On March 1, 2017, the Department of Labor released a proposal to delay the “applicability date” of its Conflict of Interest (aka “fiduciary”) regulation by 60 days, from April 10, 2017 to June 9, 2017. Interested persons have 15 days to comment on the proposed extension.
In this article, we briefly discuss DOL’s proposed extension. We note that President Trump’s nominee for Secretary of Labor, Alexander Acosta, has not yet been confirmed. Nor, critically, has a new head of DOL’s Employee Benefit Security Administration (EBSA). Thus, while the proposed extension includes a discussion of the issues presented both by the Conflict of Interest rule and by the proposed delay in its applicability date, it’s unclear what significance that discussion will have for ultimate Trump DOL policy with respect to the regulation. And the following discussion of the proposed extension should be viewed in that context.
Terms of the proposed extension
There are (as of this writing) about 45 days until the current applicability date (April 10, 2017). In the proposal, DOL invites comment on whether losses (e.g., to retirement investors being given “conflicted” advice) resulting from the delay may outweigh gains (from possible reduced compliance costs). But, as DOL notes (with some understatement), the review of the regulation directed by President Trump’s Executive Order may take more than 45 days to complete.
If the delay in applicability were not implemented, and the rule were ultimately rescinded, “affected advisers, retirement investors and other stakeholders might face two major changes in the regulatory environment rather than one.” Thus, it is hard to see a justification for not delaying for some period.
And it’s clear – with only 15 days to comment – that DOL expects to adopt the extension relatively quickly.
Some takeaways from DOL’s discussion of the proposed extension:
The final delay may be longer (or shorter) than 60 days, or there may be further delays: DOL is asking for comments on “whether a different delay period would best serve the interests of investors and the industry.” Moreover, DOL states that its “examination of the final rule and exemptions pursuant to the Presidential Memorandum … could require more time than this proposed 60-day extension would provide.”
A critical issue will be the extent to which the industry has already adapted to the new rule: In this regard, DOL is requesting information on, among other things, “sunk costs” with respect to “compliance activities that have already been undertaken.”
The delay (or, more significantly, the ultimate decision on review) may affect only part of the new rule: DOL is asking for comments “on whether it should delay applicability of all, or only part, of the final rule’s provisions and exemption conditions. For example, under an alternative approach, [DOL] could delay certain aspects (e.g., notice and disclosure provisions) while permitting others (e.g., the impartial conduct standards set forth in the exemptions) to become applicable on April 10, 2017.” This approach may also be an option when it comes to re-considering the rule itself (and not just its applicability date).
The “one for two” executive order on new regulations does not present a problem: OMB has issued guidance explaining that for 2017 the requirements of Executive Order 13711 (which “requires an agency … to identify at least two existing regulations to be repealed when the agency publicly proposes … a new regulation”) “only apply to each new ‘significant regulatory action that imposes costs.’”
Questions that may be relevant to the reconsideration of the Conflict of Interest regulation
In the preamble to the proposed extension, DOL raises a number of issues that are likely to be part of any ultimate re-consideration of the rule. As we noted above, President Trump’s team is not yet in place at DOL, and thus this list of “key issues” is likely to change. Nevertheless, DOL identifies a number of questions that a thorough re- consideration of the rule is likely to take into account, including:
Are firms … moving to abandon or deemphasize the small IRA investor or small plan market segments? Are some aiming to expand in that segment? What effects will these developments have on different customer segments, especially small IRA investors and small plans?
Are firms making changes to their line-ups of investment products, and/or to product pricing?
Are firms making changes to their advisory services, and/or to the pricing of those services?
Has implementation or anticipation of the rule led investors to shift investments between asset classes or types, and/or are such changes expected in the future?
Has implementation or anticipation of the rule led to increases or reductions in commissions, loads, or other fees?
How costly will [Best Interest Contract Exemption] policies and procedures be to maintain?
What innovations or changes in the delivery of financial advice have occurred that can be at least partially attributable to the rule? Will those innovations or changes make retirement investors better or worse off?
Have market developments and preparation efforts … illuminated whether or to what degree the final rule and PTEs are likely to cause an increase in litigation, and how any such increase in litigation might affect the prices that investors and retirees must pay to gain access to retirement services?
Class action lawsuits may be brought to redress a variety of claims, including claims involving ERISA-covered plans. What can be learned from these class action lawsuits? Have they been particularly prone to abuse? To what extent have class action lawsuits involving ERISA claims led to better or worse outcomes for plan participants?
How has the pattern of market developments and preparation efforts … compared with the implementation pattern prior to compliance deadlines in other jurisdictions, such as the United Kingdom, that have instituted new requirements for investment advice?
Have there been new insights from or into academic literature on contracts or other sources that would aid in the quantification of the rule’s and exemptions’ effectiveness at ensuring advisers’ adherence to a best interest standard?
To what extent have the rule’s and exemptions’ costs already been incurred and thus cannot, at this point in time, be lessened by regulatory revisions or delays?
In response to the approaching applicability date of the rule, or other factors, has the affected industry already responded in such a way that if the rule were rescinded, the regulated community, or a subset of it, would continue to abide by the rule’s standards?