What's Happened and What's Next for the Fiduciary Rule

It's been over six months since President Donald Trump took office. After his election, many assumed the fiduciary rule was dead, but it hasn't worked out that way.

We've seen a lot of review and questions from regulators, but the fundamental principles of the rule look like they are going to survive. With Wednesday's news reports that the administration is seeking to further delay the full implementation date, we thought it would be helpful to review a timeline of developments related to the rule during the Trump administration and what they tell us about what's next.

Feb. 3 The president issued a memorandum directing the Department of Labor to review the rule and make changes if it concluded the rule was deleterious to investors. A leaked version of the memorandum said the department should delay the rule's implementation date by 60 days, but the final version removed that language--likely because that would open the department up to a lawsuit for improper rule-making under the Administrative Procedures Act.

March 2 The career staff at the Department of Labor started a 45-day comment period, and proposed delaying the first "applicability date" to June 9 from April 10. (Applicability date is a legal term, but the rule was already "effective" just not applicable.) The staff, of course, has been studying this issue for five or six years, and had produced a previous draft version on which they received thousands of comments, plus an almost 400-page regulatory impact analysis.

May 22 After Trump's original nominee for secretary of labor, Andy Puzder, dropped out of consideration, Trump went with a more conventional pick: law school president and former Labor Department official Alexander Acosta. Noncommittal about the fiduciary rule during his confirmation hearing, he wrote an op-ed in The Wall Street Journal saying the fiduciary rule would start to apply on June 9, and explained that regulators must follow the laws governing how they make changes to the regulations, which generally require careful cost-benefit analysis and, critically, avoiding arbitrary and capricious rules.

June 9 The new definitions of who is a fiduciary as well as the impartial conduct standards went into effect June 9, 60 days later than originally planned. Since that date, IRA advisors and others should have been providing advice that is in retirement investors' best interests, charge no more than reasonable compensation, and avoid misleading statements. There was always supposed to be a transition period for firms to be fully compliant with the best-interest contract exemption. Originally, firms had many disclosure, monitoring, and record-keeping requirements during this transition, but these requirements were delayed. The department put out a message saying it would not go after fiduciaries working in good faith to comply with the rule during the transition. The department also clarified that financial institutions have flexibility in designing their internal systems to ensure their advisors give best-interest advice during the transition. Specifically, firms can comply by documenting the basis for recommendations and monitoring advisors' sales practices and recommendations to ensure they meet the impartial conduct standards, among other approaches. Further, the department indicated that firms do not need to transition to new compensation systems on June 9 to be compliant during the transition. DOL also said it would keep reviewing the rule.

July 6 With new political leadership, the department asked a number of questions about ways to adjust the enforcement mechanisms in the rule (namely, class-action lawsuits), and expressed a good deal of interest in clean shares. We weighed in on Aug. 3, and made two key points. First, the DOL should embrace clean shares, but with a strict definition to help protect investors. Clean shares have the potential to benefit investors, but the DOL must get the details right around promoting and defining these shares. Defining clean shares too broadly could undermine their effectiveness at helping investors attain access to unconflicted access. For example, share classes with revenue-sharing and sub-TA fees should not be qualified as "clean," because those are potentially inducements to sell one fund over another. Second, we believe technology and innovation can help ensure rollovers are in investors' best interests. The department could help make these innovations even better. We believe that if the department were to create another streamlined exemption and compliance mechanism, it would (and should) still require a focus on ensuring rollovers are in retirement-savers' best interests, particularly from a 401(k) and other Title I plan to an IRA. The department should be aware of innovations around documenting and analyzing rollovers as it conducts its review of the rule, such as Morningstar's best-interest scorecard, which helps firms evaluate whether a rollover is in an investor's best interest. We also urge the DOL not to adjust the fiduciary definition to lessen scrutiny on these recommendations to roll over.

Next: More Rules, More Comments The Department of Labor is beginning the process for delaying the rule, according to news reports, although we haven't seen official details yet.

We expect a notice of proposed rule-making (the formal process for introducing a rule) that gives firms another way to demonstrate they are complying with the fiduciary standard. The full rule is supposed to go into applicability on Jan. 1, 2018. Given how long it takes to produce new rules, we are not surprised that the agency is trying to delay the full rule while it figures out adjustments.

However, two things are certain. The definitions that went into applicability on June 9 are here to stay, and no matter the enforcement mechanism, they are a profound policy shift from the old suitability standard many advisors followed with regard to retirement assets. Second, the momentum toward offering holistic advice is inescapable. Regardless of what happens with the DOL's fiduciary rule, the reality is that firms are moving toward a client-centric business model and delivering financial services that put investors' interests first, and regulations are moving in the same directions.

Learn more about how Morningstar can help advisors deliver best-interest advice to investors.