This past Tuesday, April 10th, the Department of Labor's new fiduciary rule and its requirement for advisors to engage in a Best Interests Contract with their clients, didn't happen. And it didn't happen because last week the Department of Labor finalized a new regulation which enacted a 60-day delay to the applicability of the rule, which means the final DoL fiduciary rule is now scheduled to take effect June 9th, instead. Yet while many commentators have been suggesting that we'll see further delays until opponents of the DoL fiduciary rule ultimately kill it, I wouldn't be so sure of that, and particularly when you delve into the details of what this delay actually said.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we delve into the fine print details of the recent DoL fiduciary 60-day delay, why it was actually more like an 8-month delay for many key provisions, and why that actually reduces the likelihood of more DoL fiduciary delays!
First and foremost, the new regulation that enacted a 60-day delay (shifting the applicability date for the Department of Labor's fiduciary rule out until June 9th), was actually a 63-page regulation with a number of key changes, and even a few surprises. First, while the new definition of "fiduciary" is delayed until June 9th, the requirement to actually fully implement the Best Interests Contract Exemption (the crux of the new fiduciary rule) was delayed until the end of the year. Which means that the Impartial Conduct Standards (that advisors must give best interests advice, for reasonable compensation, and make no misleading statements) will go into effect on June 9th, but the remainder of the new disclosure rules, policies and procedures requirements, and enforcement mechanisms – such as the ability to bring a class action lawsuit against Financial Institutions for fiduciary breach – will not go into effect until 2018.
This delay is important to acknowledge because, contrary to much speculation, it ultimately reduces the likelihood of further delays! Segments of the industry have been fighting hard against DoL fiduciary – lobbying the DoL, suing the DoL for overreach and hastiness, lobbying Congressional Republicans to block it, and ultimately lobbying the current administration for a delay. But as I noted immediately following the election, the rule is still a done deal, finalized and formally adopted last year. Which is ultimately why President Trump didn't unwind the rule, but instead, only issued a proposal to consider whether to delay another 60 days. And based on the prior lawsuits over the "hastiness" of the rule (which was originally developed over five and a half years!), it's hard for opponents to now come back and say the rule should be killed or substantially changed in as little as 60 days! Especially when 90% of the 193,000(!) public comment letters received by the DoL were against even the 60-day delay! It's getting harder and harder to substantiate further delays to the rule now.
In fact, it seems that the only real path currently open for significant delay would be if a new regulatory impact analysis can shed new light on why the fiduciary rule would be somehow harmful after all, and undermine the prior cost/benefit analyses that have been conducted. Yet it's not clear how the industry would make that case, particularly given so many studies out there about the financial services industry's conflicts of interest, and how consumers are being harmed by those conflicts. And with the 45-day comment period to conduct a "Regulatory Impact Analysis" closing next week on April 17th, it's not clear how the DoL would possibly have enough time to substantively review the comments, propose a new rule, subject that rule to another comment period, take that feedback, complete a final rule, and submit that rule to the OMB for review and approval, and publish that new fiduciary rule in the Federal Register, all by June 9th.
In other words, the 60-day delay may have literally delayed the rule, but it's just not long enough of a delay to actually stop the rule. And when the industry's own lawsuits have claimed that the 5-and-a-half-year process of creating the rule was "too hasty", it's hard to make the case for substantively changing it in 60 days anyway. Even a re-delay will actually be challenging now, as with so many of the Best Interests Contract Exemption requirements pushed out to 2018, arguably the industry already has gotten an additional 8 months to adjust to the rule - which means advocates can emphasize that there's no reason to delay the applicability past June 9th anymore.
Notably, this doesn't mean that the rule won't be changed at all - modifications are still a definite maybe, perhaps around certain aspects of the policies and procedures requirements, disclosure obligations, or even the class action lawsuit provision. But the bottom line is that for all of the talk about the DoL fiduciary rule dying or going away, it really doesn't appear to be happening. So, if you haven't finished your preparations for the DoL fiduciary rule, I'd really encourage you to start doing so now!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
Yesterday, on April 10th, the Department of Labor's new fiduciary role and the requirement that advisors engage in a best-interest contract with their clients didn't happen.
