Fiduciary-Rule Review Zeroes In on Industry Costs, Liabilities
July 11, 2017 by Lisa Beilfuss
The Trump administration in recent days has raised questions about the impact of the fiduciary rule’s compliance costs and legal liabilities, a sign that the rule meant to protect retirement savers from conflicted advice may survive a review without some of its primary enforcement provisions.
In a legal brief this past week, the Labor Department urged the U.S. District Court for the Northern District of Texas to uphold its February ruling against business groups seeking to quash the fiduciary rule, but the agency said it doesn’t stand by a condition in the Obama-era rule that allows investors to bring class-action suits against brokers who they say failed to act as fiduciaries.
Separately, in opening a new comment period on the rule and a potential delay of its Jan. 1, 2018, deadline for full compliance, the agency asked pointed questions to gauge costs to the financial-services industry. Writing that commenters have been divided on best-interest contract requirements throughout the rule-making process, the department said that it “is interested in the possibility of regulatory changes that could alter or eliminate contractual…requirements.”
Together, legal observers say, the Labor Department moves indicate the agency is considering eliminating the best-interest contract from the fiduciary rule as it conducts an economic-impact review ordered by President Donald Trump in February. The contract currently would require retirement-account stewards to provide a legally binding promise to put clients’ interests first and allow investors to bring class-action lawsuits against those they say breached their fiduciary duty. The threat of such litigation was included in the fiduciary rule to effectively serve as the regulation’s main enforcement mechanism.
“That was the stick,” said Erin Sweeney, an attorney at Miller & Chevalier Chartered who represents parties in litigation regarding fiduciary obligations, of the regulation’s so-called right of private action. It was “intended to be a warning to the industry that if they didn’t behave, they faced the class-action threat,” she said.
The heart of the rule became effective last month after Labor Secretary Alexander Acosta said “respect for the rule of law” precluded further delay while the agency’s review plays out. However, Mr. Acosta didn’t eliminate the possibility of a repeal or revision after the Labor Department completes that review at the end of the year.
Many critics of the fiduciary rule had hoped Mr. Trump’s election would bring an end to a regulation that they say will hamper investor access to advice and poses excessive and disruptive legal risk. But the fiduciary rule has been hard to kill, in large part because of the Obama administration’s careful six-year rule-writing process that was meant to withstand legal scrutiny and industry objections.
Now, the Trump administration is “telegraphing the fact that they want to look for alternatives” to the meatiest and more onerous compliance aspects, said Robert Cirrotti, head of retirement and investment solutions at Pershing LLC, a division of Bank of New York Mellon Corp.
Lifting the legal liability facing brokers and insurance agents who handle retirement savings is “kind of clever, really,” Ms. Sweeney said. If the Labor Department cuts the best-interest contract, the rule is alive and in effect. But with no contract, it isn’t enforceable in any practical way, she said. “There isn’t a doorway open to get to court. There’s no contract to sue on.”
The department could also opt to keep the best-interest contract but throw out the class-action provision by eliminating the requirement that brokers and firms who want to use the regulation’s exemption aren’t allowed to have clients waive their right to bring class-action suits. To do so would mean investors who allege failure to uphold the fiduciary standard have to bring cases through the industry’s arbitration system.
Updated July 10, 2017 12:01 a.m. ET
Write to Lisa Beilfuss at lisa.beilfuss@wsj.com
Appeared in the July 10, 2017, print edition as ‘Retirement Rule Could Lose Some Bite.’
