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Saturday, January 21, 2017

The Fiduciary Rule - Dead Yet?

With apologies to Monty Python, is the fiduciary rule dead yet?  I've suggested here that the rule's demise may be next to inevitable, and we may now be lurching towards a conclusion that, to quote The Doors, this is the end. I think there has been a lack of focus on the Trump administration's hostility to the rule, surfacing in all its glory in the comparison of the rule to the Dred Scott decision, as I've previously noted

I'm reminded of Jake Tapper's prescient point right after Wisconsin fell to Trump that not only was it then possible to see a Trump path, he was having trouble identifying a Hillary path. Here, there are so many paths to the rule's being scuttled, that I'm having trouble identifying the path to survival.  There could be (some have even suggested that under the Priebus memo there already is) administrative delay. There could be legislative delay. There could be legislative repeal.  There could be administrative repeal. There could be mischief connected with the pending judicial actions.  And it gets even worse when it's realized that delay essentially kills the rule, as a practical matter.

Do I hear a "ding dong"? Hmm. The rule may be dead.

Now that leaves the question of, what now? I think it's pretty clear that the efforts by the DOL have appropriately and productively focused multiple aspects of the market on the benefits of a "best interest" overlay on the manner in which financial institutions interact with their customers. But there are fundamental problems with the way in which the DOL proceeded -

- Congress decided that IRAs are not subject to ERISA. It's nice that the DOL has identified that the world has changed since ERISA's enactment, but then it's for Congress to adjust its statutory scheme to a changing world, not the regulators. The DOL used a 1978 administrative reorganization to expand the scope of who's a fiduciary for purposes of the tax code, and then, as the toll charge for being able to do business given that expansion, required that institutions contractually become subject to ERISA. That may well be legally defensible, but to me it raises real and basic policy concerns.

- By having the DOL take this on, non-retirement accounts are not covered. The DOL was keenly aware of this, and in Q&A 19 of the recent Consumer Protection FAQs arguably seems to be encouraging customers to pitch for institutions to adhere to the new rule even for accounts that are not subject to it. I get it that the DOL felt zealously about what it did in the new rule and would like to see the rule become the gold standard for all institutional behavior of this type, but the lack of application to non-retirement accounts highlights that the right place for this rulemaking was the SEC. Had the SEC undertaken this effort, it presumably would have come at the issue with a deep understanding of just how the world of financial institutions works. Unfortunately, the SEC sat on its hands too long, in essence pushing the DOL to step in. But the SEC's inaction, it seems to me, does not mean that the "wrong" regulator should have taken the reins.

- The new rule, including the related exemptions, is incredibly complex. It does not seem likely that an SEC would have taken such a Byzantine turn. The rule is also harsh, and there is clear evidence that there a negative impact on providers being willing to serve and an upward effect on pricing. That doesn't mean that there should be no "best interest" element in the mix; but it may mean that this particular method of proceeding may have been . . . imperfect.

I, for one, would like to see a securities-centric effort to address the situation. Assuming the DOL's rule is done, I'd like to see the SEC actually do something here, or have a carefully designed provision added to the securities laws that moves us into this "best interest" world. I guess, as with many things right now, we shall see.

Before exiting here, I want to note that my Monty Python, Doors and Wizard of Oz references above do not seem to have exhausted the possible pop-culture references surrounding this issue.  Here's the following, from a post by Alice Joe on the US Chamber of Commerce's website:

[title] Trump Could Be a Hero to Retirement Savers

Before Russell Crowe rose to Oscar fame, he starred in the 1996 movie “Proof of Life” alongside Meg Ryan, whose character hired Crowe to help free her kidnapped husband. Against great odds, Crowe’s character heroically freed Meg Ryan’s movie husband from guerilla rebels in South America. The same heroism is needed today in Washington after eight years of overregulation that stifled the economy and growth. With the incoming Trump administration, there is hope that salvation is in the wings for overburdened workers and retirement savers.

Such heroism is called for now in Washington, D.C., as Americans saving for retirement need the Trump administration to start the process to repeal the Department of Labor’s . . . fiduciary rule. . . .

Geez, an ERISAfied reference to Russell Crowe and Meg Ryan. I may have to step up my game.

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