Last week, the DoL finalized a new regulation that enacted a 60-day delay to the applicability date for the original fiduciary rules. So, as a result, that final DoL fiduciary rule that was supposed to hit on April 10th is now pushed out to June 9th instead.
Many commentators have been suggesting that the DoL fiduciary rule delay, this 60-day delay, is just the first of what will probably be multiple delays, and that opponents of the fiduciary rule would just keep delaying it, delaying it, delaying it, until eventually, they find a way to kill it. In essence, suggesting that the DoL fiduciary rule is never actually going to happen.
But I wouldn't be so sure about that, particularly when you delve into the details of what this delay actually said.
What The DoL Fiduciary Rule 60-Day Delay Actually Said [Time - 1:17]
Because the headline announcement was just that, "The DoL fiduciary rule has been delayed 60 days, from April 10th until June 9th." But the final regulation that was approved, the actual document that substantiated this delay, wasn't just some brief regulation with a page that said, "We delay it by 60 days." It was a 63-page regulation, with a number of other key changes and even a few things that have been viewed by the industry as surprises.
The first surprise in the ruling was that not only is the new definition of fiduciary delayed until June 9th, but the requirement to actually implement the best-interest contract exemption, which is the whole crux of the new fiduciary rule, was actually further delayed until the end of the year. Once we now get to June 9th, the only thing that will actually apply are the so-called impartial conduct standards, which says that advisors must give best-interest advice for reasonable compensation and make no misleading statements.
But the remainder of the disclosure rules for best-interest contract won't apply on June 9th. The full depth of the policies and procedures requirements for financial institutions won't apply on June 9th. Advisors won't be required to acknowledge in writing that they're fiduciaries to clients on June 9th, which means they won't be bound in IRA accounts to a contractual fiduciary duty and won't be at risk for financial institutions being sued for fiduciary breach in a class-action lawsuit, for any fiduciary failures that might happen after June 9th and before the end of the year.
In addition, because the full best-interest contract exemptions are delayed to the end of the year, that also means that variable and fixed-index annuities will not be subject to the best-interest contract exemption at all this year, not even after June 9th. They'll stay under the old PTE-84-24 rules instead, which is a really big deal because annuity marketing organizations that help annuity companies distribute their annuity products through independent annuity agents have been really struggling with the best-interest contract requirements, because annuity marketing organizations don't actually count as financial institutions.
As a result, they couldn't sign off on the best-interest contract. The annuity companies didn't want to do it because they didn't really have oversight of the agents, and the agents couldn't do it because the rules require a financial institution. So, we were stuck in this limbo with annuities in particular, and the annuity marketing organizations have been applying the DoL to become financial institutions and be recognized as such, so that they can sign off on a best-interest contract, but that process (or any other potential regulatory relief) has still been pending.
But with the best-interest contract exemption delay until the end of the year, annuity agents and annuity marketing organizations don't have this problem now looming, not today and not June 9th. They don't have to deal with it until 2018.
In other words, this wasn't really just a 60-day delay. Much of it was actually an eight-month delay, from April 10th, all the way until the end of the year, for most of the key provisions, the "teeth" part, the enforcement part of the fiduciary rule. At a high-level, a fiduciary obligation is still going to be applicable on June 9th. But in practice, from June 9th until the end of the year, it's basically a rule with lots of wiggle room and very little actual enforceability, particularly in IRAs, until we get to 2018.
Why The Fiduciary Delay Reduces The Likelihood Of More Fiduciary Delays [Time - 4:39]
Here's why all this matters. The industry has been fighting hard, basically ever since the final version of the DoL fiduciary rule was re-proposed, back in 2015, to stop the rule from happening. They lobbied the DoL to prevent it, change it, or at least water it down. They sued the DoL after the rule was issued, claiming that the DoL overreached and that they'd acted too hastily. They lobbied congressional republicans to pass a law to block it. They lobbied the current administration to delay it.
That last piece was ultimately what led to President Trump's decision to issue a memorandum back in February that suggested the rule needs to be revisited. But it's important to recognize that the rule is still a done deal on the books. It was finalized last year. It was formally adopted and effective. That's why even when President Trump won the election, we noted on this blog, in "Office Hours," the day after the election, that his victory was not going to lead to an immediate repeal of the rule, even though that's what all the publications were writing at the time.
