With the retirement industry in mid-stride gearing up to comply with the Department of Labor’s conflict-of-interest (fiduciary) guidance, the election of Donald Trump to the presidency has led to more uncertainty over its implementation.
The DOL’s April 2016 release of final regulations and accompanying exemptions was intended to address what the Obama administration believes is delivery of investment advice that may not be in retirement savers’ best interest, leading to negative impacts on retirement readiness.
Having campaigned on a platform opposed to what he described as “job-killing regulations,” President-elect Trump is expected by some to take action to delay— even attempt to overturn—this guidance once he is in office. Especially problematic is the fact that the DOL’s final regulations and accompanying exemptions have their initial “applicability date” in April 2017, less than three months after Mr. Trump’s inauguration as President.
Without knowing how he will act, financial organizations have little choice but to proceed with their compliance planning, which in some cases may involve product or procedures changes, while at the same time perhaps hoping – some organizations, at least – that the guidance will not take effect.
As of this release, no official word on the issue has come from Mr. Trump’s transition team, or from the President-elect himself. But an advisor to Mr. Trump has indicated that he does not favor the guidance as released by the DOL. Following is a discussion of presidential, congressional, and legal courses of action, some of which could potentially delay, or perhaps even overturn, the DOL’s conflict-of-interest guidance.
1) Declare That the Guidance Will Not be Enforced
The most immediate action that President-elect Trump could take would be to issue an executive order stating that the guidance would not be enforced under new DOL leadership. This would parallel action taken by President Obama when he proclaimed that the U.S. Department of Justice would not enforce the Defense of Marriage Act (DOMA).
In effect, noncompliance with the DOL’s final regulations and accompanying guidance would still be a violation, but no action to punish such violations would supposedly be taken. This would likely put financial organizations in an uncomfortable position from a risk-management standpoint. And, there is no guarantee that a new administration taking office in a future year might not decide to prosecute earlier violations if permitted under statute-of-limitation rules.
2) Suspend Effective/Applicable Dates
There is precedent for a new President issuing an executive order delaying or suspending effective dates of regulations issued under a prior administration if not already in effect. Herein lies a potential semantic issue. The DOL identified June 7, 2016, as the effective date of the guidance, but April 10, 2017, and January 1, 2018, as “applicability dates” for the guidance.
This could have been a strategic move by the DOL, fixing an effective date during the Obama administration’s tenure, while at the same time giving stakeholders time—through the applicability dates—to take necessary compliance steps. Could the new President suspend the implementation of the guidance by contending that they had not actually taken effect? The answer to this, unfortunately, is not known at this time. Alternatively, new DOL officials could issue guidance that would delay or suspend the effective dates.
3) Congress Enacts Legislation to Overturn the DOL Rule
Republican policymakers are extremely pleased that the party is once again in control of both houses of Congress, as well as the White House, as was similarly the case with both the Bush and Obama administrations during their first terms in office.
However, under current Senate rules, most legislation needs 60 votes to close debate and bring a bill to a final vote. This has consistently made it more difficult for the Senate to pass legislation, as opposed to the House of Representatives, where legislation can be brought to a vote by simple majority.
If the Republican-controlled Congress attempts to pass stand-alone legislation invalidating the DOL fiduciary regulations, it would most likely face this obstacle. With a tightened majority in the Senate, it is unclear whether the Republican leadership could marshal enough votes to end debate and pass the legislation. But without the pressure of an election and the urgency of (Democratic) party unity, it is possible that the 60-vote threshold for voting could be reached with Democratic support.
4) Issue New Regulations
Both DOL and Treasury regulations are amended or replaced from time to time. These DOL conflict-of-interest regulations do just that, replacing rules issued in 1975. The process is time-consuming, however, and involves the issuance of proposed regulations, a public comment period, review of comments that may modify the proposed regulations, final review by the Office of Management and Budget, and eventual release.
In the meantime, the existing regulations would be in effect, whether federally enforced or not. Certain dimensions of the guidance, notably the Best Interest Contract (BIC) exemption, provide parties receiving fiduciary investment advice with a legal cause-of-action, exposure that would not necessarily be diminished by a federal non-enforcement posture. This would not offer the certainty that financial organizations are looking for.
5) Litigation to Delay or Halt the Fiduciary Guidance
The first of several lawsuits seeking to prevent implementation of the fiduciary guidance was recently decided. The District Court for the District of Columbia ruled in favor of the DOL in this suit brought by the National Association for Fixed Annuities (NAFA), rejecting contentions that DOL acted beyond its authority, and that it inappropriately targeted annuity products in its guidance.
This ruling is under appeal, and findings in the other lawsuits are being anxiously awaited. Some believe that it could ultimately fall to the U.S Supreme Court to settle the issues raised.
What’s Next?
While there are multiple executive, legislative, and judicial “moving parts” in this regulatory machinery, most anticipated at the moment are actions that could be taken by members of the new administration. All eyes will be on President-elect Trump, his transition team, and his nominees to lead federal agencies—particularly the DOL. Complicating the picture for financial organizations is the fact that many have already taken steps to adapt to the new DOL rules.
Furthermore, it is unclear if or when the Securities and Exchange Commission (SEC) could beef up fiduciary requirements of its own in the future. Some organizations may feel that uncertainty is as undesirable as additional fiduciary burdens.
Mike Narkoff is an executive vice president of Ascensus, the nation’s largest independent retirement plan and college savings services provider. He has been with Ascensus for over two decades, where he specializes in sales and working with retirement plan advisors.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.