There is a growing consensus among retirement professionals that the Department of Labor’s new fiduciary rule will not be forwarded to the Office of Management and Budget (OMB) for consideration until the first quarter of 2023. The regulation, which aims to create a universal fiduciary guidance standard among financial professionals, will probably see another delay, partly due to two active and related legal cases.
The DOL under the Trump presidency released PTE 2020-02 in December 2020, allowing investment advice fiduciaries to receive payment in connection with rendering fiduciary investment advice. This includes advice regarding rolling over a participant’s account in an employment retirement plan to an IRA and other comparable types of rollover suggestions.
This came after the Fifth Circuit Court of Appeals, which is situated in New Orleans, overturned the fiduciary rule from the Obama administration in 2018, citing that it was “unreasonable” and that the DOL’s execution of the rule amounted to “an arbitrary and capricious use of regulatory power.”
Many in the retirement plan sector believed that the Trump administration’s rule would be done away with following the 2020 election. However, the Biden administration decided to allow it to go into force while making it clear that it would review the five-part criteria and, if necessary, make changes. The rule was expected to be published in December. However, new reports are emerging that there may be delays as the rule has not been sent for OMB review.
OMB Review Likely Delayed
Normally, OMB reviews last up to three months. Rarely do they last less than 60 days for significant rules such as this. If the rule’s OMB review proposal were to be presented in September or early October, it would have been published in December this year.
However, while speaking to ThinkAdvisor, Brad Campbell, a former head of the EBSA and now a partner at law firm Faegre Drinker based in Washington, reveals, “the OMB review delay is likely due to the ongoing lawsuits facing the Department of Labor or other regulatory initiatives.”
The Lawsuits Against DOL
The DOL is presently facing two lawsuits regarding fiduciary advice. The Labor Department’s investment advisory regulation’s opponents in Texas are fighting to get it overturned in the hopes that history will repeat itself. The Trump administration’s fiduciary rule was finalized in late 2020 and implemented by the Biden DOL. Still, the Federation of Americans for Consumer Choice (FACC) filed a lawsuit in federal court in Dallas opposing it.
The FACC claims in the lawsuit that the DOL does not have the jurisdiction to enlarge the list of financial advisors who are required to serve as fiduciaries for pension savings. The FACC is a trade association for independent life insurance agents and companies that offer annuities and other insurance products. It claimed that the DOL regulation would greatly affect its members.
According to the current DOL fiduciary rule, fiduciaries of retirement funds are immune from federal retirement law’s prohibitions on taking commissions and 12b-1 fees and other types of remuneration as long as they operate in their client’s best interests and adhere to other conditions.
In the preamble, the DOL construed a five-part criterion for evaluating fiduciary capacity so that a fiduciary care standard would be activated for rollover guidance and allow more advisors to be fiduciaries.
The American Securities Association (ASA) filed a second lawsuit in a federal court in Florida. In contrast to the FACC lawsuit, which contested the regulation as a whole, the ASA lawsuit focused on the FAQ instruction, claiming that its content created new legislation and breached regulations requiring a period for public input.
In a recent panel discussion, Phyliss Borzi, a former DOL official, said she believes that the DOL will revise its long-standing position on whether the initial instance of communication between a consultant and customer must be regarded as a fiduciary contact in the rollover advice. “Although the argument is focused on legal nuances, the rollover guideline is at the complaint’s core.” She thought the advice didn’t go very far. The DOL is yet to respond to this lawsuit.
The Road Ahead for the Rule
Even though Trump’s DOL proposed the rule almost two years ago, it still has a long way to go, especially with the lawsuits that the Department of Labor is facing. Analysts anticipate that the DOL will include this information in the public protocols it uses to inform retirement plan consultants in the future.
Borzi believes that the merits of none of these actions are strong enough to overcome motions to dismiss. However, one can never tell what a court might rule, especially a Texan court. “As it stands, the Department of Labor is holding off on providing more instructions as it awaits what the courts will rule”.
The Labor Department is undoubtedly encountering pushback as it works on a regulation to specify who is a fiduciary. With no sign of any OMB proposal submitted for review, the rule won’t probably be made public until the first quarter of 2023. This is due to the sheer volume of other regulatory initiatives they are engaged in and partly because they wish to wait and see how the two cases brought against the Department of Labor fare in Texas and Florida courts.
Brian Menickella is the founder and managing partner at Beacon Financial Services, a broad-based financial services firm based in King of Prussia, PA.
Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.