Because when you delve into how this actually happens, the president can't just undo an existing regulation. It's a violation of the Administrative Procedures Act. That's also why even when President Trump finally took action, he still didn't unwind the rule. In fact, originally, there was discussion he was going to delay it by 180 days. He didn't delay it by 180 days. In fact, he didn't even delay it by 60 days. He directed the Department of Labor to issue a proposal to consider whether to delay it by 60 days.
Now, that's ultimately what the DoL has done, but it did so under substantial pressure and threat from consumer advocacy groups, that they would sue the DoL for making hasty changes. The industry fighting the rule is in a very awkward position now. They claim that the DoL rule, which ultimately took five-and-a-half-years (from first proposal in 2010 until it was finalized in early 2016), was too hasty. They sued the DoL on the basis that the rule was done too hastily.
It's very hard now to say the rule should be killed or substantially changed in the next 60 days or 180 days, while simultaneously claiming that the prior change, which took 10 times as long, was too hasty. Simply put, if the DoL changes too much, too quickly now, to try to unwind the rule, they really are going to get sued, and there actually is a material risk. They would lose.
In addition, the challenge now is the media has caught wind of this, and the public has caught wind of this. Rolling back the fiduciary rule is wildly unpopular with the public. Ultimately when the DoL did their 60-day delay, they noted that they ended up getting 190,000 comment letters about the delay, and over 90% of them opposed any delay. That was for a two-week comment period, just about delaying, 190,000 comment letters, and almost 180,000 of them said, "Don't delay."
It's really hard to substantiate much real change to the rule when the public is overwhelmingly in support, making quick changes are at risk from a lawsuit from fiduciary advocates for violating the Administrative Procedures Act, and the DoL's hands are just largely tied because it really was a done rule, last year.
A New Regulatory Impact Analysis Of The Fiduciary Rule? [Time - 7:50]
That's why the only way that the rule can realistically be changed at this point is they have to do a new cost-benefit analysis, a new regulatory-impact analysis, something that provides some kind of new light about why, perhaps, the fiduciary rule would somehow be harmful after all.
Frankly, I'm still not sure how the industry is really going to make that case. They're already being buried in studies out there about the problems with the industry's conflicts of interest and how consumers are being harmed by those conflicts of interest. It's not just about the fact that advisors are paid or even paid commissions. Advisors have a right to get paid. That's part of why the fiduciary rule didn't actually ban commissions.
It is about the fact, though, that substantial investor inflows keep going to funds with known-to-be inferior performance, where those funds coincidentally pay commissions or pay higher commissions. That was actually the driving force of that widely cited stat that the lack of a fiduciary rule will cost investors $17 billion. It wasn't just about advisors getting paid. It was about a subset of salespeople posing as advisors, selling clearly inferior investment products when superior alternatives are available.
That's part of why President Trump's memorandum directed the DoL not only to propose a 60-day delay, but also to solicit comments about a new regulatory impact analysis, basically a new cost-benefit analysis of the trade-offs of a fiduciary rule, one that would look at three primary areas: whether the fiduciary rule is reducing access to retirement advice, causing dislocations or disruptions in the retirement industry that might harm investors, or whether the DoL fiduciary rule will likely cause an increase in litigation that leads to an increase in prices that investors would pay for retirement.
That comment period is actually open now. It was a 45-day comment period, opened alongside the 15-day comment period for the 60-day delay, to conduct this regulatory impact analysis of the rule. That comment period actually closes next week, on April 17th.
But with that 45 day impact analysis comment period closing, it's still not clear that the DoL could possibly have enough time to substantively evaluate the comments, take them in, write a new rule, propose the new rule, have that proposal with actual changes subject to another comment period, take that feedback, draft a final rule, submit that to OMB, get that back for review, get it approved, and then publish it in the Federal Register, all by June 9th. In fact, one of the primary criticisms from the industry about the 60-day delay is that they fear it's not long enough to actually stop the rule, and I think they're right. It's not.
I'm not even sure that there are any grounds at this point to delay it further, because the best-interest contract exemption provisions, the big onerous part for the industry, already got delayed until the end of the year. Only the somewhat unenforceable on its own, impartial conduct standards, are...and that's the only part that even kicks in on June 9th.
