RIA Washington Watch: DOL begins process to delay fiduciary rule, but timing still uncertain

RIA Washington Watch

"RIA Washington Watch" is an ongoing series featuring the observations, insights, and analysis of Michael Townsend, vice president of legislative and regulatory affairs for Charles Schwab & Co. Inc., regarding issues and topics that affect Registered Investment Advisors (RIAs), their clients, and the RIA industry.

On March 1, the Department of Labor (DOL) proposed its much-anticipated rule to delay the April 10, 2017, applicability date of the so-called "fiduciary rule." The proposal calls for a 60-day delay in the rule, but the administrative process is such that it will be a race against the clock to see whether the delay can be finalized before April 10.

Michael Townsend, V.P., Legislative & Regulatory Affairs, CS&Co.

The original rule, which redefines who is a fiduciary and cracks down on conflicts of interest in the retirement savings space, was finalized in April 2016 after nearly five years of discussion and debate in Washington. Advisors of all types and sizes, from one-person wealth management advisors to the largest broker-dealers in the world, have been focused since on implementing the numerous changes required to comply by the upcoming kick-off date.

Now, however, the circumstances produce considerable uncertainty for advisors. Firms face the very real possibility that the delay will not take effect until after April 10, meaning that the fiduciary rule could be in place for a matter of days before being delayed.

At Schwab, we are focused on being ready to comply with the rule by the deadline, particularly given the uncertain timing of a delay. Registered investment advisors should proceed in the same manner until a formal delay is in place. Given that the timing of the process has been highly unpredictable since the Trump administration took over in January, advisors should not count on a delay being finalized by the April 10 applicability date.

"Given that the timing of the process has been highly unpredictable since the Trump administration took over in January, advisors should not count on a delay being finalized by the April 10 applicability date."

What happens next?

Publication of the proposed delay in the Federal Register starts the clock ticking on an abbreviated, 15-day comment period. Comments, which are due to the Labor Department by March 17, are requested on both the negative impacts of the fiduciary rule on retirement savers and the benefits and cost implications of a delay.

Labor officials will then need some amount of time to review, summarize and respond to the comments. DOL will then draft a final rule that includes its response to the comments. Normally, this part of the process would take several weeks to several months, but even on an accelerated schedule, it's difficult to envision how the DOL could complete this step in less than two weeks. That would bring us to the end of March.

Once the DOL has prepared the final rule, it goes to the Office of Management and Budget (OMB), the White House office that oversees and must sign off on all regulations. Again, there is no set time period for how long this step takes. OMB, for example, took three full weeks to review the delay proposal before okaying it earlier this week.

Once OMB signs off, the final rule can be published and the 60-day delay begins as soon as the rule is published in the Federal Register. The DOL has the ability to extend the delay as needed to provide more time to revise or rescind the fiduciary rule and its related exemptions.

At the same time, the DOL has also asked for comments on whether the fiduciary rule itself should be revised. In an Executive Memorandum issued on February 3, President Trump directed the DOL to examine whether the rule could negatively impact the availability of investment advice to retirement savers, increase costs or increase the risk of litigation. If the DOL finds that the rule does have negative impact, the memorandum directs the agency to propose a new rule rescinding or revising the fiduciary rule. Comments regarding these broader questions are due April 17.

"President Trump directed the DOL to examine whether the rule could negatively impact the availability of investment advice to retirement savers, increase costs or increase the risk of litigation."

Other complications loom

A host of other factors further complicate matters. One is that a confirmation hearing has yet to be scheduled for the President's nominee for Secretary of Labor, Alexander Acosta, who was tapped in February after restaurant executive and original nominee Andrew Puzder withdrew from consideration. Acosta has not weighed in on the fiduciary rule but will be confronted with strong sentiments from career DOL staff who drafted the rule if and when he assumes office.

At the same time, Congress continues to consider legislative solutions to the fiduciary debate. One proposal would hand the issue over to the SEC and indefinitely delay the DOL from imposing the rule until the SEC has completed a comprehensive fiduciary rule that encompasses both retirement and non-retirement accounts. The wheels turn very slowly on Capitol Hill, however, and it remains unclear whether any fiduciary-related legislation could clear both the House and Senate. A resolution on that front is many months away at the very least.

Finally, legal challenges — to both the rule and to the delay — are a factor. Several legal challenges to the rule are underway, and legal action from consumer groups and other pro-fiduciary organizations to prevent the delay are also a strong possibility.

Needless to say, all of these circumstances combine to produce extreme unpredictability. Advisors should proceed as though the rule will become applicable on April 10 pending further developments. Schwab will keep a close watch on the unfolding situation in the weeks ahead.

This report is current as of March 3, 2017. Schwab Advisor Services is committed to keeping you abreast of the latest happenings in Washington. Look for future RIA Washington Watch updates on Schwab Insights Hub®.

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