DOL analysis

As the DOL continues to examine the Rule pursuant to the Presidential Memorandum, it invites public comments that “might help inform updates to its legal and economic analysis, including any issues the public believes were inadequately addressed in the RIA.”8 The proposed rule sets forth several relevant questions for interested parties to consider, including:

  • Do firms anticipate changes in consumer demand for investment advice and investment products? If so, what types of changes are anticipated, and how will firms respond?
  • Are firms making changes to their target markets, their line-ups of investment products, and/or their advisory services?
  • Has implementation or anticipation of the Rule led investors to shift investments between asset classes or types?

Comments on the broader purpose of examining the Rule and PTEs in response to the Presidential Memorandum are due by April 17, 2017.

The DOL notes that, upon completion of its examination, it may decide to allow the Rule and PTEs to become applicable, issue a further extension of the applicability date, propose to withdraw the Rule, or propose amendments to the Rule and/or the PTEs.

delay-comment-requests-002

What does this mean for the future of the Rule?

Until the DOL issues a final rule delaying the applicability date, the Rule remains effective and the substance of it remains intact.

Substantial changes to the Rule or a repeal will likely require the DOL to initiate the full rulemaking process, including a public notice-and-comment period.  The formal rulemaking process would also require substantial effort and time from the DOL that may be subject to litigation.

Considerations for our clients

While the future of the Rule remains unknown, it has already acted as an accelerant for greater transparency.  Given this trend and the uncertain impact of the directive to further study the impacts of the Rule, firms should continue to prioritize and implement the most crucial aspects of adhering to the DOL Fiduciary Rule, including, as we have previously discussed:

  • Evaluating in-flight initiatives to identify which strategic or business priorities will remain regardless of the Rule’s future (e.g., product platform rationalization, business model transformations, technology enhancements, changes to compensation structures of both financial advisers (FAs) and products/platforms, timing of account migrations)
  • Assessing the cost of completing and delaying full implementation of in-flight initiatives versus the cost of cancelling and restarting if further Rule delays do not occur
  • Evaluating and adjusting timelines for critical internal and external communications and documentation (e.g., sending of transition disclosures, entering into negative consent contracts with customers, communications to FAs announcing changes and strategic decisions)
  • Evaluating and adjusting timelines for introduction of new share classes and products, including regulatory approvals and marketplace launch
  • Engaging in contingency planning across various Rule outcome scenarios (e.g., 60-day delay, six-month delay, indefinite delay, full repeal)
  • Contacting service providers with solutions on which DOL Rule compliance may depend, to understand how they may modify their solutions and timelines in response to the potential delay
  • Addressing the impact of the continuously evolving business landscape and industry trends, regardless of changes to the Rule:
    • Availability of new mutual fund T-shares and “clean” share classes
    • Reductions in product fees and expenses
    • Renegotiating and streamlining revenue sharing arrangements
    • Migration toward fee-based advisory
    • Migration toward passive investment strategies
    • Changes to how financial advisers are paid and how investors pay for services
    • Increase in demand for robo-advisors and other digital solutions

Next steps

Institutions that will be affected by the Rule may contact Deloitte with questions about the Rule and activities to support planning, preparation, implementation and compliance.  Deloitte will continue to analyze the proposed delay and related developments, and will release a more detailed summary and point of view on industry and institutional implications as information becomes available.

Contacts:

Susan Levey
Managing Director | Deloitte Advisory
Deloitte & Touche LLP

Maria Gattuso
Principal | Deloitte Advisory
Deloitte & Touche LLP

George Hanley
Managing Director | Deloitte Advisory
Deloitte & Touche LLP

Scott Parker
Principal
Deloitte Consulting LLP

Daniel Rosshirt
Principal
Deloitte Consulting LLP

Karl Ehrsam
Principal | Deloitte Advisory
Deloitte & Touche LLP

Bruce Marcus
Managing Director | Deloitte Advisory
Deloitte & Touche LLP

Josh Uhl
Senior Manager | Deloitte Advisory
Deloitte & Touche LLP

Sean Cunniff
Specialist Leader
Deloitte Consulting LLP

Sameer Shroff
Senior Manager
Deloitte & Touche LLP

Craig Friedman
Senior Manager | Deloitte Advisory
Deloitte & Touche LLP

Jared Bixler
Senior Manager | Deloitte Advisory
Deloitte & Touche LLP

Alex LePore
Senior Consultant| Deloitte Advisory
Deloitte & Touche LLP

1 The White House, “Presidential Memorandum on Fiduciary Duty Rule,” (February 3, 2017), available at https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-memorandum-fiduciary-duty-rule.
2 Department of Labor, “Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice; Best Interest Contract Exemption ((Prohibited Transaction Exemption 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Prohibited Transaction Exemption 2016-02); Prohibited Transaction Exemptions 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128),” Proposed Rule, 82. Fed. Reg. 12319, (March 2, 2017), available at https://www.gpo.gov/fdsys/pkg/FR-2017-03-02/pdf/2017-04096.pdf.
3 Id, at 12321.
4 Id, at 1231.
5 Id, at 12320.
6 Id, at 12320.
7 Id, at 12321.
8 Id, at 12324.

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