Now if the industry still tries to fight for another delay, fiduciary supporters can point out, "Hey. You've already got until the end of the year to finish your compliance systems, your policies and procedures, your new disclosures. You got transition relief. Why should we grant more?"
Modifications Maybe, But Delays Are Probably Dead [Time - 11:05]
The key point here is that the industry may have gotten more time to adjust out of this 60-day delay. It's actually, I think, a little bit of a misnomer to call it a 60-day delay, because a lot of it was really an 8-month delay, but that still means all-the-more that when the rule becomes applicable on June 9th, even with the partial initial provisions and the rest that kick in later this year, it's getting harder and harder to stop or delay or kill the rule, because you can't even claim you don't have time to adapt to changes by June 9th, because you don't have to actually do most of them by June 9th. You only have to do them by the end of the year.
Ultimately, I think what you're going to find is this conversation is about to shift from killing the fiduciary rule, which just isn't going to happen, to modifying it. Ultimately, as I suggested to all of you back in November, the day after the election, I think modification is still actually a likely outcome. The DoL fiduciary rule may be here to stay, because the president doesn't really have the authority to rescind it, and the DoL doesn't really have the authority to kill it, and there's too much support now with 193,000 comment letters, with 90% support, but we could modify it.
Because I've talked to a number of broker-dealers that are actually acknowledging now that, while the rule is a tough transition, if you're a leading broker-dealer, and you're actually well-positioned to handle compliance, this is a business opportunity for you to gain market share from all the other broker-dealers that might be lagging, which means even the broker-dealer community now is kind of split on the rule. If you're ahead on compliance and adoption, you actually want this thing to go through, to grow your market share, but you might want it to be modified a little. Maybe dial back the threat of that class-action lawsuit provision.
In the meantime, we're seeing services like Vanguard Personal Advisor Services and Schwab Intelligent Advisory ramping up with very low account minimums and cost of 28 to 30 basis points, for a human CFP financial advisor, which is really taking away any industry credibility for that whole argument that small investors won't be served or lose access to advice, because the reality is major firms are already offering even cheaper services for those advisors, under an advisory environment. That's actually the irony of this. The broker-dealers are claiming that consumers will lose access to advice, but, legally, they're not even in the business of giving advice. Legally, they're salespeople in the business of selling products, and their advice has to be solely incidental. It's Vanguard and Schwab that have launched actually investment advisory services as RIAs, there to give advice, with low minimums, at lower cost than most of today's brokers.
The bottom line is simply this. For all the talk about DoL fiduciary rule dying or going away, it's really not. I think it's been wishful thinking of a subset of very vocal industry firms that are fighting the rule, but the tide has shifted. More and more industry firms have come into compliance. They've built the compliance systems that they had to do, and they're ready for it. Some of them even want it now, because their fiduciary preparedness is a competitive advantage.
In the meantime, hasty actions to kill the rule from DoL face the risk of a lawsuit that might well win. Congress could kill it, but congress is gridlocked, and the senate can filibuster to keep the DoL rule from changing, and Senator Warren's office has already been rallying the democrats around the rule to prepare for that.
It's getting harder and harder even to make the case for a delay of the rule from here, when so many of the compliance deadlines were already pushed out not just to June 9th, but all the way to the end of the year.
For any of you listening, if you haven't finished your own preparations for DoL fiduciary yet, I really encourage you to be doing it now, because I think the rule is really coming. It may get modified. It can even get modified after the fact. Maybe we'll dial down the class-action provision. Maybe we'll adjust some of the disclosures, but we're now in the phase of incremental changes to the rule. Repeal just does not realistically seem to be on the table anymore, which, frankly, I think ultimately is a good thing, not only for consumers but for those of us who are real financial advisors who want to regain consumer trust and are tired of having our whole industry's trust dragged down by a small subset of salespeople posing as advisors, that are causing consumer harm.
But in any event, I hope that's some food for thought about the current state of the DoL fiduciary rule and why modification is still a maybe, but further delay is probably dead at this point. This is "Office Hours with Michael Kitces," live here on Periscope, 1:00 p.m. East Coast Time on Tuesdays. Thanks for joining us, and have a great day, everyone.
So what do you think? Is DoL fiduciary here to stay? What modifications might we see to the rule? Is there realistically even enough time to kill the rule? Please share your thoughts in the comments below!