The White House Office of Management and Budget has completed its required review of the amended advice rule for financial advisors and sent it to the U.S. Department of Labor, which is expected to publish a final rule by year end.
Any changes to the rule—which in proposed form allow advisors to recommend rollovers and receive many forms of compensation that have been restricted or forbidden by the previous DOL rule--will not be available until the DOL publishes its final rule.
Despite the fast-track approval, it might be too late for the rule to go into effect. That’s because “midnight regulations—those rules published in the final 60 days of an administration—can be rescinded by the incoming administration.
President-elect Joe Biden’s platform vowed to reverse Trump administration rules on investment advice and House Banking Committee Chairwoman Maxine Waters (D-CA) repeated that call last week, making it unlikely that the new DOL advice rule will live to see the spring.
The Trump replacement has two main parts: a new exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" from 1975 to determine what constitutes investment advice.
Consumer Federation of America’s Director of Investor Protection Barbara Roper said she expects the Biden administration to delay implementation and then launch a new rulemaking process to revise advice rules. “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.”
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.”
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 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 the law firm 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.”