Expect a stronger, more lawsuit-proof fiduciary rule very soon

With the final version of the rule now at the Office of Management and Budget, it won't be long before it's published. Don't expect a lot of changes, lawyers say.

The DOL continued its fast-track pace on its fiduciary rule, sending a final version to the White House last week that will likely be released in a matter of weeks.

Lawyers who have been carefully reviewing the fiduciary rule say that it’s not likely that the Department of Labor will change much from the contentious proposed version of the rule and its prohibited transaction exemptions. The department is racing ahead to make it difficult for Congress or a new president to undo the rule.

It’s notable that the deadline for public comments was January 2 for a rule that was proposed at the end of October and that is now in its final form, said Fred Reish, partner at Faegre Drinker Biddle & Reath. Evaluating a mountain of comments from the public and industry groups during that time and getting a finished document to the Office of Management and Budget on Friday was no easy task, he said.

“That is very, very fast for the government to move and indicates the priority the DOL has put on this. You almost never see a regulation or exemptions finalized that quickly,” he said. “Roughly six weeks from now, the final rules could released by the OMB, and the DOL could publish them in the Federal Register.”

The DOL has likely been coordinating with the OMB to further expedite the fiduciary rule, Reish noted. After publication, the rule would become final in 60 days, although the “applicability date,” or the deadline for complying with it, could be January 1, 2025, he said.

“My opinion is that they will want the rules to be applicable before the next president is sworn in,” Reish said. “That way, everybody will be substantially in compliance at least before the next administration takes over.”

If it turns out that President Joe Biden wins another term, the DOL might decide to provide an extension to the applicability date, he said.

Toward the end of a president’s term, it’s crucial for the administration to get any final rules done before the last 60 meeting days of Congress, as anything finalized after that time can be reversed via the Congressional Review Act.

FAST, BUT SLOW

It’s important to note that even as the DOL has pushed its new fiduciary rule and exemptions through very quickly, the agency has been working on different iterations of the rule since at least 2010, said Jason Roberts, CEO of the Pension Resource Institute.

A prior version of the rule finalized in 2016, late in the Obama administration, was ultimately vacated in federal court. During the Trump administration, the DOL finalized a less burdensome version that did not subject one-time rollover advice to fiduciary status but required brokers to disclose conflicts of interest to clients and follow impartial-conduct standards.

Since then, the agency has reverse-engineered the 5th Circuit Court of Appeals decision that killed the Obama-era rule, making the forthcoming version more watertight, Roberts said.

Based on the comments it’s received, the DOL may make some changes to part of the test to determine whether one-time recommendations trigger fiduciary status, he said. That part includes whether a broker made a recommendation under circumstances where there was a relationship of trust and confidence, including whether the broker had discretion over any other types of accounts with the client. A “squishier” part of the test that could be revised includes whether the business holds itself out as a place where people can go for advice and if the circumstances of the advice could be relied upon to be in the client’s best interest, as well as being provided on an individualized basis, Roberts said. Commenters have said that that needs to be a more objective standard, he said.

More likely to get revised significantly are two amendments to Prohibited Transaction Exemption 20-02 that would require financial institutions to publish compensation arrangements with third parties and allow retirement investors to inspect companies’ books and records to ensure compliance, he said. Both of those would seem to invite litigation and require firms to hire extra staff, Roberts said.

Reish said the DOL could also revise part of the prohibited transaction exemption requirements that would allow the agency to revoke eligibility for firms that are convicted of serious crimes or have patterns of noncompliance with rules. That is potentially a major issue for institutional-sized companies with international operations, as the proposed rule included foreign convictions, he noted. It could mean that the DOL would have the ability to essentially stop rollover businesses for some broker-dealers and insurance companies.

“In the private sector, that has been called ‘the death penalty,’” Reish said.

Given the number of variables in that aspect of the rule, and the fact that not every country has “fair” justice and prosecutorial systems, the DOL could revise it, he noted.

WHAT THE PEOPLE WANT

Following news that the final rule and exemption requirements were sent to the OMB, the CFP Board issued a statement supporting it.

“The DOL’s proposed Retirement Security Rule helps assure clients that they can trust their advisor to help them achieve their investment and retirement goals confidently and ethically,” CFP Board CEO Kevin Keller said in the statement. “This new rule would close existing regulatory gaps from antiquated regulations that were created in 1975.”

The CFP Board also published results of a recent survey of retirement savers showing that 92 percent said they believe that financial professionals who make rollover recommendations from workplace retirement accounts do so in the client’s best interest. Further, 64 percent said they expect those recommendations to be fiduciary in nature, the board found.