While watching the Trump Administration fall into place, notably with the naming of Labor Secretary Alexander Acosta, there was a widespread assumption that clarity on the agency’s controversial fiduciary rule, and perhaps relief, would soon be offered.
That wasn’t exactly what happened and Acosta took a surprising route for an announcement that all remains on track for the scheduled June 9 compliance date. Rather than a press release or transcribed speech, he laid out the important announcement in an opinion piece in the Wall Street Journal.
In April 2016, the Department of Labor finalized a new rule that creates a fiduciary duty for brokers and registered investment advisers who offer retirement advice. It provides exemptions that, if applied for and granted, would allow these advisers to maintain fee-based arrangements.
In general, fiduciaries are prohibited from receiving commissions, which are considered to present a conflict of interest. The new rule, however, creates a Best Interest Contract Exemption for fixed index annuities and variable annuities. It allows fiduciaries to receive commissions only if they adhere to certain conditions, including signing a written contract with the consumer that contains enumerated provisions intended to protect their interests.
In February, President Trump ended his second full week in office by ordering the Labor Department to review the rule and prepare an updated economic and legal analysis. If it concludes that the rule is “inconsistent” with Administration priorities, it was instructed to rescind or revise the rule as appropriate.
The May 22 piece clarifies that even deregulatory zeal is no match for the rule of law, notably the Administrative Procedure Act, and its requirements for notice and seek public comment.
“The process ensures that all Americans—workers, small businesses, corporations, communities—have an opportunity to express their concerns before a rule is written or changed,” Acosta wrote. “Agency heads have a legal duty to consider all the views expressed before adopting a final rule.”
“The Labor Department has concluded that it is necessary to seek additional public input on the entire Fiduciary Rule, and we will do so,” he added. “We recognize that the rule goes into partial effect on June 9, with full implementation on Jan. 1, 2018. Some have called for a complete delay of the rule.”
“We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input,” Acosta wrote. “Respect for the rule of law leads us to the conclusion that this date cannot be postponed.”
In March, in response to the presidential memorandum, the Labor Department announced a 60-day extension of the applicability dates of the fiduciary rule and related exemptions, including the Best Interest Contract (BIC) Exemption. Under the terms of the extension, advisers to retirement investors must adhere to “impartial conduct standards” beginning on June 9, rather than April 10 as originally scheduled. Acosta’s decision keeps that deadline intact, even if specifics of the rule may eventually be modified.
SIFMA President Kenneth E. Bentsen was among industry leaders expressing both disappointment and support for Acosta’s decision not to further delay the fiduciary rule beyond June 9, 2017.
“While we are disappointed that the Department of Labor has chosen not to further delay the rule until the Department has completed a review of the entire rule’s impact on investors, we appreciate Secretary Acosta's recognition of the rule's negative impact and his desire to seek public input,” he wrote. “In anticipation of the rule taking effect, SIFMA's members have been working for the past eighteen months to develop the systems and processes to ensure compliance. We hope that upon the Department’s completion of its wholesale rule review, they will conclude, as we believe the evidence clearly shows, that dramatic and fundamental changes are appropriate and necessary.”
SIFMA has long-supported the creation of a best interest standard for brokers who provide personalized investment advice, “and we continue to believe that the SEC is the appropriate regulator to do so,” Bentsen added. “We look forward to working with the Administration and Congress on the creation of a best interest standard that protects all retail investors, while preserving choice and investment services without raising costs.
On May 26, the U.S. Chamber of Commerce, in a letter to members of Congress, announced the findings of its research into the forthcoming rule requirements.
It “remains seriously concerned about the impact that the Department of Labor’s misguided ‘fiduciary’ rule is having upon low and moderate income savers, as well as small businesses that are looking to help their employees save for retirement,” it wrote, calling the economic analysis supporting the final rule was “fundamentally flawed” and it would “harm the very investors it was purported to protect.”
The Chamber’ report cites a recent survey that found that 35 percent of advisers will no longer serve accounts under $25,000 because of the rule. Also, a large mutual fund provider reported that its number of “orphaned” accounts nearly doubled in the first three months of 2017.
It claims that 70 percent of insurance service providers report that they have exited or are considering exiting the market for small balance individual retirement accounts.
“Such examples help tell the real-life story of a rule that was built upon a faulty premise,” the Chamber wrote. “The fiduciary rule has made it harder for workers to receive financial education and save for retirement.”
Among the statistics presented in the Chamber’s report:
92 percent of firms surveyed say that the Rule could limit or restrict investment products for their customers, which could ultimately effect some 11 million households;
up to 7 million individual retirement account (IRA) owners could lose access to investment advice altogether; and
a survey of insurance service providers shows 70 percent already have or are considering exiting the market for small balance IRAs and small plans, and half are preparing to raise minimum account requirements for IRAs.
A separate survey of advisors finds 71 percent will stop providing advice to at least some of their current small accounts due to the risk and increased costs of the rule.