DOL fiduciary rule developments give both sides something to cheer

Both opponents and proponents of the Department of Labor's fiduciary rule have something to cheer following February's fast-breaking developments. Opponents will almost certainly get a 180-day delay in the rule and may eventually see a more industry-friendly version of the rule introduced. Proponents were buoyed by the sweeping Texas court decision that summarily dismissed all of the plaintiffs' complaints and refuted many common arguments against the rule. Perhaps it is fitting that these developments started immediately after Groundhog Day, because the president's memorandum directing a review of the rule and the DOL's subsequent proposal to the Office of Management and Budget to delay the rule foreshadow at least six more months of regulatory limbo. In fact, it could be years before the legal and regulatory maneuvering play out and we have a "final" final rule. The president's memorandum essentially played out in three parts. First, it stated an administration priority to empower Americans to make their own financial decisions, and to facilitate their ability to save for retirement and meet other important financial goals, such as buying a home and paying for college. Second, it directed the DOL to prepare an updated economic and legal analysis as part of an overall examination of the fiduciary rule to determine whether it is inconsistent with that policy. And third, if the department determines that the rule is inconsistent with the policy, it directs the DOL to publish for comment a new proposed rule to rescind or revise the rule. With respect to the required economic and legal analysis, the secretary of Labor is to assess whether the rule is likely to harm investors by (1) reducing access to retirement products and advice, (2) disrupting the retirement services industry in a way that materially damages its ability to properly serve clients, and (3) increasing litigation that is likely to adversely impact market pricing. While the administration seems intent on rescinding or revising the rule on either procedural grounds or because it harms investors, that won't be easy. The rule has withstood three legal challenges that have dealt with several aspects of what the DOL secretary has been instructed to review. In particular, Judge Barbara Lynn's 81-page Feb. 8 decision in the case brought by business groups dealt a significant blow to industry arguments against the rule. Several of the claims questioned whether the DOL exceeded its statutory authority under the Employee Retirement Income Security Act of 1974 in regard to the rule generally, and with respect to creating the best-interest contract exemption (BICE) and narrowing the safe harbor for annuity sales under Prohibited Transaction Exemption 84-24. Other claims asserted the rule is unworkable and the cost-benefit analysis was arbitrary and capricious. The plaintiffs even argued the rule violated first-amendment protections of commercial free speech under the constitution. Ms. Lynn rejected all seven of the plaintiffs' complaints with extensive analysis of the court's reasons for doing so. She found the DOL had not exceeded its authority in any of the ways claimed. Regarding BICE, she concluded it "is not unduly burdensome, nor is it a mandate" and the "conditions and consequences of BICE are reasonable." She also found that the "DOL's cost-benefit analysis was reasonable" and the DOL reasonably concluded the rule's provisions would help reduce litigation risks and that those risks were outweighed by investor protection benefits. In regard to a claim that Title II of ERISA doesn't require loyalty and prudence, she said that this conclusion is "not supported by the plain language of ERISA." And with respect to the alleged infringement upon first-amendment rights, she declared the rule "regulates professional conduct, not commercial speech" and "the only speech the rules even arguably regulate is misleading advice." As the DOL embarks on its review of the rule and the long and arduous path of a new rulemaking, the marketplace is certainly not sitting idly by. A number of large, formerly non-fiduciary firms have declared they will continue to prepare for the rule. New fiduciary-friendly product choices are becoming available, and product prices are coming down under regulatory and competitive pressure. In short, the marketplace is being transformed, which in and of itself adds to the challenge of making a case for turning back. Blaine F. Aikin is executive chairman of fi360 Inc.