Delay of DOL fiduciary rule may be challenged in court

Part of Invesco’s Legislative Insights Series

Delay of DOL fiduciary rule may be challenged in court

Jon VoglerTime to read: 3 min

Consumer advocacy organizations have indicated they may sue the Department of Labor (DOL) to prevent it from delaying the Jan. 1, 2018, applicability date of its fiduciary (conflict of interest) rule.

In August, the DOL proposed a delay of several key provisions of the rule to July 1, 2019. The proposal was then opened to a 15-day period of public comment, which closed Sept. 15. I’ve heard speculation that the DOL may issue the extension in early November. To do so, the DOL must adequately justify the necessity of a delay under the Administrative Procedures Act (APA).

Opponents of the delay have claimed that the DOL’s proposal fails to accurately cite its statutory authority to postpone implementation of the fiduciary rule. The core position of the Consumer Federation of America and similar groups is that the DOL is actually proposing a stay of the rule under the guise of a simple delay of the rule.

A provision of the APA gives agencies the authority to stay regulations. However, that authority is limited, as it does not allow agencies to stay rules that are already effective. The fiduciary rule technically became effective in June 2016.

According to New York University’s Institute for Policy Integrity, a nonpartisan think tank, the substance of the proposal amounts to a stay of the rule, because it would remove the DOL’s enforcement authority for 18 months. Bethany Davis Noll, the institute’s Litigation Director, said (with regard to the DOL), “They are trying to set up a world where the rule hasn’t been implemented. An eventual repeal of the rule will be difficult to rationalize because of the original cost-benefit analysis behind the rule (under the Obama administration). If they stay the rule and put off implementation, it will make repeal easier.”1

However, other evidence in requests for information from the DOL suggests that it is focused on improving the rule through new exemptions, rather than repealing the rule outright. Whether those prospective new exemptions would improve the rule and facilitate compliance, or deprive retirement investors of adequate protections, appears to be in the eye of the beholder.

Meanwhile, back at the SEC …

Securities and Exchange Commission (SEC) Chairman Jay Clayton told lawmakers at a hearing on Oct. 4 that the agency is drafting its own proposal for a fiduciary rule.

In testimony before the House Financial Services Committee, Mr. Clayton outlined his core requirements for a fiduciary rule, stating that it must preserve investors’ choice to use a broker or investment advisor, be clear and apply consistently to all types of investment accounts. It must also be the product of cooperation between the SEC and DOL, whose rule requires brokers to act in the best interests of their clients in retirement accounts only. He declined to provide a timeline for when the measure might be released.

Mr. Clayton reassured Republican lawmakers that the SEC would address concerns they have raised about the DOL fiduciary rule. Some Republicans and financial industry opponents assert that the measure is too complex, increases litigation risk and limits the ability of smaller investors to access advice and other services.

Supporters of the DOL rule maintain that it would mitigate broker conflicts of interest that lead to the sale of inappropriate high-fee investment products that erode savings.

At the hearing, Rep. Ann Wagner, R-MO, spoke about the bill she introduced in late September that would kill the DOL rule and replace it with a disclosure-based, best-interests standard for brokers. The legislation would instead direct the SEC to write a fiduciary rule. Mr. Clayton aligned himself with Ms. Wagner’s bill, with respect to the theme of investor choice.

Rep. John Delaney, D-MD, asked Mr. Clayton at the hearing whether he supported the DOL rule. Mr. Clayton replied, “I like the words,” referring to the DOL rule’s goal of reducing brokers’ conflicts of interest. “The question is, are we going to implement it in a way that adversely affects choice?”2

The SEC’s effort may also serve to slow down state initiatives on the subject, such as the Nevada law that would require broker-dealers and investment advisors to abide by state fiduciary standards from which they were previously exempt. The hope is that a uniform SEC rule would prevent a patchwork of state regulations concerning fiduciary duty to investors.

Read more retirement insights by Invesco’s Senior Analyst Jon Vogler.

1. Source: BenefitsPRO, “Delay of fiduciary rule likely to be challenged in court,” Nick Thornton, Oct. 3, 2017

2. Source: Investment News, “SEC chief Jay Clayton tells lawmakers agency is drafting its own fiduciary rule,” Mark Schoeff Jr., Oct. 4, 2017

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Jon Vogler
Senior Analyst
Retirement Research, Invesco Consulting

Senior Analyst Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer and editor to a variety of retirement-related Invesco communications.

Prior to joining Invesco in 2008, Jon spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.

Jon earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He has a B.A. in History from Rutgers, The State University of New Jersey.

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