THE FATE OF THE FIDUCIARY RULE

By: Cara Van Dorn*| Staff Writer

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The Trump administration and a republican Congress have begun efforts to unravel the Department of Labor’s six-year-long effort to ensure that Americans saving for retirement receive only investment advice that is in their best interest.  The Fiduciary Rule, unpopular with conservatives and some members of the investment advice industry since its inception, was promulgated in response to a study by the White House’s Council of Economic Advisors that found that American workers lose more than $17 billion each year to conflicted investment advice.  

On February 3, President Trump issued a memorandum instructing the DOL to reexamine the Fiduciary Rule to determine whether it is consistent with his administration’s objectives.  The memorandum instructs the DOL to determine whether the Rule would (1) “harm investors due to a reduction of Americans’ access to certain retirement savings [offerings, products, information, or advice]”; (2) cause “disruptions within the retirement services industry that may adversely affect investors or retirees”; and (3) “cause an increase in litigation, and an increase in the prices that investors [] must pay.”  An affirmative answer to any of these questions will result in revision or even rescission of the Rule.  In response to the memorandum, the acting labor secretary, Ed Hugler, requested a delay in the implementation of the Rule.

What is the new DOL likely to find?  Since there are two sides to every story, the narrative truly depends on what the Trump administration hopes to find.  In answering the first question: yes, the Rule is likely to cause restricted access to some investment products.  However, proponents argue that the Rule will weed out risky, expensive, under-performing products that are unlikely to be in any investor’s best interest.

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An affirmative answer to the second question can be found in a study by A.T. Kearney, estimating that the investment advice industry will lose $20 billion by 2020 as a result of the Fiduciary Rule.  However, another analyst reads losses for the industry as savings for retirement investors and therefore considers the figure evidence of the Rule’s efficacy.

“Yes” is also a likely answer to the final question: One analyst estimates litigation costs for the investment advice industry could range from $70 million to $150 million per year.  Again, this figure can be characterized in two different ways: Some will say these are unnecessary losses to the industry for frivolous litigation and good cause to change the rule.  Others say it is the price that bad actors must pay for breaching their fiduciary duties and the appropriate remedy for innocent investors who relied on conflicted advice.

Do these affirmative answers mean the DOL’s work was wasted?  Not necessarily.  Since the Rule was made effective soon after its promulgation in 2016, the Trump administration cannot easily abandon it or alter its provisions.  The Administrative Procedure Act requires either time-consuming notice and comment rulemaking, complete with justifications for any changes to the provisions, or a showing of “good cause” to skip steps in the rulemaking process (a high bar and a subject of disagreement among Circuit courts).  Without the threat of a presidential veto looming, Congress Republicans likely pose a more imminent threat to the Rule’s survival.  These champions of the industry have already authored multiple bills to slow its implementation or abolish it altogether.  Any argument against the Rule’s legality may prove difficult as multiple federal judges have already upheld the Rule in the face of judicial challenges from the industry and the Chamber of Commerce.

Regardless of the Fiduciary Rule’s ultimate fate, some of its objectives have already been met.  While some members of the industry fought tooth and nail against the Rule, others, who have been adhering to a fiduciary standard for decades, welcomed it with open arms.  Members of the industry had already begun implementing some of the policies pushed by the DOL simply because the marketplace demanded it as investors became wise to the detrimental high costs of managed funds and the advantages of passive, low cost funds.  Many big wirehouses report a shift in assets and revenues from actively managed funds into passively-managed fee-based funds in recent years.  These institutions have changed their business models, not only to meet the regulatory requirement, but also in response to the impetus of the market.  Even some of the firms that were not keen to make the changes originally have already adjusted their business practices and fee models in compliance with the Rule and therefore now expressed their intention to stay the course.

Indeed, the market is pushing the industry to clean up its act, but if the Fiduciary Rule is abandoned, removing the regulatory push may leave investors in a dangerous lurch.  Even if much of the industry voluntarily complies with the spirit of the Rule, bad actors will be left to their own devices and investors injured by conflicted, imprudent advice will have no recourse against them.

Cara Van Dorn is a third year law student at Wake Forest University School of Law.  She holds a bachelor of arts in English and Comparative Literature from the University of North Carolina at Chapel Hill.  After law school, Cara will join Motley Rice, a plaintiffs’ mass litigation firm in South Carolina.