The Labor Department's fiduciary rule has partially taken effect, but its future, much like its past, is shrouded in uncertainty.
Two provisions of the measure, which requires financial advisers to act in the best interests of their clients in retirement accounts, become applicable today. One expands the definition of who is a fiduciary, and the other establishes impartial conduct standards.
How much of the rest of the rule will survive is an open question.
In late May, Labor Secretary Alexander Acosta said that part of the rule would go into effect while the agency continues to review the entire regulation under a mandate from President Donald J. Trump that could result in its revision or repeal.
"This entire process has been defined by uncertainty," said Josh Lichtenstein, an associate at Ropes & Gray. "Even as we have partial implementation on June 9, that uncertainty will still remain."
The final rule was released in April 2016, nearly six years after it was first proposed by the Obama administration. The initial implementation date of April 10 was delayed for the Trump administration's reassessment, which likely will continue until the Jan. 1 implementation deadline for the entire rule. But the DOL has indicated that the Jan. 1 deadline may be pushed back.
Unlike other Obama administration regulations finalized closer to the November election, Congress could not scrap the fiduciary rule through a special legislative process. Instead, the measure is being subject to what may become a lengthy rethink.
"This is uncharted territory," said Charles Field, a partner at Sanford Heisler Sharp. "I've never seen anything like this."
The volatility surrounding the DOL rule amped up two weeks ago when the Securities and Exchange Commission released a request for comment about fiduciary duty. With that move, the SEC jumped back into an issue it had been sidestepping since the Dodd-Frank financial reform law gave it the authority to promulgate a uniform standard for retail investment advice.
New SEC Chairman Jay Clayton said that he was in part responding to Mr. Acosta's offer to work together on a fiduciary regulation. Critics of the rule say that the SEC is the appropriate agency to set advice policy, while supporters of rule counter that it can cover insurance and other products that the SEC doesn't regulate.
"Predicting the final outcome is complicated by the fact that the SEC appears ready to enter the arena," said Hillel Cohn, a partner at Morrison & Foerster.
Although political divisions at the SEC have prevented the agency from acting on fiduciary duty in the past, the fact it has reasserted itself "adds a whole different layer to the calculus" about the DOL rule, said Erin Sweeney, a member at Miller & Chevalier.
"That itself could be a plausible reason for the DOL to take a look at its process or [call for a] joint process," said Ms. Sweeney. "It could grind [the DOL rule] to a halt."
For now, the two provisions that have gone into effect will govern adviser interactions with clients in retirement accounts. Under those provisions, advisers must give advice that is in the best interests of their clients, charge reasonable compensation and avoid "misleading statements" about investment transactions and what they're being paid.
CATCHING A BREAK
Investment advisers, who already adhere to a fiduciary standard, won't have to make nearly as big a change to their practices as brokers, who meet a less stringent suitability standard, and insurance sales professionals, who are regulated by states.
But those who are adjusting how they give advice have caught a break from the DOL, which said that until Jan. 1, it "will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule."
Even though advisers will be operating on scout's honor until the first of the year, the fact that the two parts of the rule are now applicable is a victory for supporters of the rule. Opponents wanted the whole measure put on hold during the DOL review.
"It's a very big step forward for people who are saving for their retirement," said Maureen Thompson, vice president for public policy at the Certified Financial Planner Board of Standards Inc. "It's the first major [investor protection] improvement in a long time."
Large broker-dealers have been changing their pricing on products and advice to comply with the rule. Independent brokers and advisers are likely to alter the kind of advice they prescribe, said Laura Anthony, founding partner of Legal & Compliance.
"Those smaller firms will stop making investment recommendations except for the most conservative products and strategies," Ms. Anthony said. "That will conflict with what could be the interests and objectives of account holders, if they have an aggressive growth plan."
Although the provisions that have gone into effect won't have enforcement teeth until January, or maybe beyond, the prognosis for their survival is good.
"What becomes effective on June 9 is likely to stick," Mr. Lichtenstein said.
What happens to the rest of the rule, including the most controversial parts, is up in the air.
For instance, disclosures about compensation and other conflicts, as well as the right for investors to file class-action suits against advisers that are part of the best-interest contract, could be changed or scrapped. The legally binding agreement lets advisers charge variable compensation as long as they put clients' interests ahead of their own.
In a May 22 Wall Street Journal op-ed, Mr. Acosta indicated the DOL is inclined to revise the rule. Opponents will get another chance to make their case when the DOL issues a request for information, the timing of which was imminent as this story went to press.
"The new RFI will be a solid procedural foundation for discussing necessary changes to the rule and the exemptions," Bradford Campbell, a partner at Drinker Biddle & Reath, wrote in an email.
Supporters will once again argue for the rule's preservation.
"The rule itself is very much a compromise," Ms. Thompson said. "It recognizes different business models and forms of compensation. I'm not sure how much further a rule can be compromised. Even a deregulatory agenda requires there are certain protections people need. Will it be a challenge to keep them? Sure."