When it comes to the Labor Department's new "investment advice" regulation, the first question on the table has to be: Will it survive this historic election? The answer: a definite “maybe not.”
First and maybe foremost, let's talk possible paths to revocation:
• New DOL leadership could move to revoke the fiduciary rule, possibly moving to delay effectiveness during the pendency of the process.
• Congress could move to de-fund any efforts to enforce the new rule. Presumably, Congress would want to address not only the DOL but also the IRS, as much (and in some cases all) of the enforcement authority is in the IRS' hands.
• Congress could move to put off the rule until further legislative or administrative action. Arguably, a stand-alone delay could well be the rule's death knell.
Any of these possibilities should be troubling to proponents of the new rule. We are no longer in a world in which there is a zealous administrative bent to action coupled with a supportive president. We are now in a world in which the administrative tack may well reverse, and in which legislative action of some sort is quite feasible.
In addition, a court in one of the pending challenges could stay or vacate the regulation. Some have suggested allowing judicial challenges to stand unopposed, although there may be any number of policy, process, precedent and other concerns with such an approach.
There are any number of unusual dynamics that could affect the way things go. For example:
• The regulation was opposed not only by many Republicans, but also some key Democrats.
• There are potential downsides to the regulation on the customer side as well as on the institutional side. Some customers may be orphaned, and desirable providers may raise prices or exit the business. I've also heard various officials intone that they'd rather see no advice than conflicted advice, and that higher costs may be palatable if the result is a more protective compensation structure. These are not indisputably pro-customer mantras.
• Trump advisers and backers have been openly hostile to the new regulation, and have indicated that it is on the hit-list radar. One adviser even compared the regulation to the Dred Scott decision.
• President Obama took a personal interest in the initiative, making it a part of his hoped-for legacy. Would President Trump be especially motivated to undo it?
• Unlike in the case of eliminating healthcare reform, eliminating these rules is not cumbersome. They could simply be scuttled, and replaced by the prior rules, which the market has lived with for more than 40 years. While the DOL's finalization timelines were pretty clearly crafted around concerns about the election, there was just no way to get them fully applicable before a change in administration, and therein lies the rub. It's much easier to waylay a rule that has not yet become applicable, than to unwind something that's already in place.
Importantly, returning to the status quo would not necessarily be permanent. There is the possibility of follow-on action. In this regard, one criticism has been that the wrong regulator took the reins, and that the Securities and Exchange Commission should have driven this bus. Here, the DOL, relying on a 1978 administrative reorganization, shoehorned IRAs and other non-ERISA plans into a new comprehensive set of quasi-ERISA rules, notwithstanding that Congress excluded them from ERISA coverage.
On the other hand, some have argued that the SEC sat on its hands too long, and that someone had to act. But any number of SEC types pointedly disagree, and, depending on who is chosen to lead the new SEC, there could be another voice inside the new administration supporting the new rule's demise.
If the new rule does fall, it may be more likely that the SEC will finally move forward. Indeed, some in the financial industry seem to view the reevaluation of the tone surrounding customer relationships as productive, and changes may be in the offing whether or not required by law.
If an effect of the DOL's efforts is to spur alternative regulatory efforts or otherwise bring about pro-customer changes in market practice, then the DOL's efforts may not have been in vain, even if the regulation is scuttled.
And what about institutional compliance efforts to date? They might not be wasted, if those efforts become useful in light of later regulatory efforts, or if institutions voluntarily retain certain new approaches. As to current compliance efforts, institutions are probably moving ahead, although one can wonder whether they are moving as quickly toward implementation.
In the end, will the new rule survive? No one knows. Just as there are paths to ultimate revocation, surely there are paths to survival. If the rule makes it to the applicability date, then you've got a whole different ballgame. Regardless, it's going to be … interesting.
Andrew L. Oringer is a partner at Dechert LLP.