The prospect of a Donald Trump victory in the presidential election was considered so "farfetched" by industry stakeholders that virtually no one expected this year's election would affect the fate of the Department of Labor's fiduciary rule.
"This outcome was not war-gamed," said Rob Foregger, co-founder of NextCapital, the Chicago-based provider of automated investment platforms for 401(k) and retail investment advisors.
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Foregger, an early and vocal proponent of the rule, which requires a fiduciary standard of care on all advisors to IRA investors and 401(k) plans with less than $50 million in assets, is among the many stakeholders who now doubt the rule in its current form will survive.
"The issue is so fresh on House Republicans' hatchet list that I expect the rule will be high on the new administration's target list," said Foregger.
On the campaign trail, President-elect Trump routinely accused the Obama administration of stalling economic growth through its regulatory policies.
While he vowed to repeal and replace both the Affordable Care Act and the 2010 Dodd-Frank Act, he did not make specific mention of DOL's fiduciary rule. In an August address to the Detroit Economic Roundtable, Trump said he would impose a temporary moratorium on all new federal regulations.
More recently, Anthony Scaramucci, founder of hedge fund SkyBridge Capital and an advisor to the Trump campaign, suggested the new administration would roll the rule back, as reported by InvestmentNews.
Foregger holds out a "glimmer of hope" that the new administration will consider what he believes are the rule's benefits to investors.
Moreover, the consolidated industry effort to stop the rule throughout the more than five-year rulemaking process may now not be as coordinated, given the millions already invested in complying with the rule, and the fact that many providers are using the rule to create an "offensive" competitive strategy, he said.
But in the more likely event the rule is rolled back, Foregger says the wheels are already in motion for a uniform fiduciary standard among providers of retirement advice.
"Even if there is a reprieve, is it really wise at this point to not build your investment model on the fiduciary premise? That would seem risky," said Foregger. "The fear mongering around the rule that said it would push smaller investors out of the market—that unintended consequence is clearly not happening."
At the early stages of the rulemaking process, industry was overwhelmingly against DOL's effort, but now, Foregger estimates that as much as half of the industry has come to see the rule as positive for investors and positive for providers.
"Industry's tune has dramatically changed since the rule was first floated," said Foregger. "That may influence how the administration approaches the rule."
The trend of massive flows of assets from active to passively managed investments, which Foregger says has clearly been accelerated by the fiduciary rule, will continue no matter its ultimate fate.
And while the rule gives significant momentum to the role of digital advice platforms in the market, those tools will continue to be leveraged as value-adds for both individual advisors and investors.
"The number of large institutions seeking to deploy technology is astonishing," said Foregger. "We expect that to continue no matter what the new administration does."
Options at hand
Hours after President Obama was sworn in 2009, his administration issued a memo to agency heads freezing all Bush administration regulations that were in the rulemaking process.
That option won't be available to the Trump administration with respect to the fiduciary rule—it was officially made effective on June 7, 2016.
"That will make it more difficult for the new administration to stop the rule, but there are options," said Leland Beck, an administrative law expert who previously worked in the Department of Homeland Security and Justice Department.
A provision in the Administrative Procedure Act, the federal statute that governs how regulations are made and issued, says an agency can postpone the effective date of a rule before it becomes effective.
And an agency can do that on its own or with a court order, said Beck. The Trump administration could "stay many rules that are not yet effective on January 20th of next year," he said.
But because the fiduciary rule is already effective, the new administration will have to pursue other routes to dismantle the rule.
One available option is to work off the lawsuits against the rule currently playing out in four federal courts.
The Trump administration could ask the presiding judges for a voluntary remand, said Beck. They could go a step further, confess error and coordinate with the stakeholders who have brought suit to request a consent decree.
If a court were to grant the decree, it would vacate the rule back to Labor for further consideration. "That would mean the rule in its existing form would be back off the books," said Beck.
Either approach can expect to meet objections from consumer advocates and stakeholders in favor of the rule, but Beck said courts are likely give significant deference to the new Labor Department. He added that courts routinely grant requests for voluntary remand.
What a new Labor Department can't do is simply say it won't enforce the rule. The Employee Retirement Income Security Act gives plan participants a private right of action, meaning they can enforce Labor Department regulations even if the Labor Department does not.
Some recently made rules can be taken off the books entirely, but Beck says the complexity of the fiduciary rule suggests to him that the rule will not be subject to an "up or down" fate. The new administration is likely to parse aspects of the rule and release a different version, he said.
Congressional action
The Trump administration could also direct Congress to legislate the rule off the books.
In September, the Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs, or CHOICE Act, passed out of a House committee by a narrow vote along party lines.
Sponsored by Rep. Jeb Hensarling, R-Texas, the chairman of the House Financial Services Committee, the proposed legislation includes a provision that would require the Securities and Exchange Commission to evaluate the need for a new fiduciary standard.
"The SEC is the agency that Congress designated to oversee and regulate the conduct of persons providing investment advice and affecting securities transaction in the United States," according to an explanation of the bill. If passed, the bill would require the SEC to issue its own fiduciary rule before the DOL rule could be implemented.
Most of the CHOICE Act addresses the Dodd-Frank Act that Mr. Trump has vowed to repeal and rewrite.
To pass, the bill would require a simple majority in both chambers of Congress. Senate Democrats could filibuster the rule, which would require 60 votes to override. The Republicans' Senate majority after the election stands at 52 to the Democrats' 48 seats.
Trump's loyalty to party
Knut Rostad, director of the Institute for a Fiduciary Standard and a strong proponent of DOL's fiduciary rule, says there is too much unknown about Mr. Trump's views to presume he will back dismantling the rule.
Moreover, that might not be what industry wants, he said in an interview.
"We are halfway there to implementing the rule," said Rostad. "Industry may offer the idea that the better choice is to not repeal it outright."
While Trump has been clear on his dissatisfaction with Dodd-Frank, less obvious is how loyal he will be to other core party principles in Congress. Republicans have voted in lockstep to block the fiduciary rule's implementation.
"The assumption is that he is automatically going to follow Congress, but I don't know where that assumption is validated," said Rostad, a registered Republican.
Foregger says the rule ultimately is not a business killer, but a rule changer. Moreover, he offers a reminder that Trump made routine promises on the campaign trail to not be blindly beholden to Wall Street interests.
"If you were trying to lobby the President-elect to keep the rule in place, you would remind him of that, and argue that the rule ultimately protects the consumer," said Foregger.
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