Both critics and advocates believe that the U.S. Department of Labor will be able to finalize its fiduciary rule by the end of the year, but its fate in the incoming Biden Administration is unclear.
The rule, which expands advisors’ abilities to recommend rollovers and receive many forms of compensation that have been restricted or forbidden by the previous DOL rule, was sent to the Office of Management and Budget (OMB) during Thanksgiving week.
“OMB can finalize this by year’s end if they are motivated to do so, and I expect they will. And DOL can then finalize the rule and potentially get it published in the Federal Register by year’s end, though that is becoming increasingly difficult,” Consumer Federation of America’s Director of Investor Protection Barb Roper said.
However, because this is a major rule, the effective date will generally be set 60 days after publication in the Federal Register, which means the rule won’t be in effect by Inauguration Day. As a result, the Biden administration can delay implementation and then launch a new rulemaking process to revise the rule, Roper said.
“I don’t expect the exemption in its current form ever to take effect,” Roper said. “The DOL has to know that, which suggests that they are just acting to make it as burdensome as possible for the new administration to fix the standard—one last gift to industry at the expense of workers from Secretary (Eugene) Scalia.”
Although the proposal is supported by trade groups such as the Securities Industry & Financial Markets Association (SIFMA) and the Financial Services Institute (FSI), it opposed by some like Roper who worry it might weaken investor protections.
“Unfortunately, the DOL has already reinstated the loophole-laden regulatory definition of fiduciary investment advice as a final rule. So, the Biden administration will need to act to close those loopholes, and that will also require a new rulemaking,” Roper said.
According to Roper, because of loopholes in the definition of fiduciary investment advice, the DOL rule “would allow many, if not most, rollover recommendations to escape the fiduciary standard entirely, and that’s likely to have gotten worse, rather than better, in the version that was sent to OMB, though we won’t know for sure until we see it,” she added.
In June, the DOL announced that it would propose the new fiduciary standard based on a temporary policy put in place after the Fifth Circuit Court of Appeals vacated the DOL’s previous rule in March 2018.
The agency said it wanted to “allow investment advice fiduciaries to receive certain forms of compensation once prohibited,” as long as certain impartial conduct standards are met. As a result, the rule establishes a prohibited transaction exemption (PTE), which allows advisors to accept commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue-sharing payments from investment providers or third parties, even within qualified plans and IRAs, as long as they can meet best interest and impartial conduct standards.
George Michael Gerstein, co-chair of the fiduciary governance group at Stradley Ronon, said the newly filed final fiduciary rule’s exemptions stand a good chance of sticking around.
They “represent a fairly good compromise by the DOL,” according to Gerstein, who said the DOL’s rollover guidance was a nod to the consumer protection community.
He called the proposal “a decent middle ground between the two sides of the issue.”
While acknowledging that the Biden administration may seek to completely rewrite fiduciary advice rules, Gerstein said there is “definite fatigue” over this debate that has created “a desire for certainty and finality. It’s been 10 years now that we’ve been debating these different proposals. It’s possible we have finally reached the middle ground, but we will have to wait and see.”