What advisors need to know to prepare for a new administration.
Given that the new administration in Washington promised to reduce regulation across a range of industries, what should financial advisors expect regarding the Department of Labor (DOL) regulatory redefinition of an investment advice fiduciary? Can the DOL’s regulatory change be rescinded or significantly amended soon after the presidential inauguration?
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Three dates are important to keep in mind with regard to the DOL fiduciary rule:
- June 7, 2016: Effective date
- April 10, 2017: Applicability date
- January 1, 2018: Final date (all requirements are in place)
Because the regulation is already in effect, although not yet applicable, changing it or rescinding it would require a ruling by a federal court, a legislative change or a reproposal of the DOL regulation — none of which are likely to happen quickly.
Actions that could affect the DOL regulation:
- A ruling by a federal court
The courts may one day provide relief from the new regulation, but so far have declined to act. To date, six lawsuits have been filed by opponents of the regulation asking to vacate all or parts of the regulation. In two of those lawsuits, federal courts have denied the requests for relief. In the remaining four, which are proceeding together, the court has heard arguments and the parties await a ruling.
- A legislative change
Congress would have to pass a regulatory change, and the president would need to sign it. The Congressional Review Act was a potential option for preventing the regulation from taking effect, but the timeframe to use this option has passed. Bills have been considered by Congress that would either delay, defund or redefine the regulation. While the House of Representatives has passed legislation, getting it through the Senate, which requires 60 votes to end legislative debate and allow a simple majority vote, has so far been unsuccessful. The number of supporters and detractors of the DOL regulation in the Senate remain close — even after the election — thus making 60 Senate votes hard to come by and legislation unlikely to pass in the near future.
- A reproposal of the regulation by the DOL
Could the new Labor Secretary change the new regulations? Unlike executive orders, which can be repealed by a new administration, the Administrative Procedure Act of 1946 creates a statutory framework governing the way in which federal administrative agencies propose and establish regulations. In other words, federal appointees cannot simply whisk away existing regulation but instead would have to begin a time-consuming process starting with a Notice of Proposed Rulemaking (NPRM). The new DOL administration could propose a rule that delays the implementation while seeking comments on permanent changes. Could that result in certain changes to the new regulation, or even a complete rescission? Only time will tell. There are only 80 days between Inauguration Day, January 20 and the applicability date of April 10. Therefore, the timeline is most likely too short to carry out the required processes needed to make changes to the regulations.
So what is the best course for financial advisors?
First, listen closely to how your firm is approaching this issue. Broker-dealers and investment advisers have invested considerable resources to help you prepare for this change, and they have also made varying degrees of public announcements about a course of action with regard to policy and practice. How much the election will cause a change in course will be a firm-by-firm decision.
Second, it’s important to recognize that the DOL regulatory policies are not the only factor driving change in the financial services industry. In addition to regulatory considerations, the industry was already changing for a number of other reasons, including technological considerations, demographic changes and cost pressures. Sometimes regulatory changes act as a catalyst to bring about change in the industry, and at other times, such as in this case, they simply act as an accelerant for existing trends.
Phyllis Borzi, the DOL assistant secretary and driving force for the regulatory change, said as much at the Consumer Federation of America Conference in Washington on December 1, 2016. “We’ve put in motion a process that builds on what the industry was already doing. We’ve just accelerated it a bit. I don’t know what’s going to happen next. I don’t want to speculate. But the best interest principle is there.”
The best course, unless otherwise indicated by your firm, is to continue to prepare for the change within the guidelines your firm has outlined.
Article by Columbia Threadneedle Investments