The Labor Department’s proposed 18-month delay for the fiduciary rule’s major compliance requirements andenforcement mechanisms is needed for regulators to complete a fullreview of the rule, according to language in Labor's proposalreleased today.

This week, the Office of Budget and Management signed off on theproposed delay after an expedited review of the proposal. OMBtook less than four weeks to green light a delay.

Reviews of proposed rule-making commonly take up to threemonths.

Stakeholders have until September 15 to comment on the proposeddelay.

Regulators said the “primary purpose” of the delay is to givethe Labor Department the necessary time to consider possiblechanges to the rule, and potential alternatives to its Best InterestContract Exemption and other prohibited transactionexemptions.

“The Department is particularly concerned that, without a delayin the applicability dates, regulated parties may incur undueexpense to comply with conditions or requirements that itultimately determines to revise or repeal,” the proposal says.

Last February, President Trump ordered a review of the rule.Labor says that can’t be completed by January 1, 2018, thescheduled full implementation date for the rule.

Whether or not changes to the rule will be made won’t be knownuntil the review is completed, the proposal said.

But in the same paragraph, the proposal says, “the Departmentalso anticipates it will propose in the near future a new and morestreamlined class exemption built in large part on recentinnovations in the financial services industry.”

Labor considered other options to the 18-month delay, includingnot delaying the January 1, 2018 implementation date, the proposalsaid.

But regulators settled on the 18-month delay, saying it was thebest way to avoid disruption in the investment advice market,facilitate the innovation of fiduciary-friendly investmentproducts, and minimize investor losses.

|

'Relatively small losses' to retirement investors

In rationalizing the delay, Labor said, “investor losses fromthe proposed transition period extension could be relativelysmall.”

The proposal bases that belief on the fiduciary rule’s impartialconduct standards, which went in effect in June.

Those standards would remain in effect during the proposeddelay. They require brokers, advisors, and insurance agentsrecommending investment and insurance products in qualifiedretirement accounts to give advice in investors’ best interests,and prohibit unreasonable compensation and misleading statementsfrom investment providers.

Under the impartial conduct standards, investment providers inthe IRA market are not required to disclose their fiduciaryrequirements in writing. Nor are the impartial conduct standardsbacked by the BIC Exemption’s required warranties and private rightof action provision.

Consumer advocate groups, including AARP, lobbied Labor to notdelay the rule on the grounds that investors would be exposed tocontinued conflicted advice without the BIC Exemption’s fullwarranties.

“The proposal’s quantitative analysis is shoddy and notsupported by logic or fact,” said Micah Hauptman, an attorney withthe Consumer Federation of America, which has advocated for fullimplementation of the rule as scheduled.

“Without an effective enforcement mechanism, there’s no way toensure firms and advisers will comply with the rule and no way tohold them accountable if they don’t comply,” added Hauptman in anemail.

When the rule was finalized in 2016, the Obama-era LaborDepartment estimated it would result in $33 billion to $36 billionin IRA investors’ gains over 10 years, due to the rule’sprohibition on conflicted advice.

Labor says those gains will “remain intact” during the proposeddelay, so long as investment providers “fully adhere” to theimpartial conduct standards.

Hauptman says that reasoning is questionable.

“The assumption that investors will receive the total gains ofthe rule without an enforcement mechanism is belied by the facts onthe ground,” said Hauptman. “There is a segment of the industrythat is sitting on the sidelines and failing to come intocompliance, waiting for the DOL to gut the rule.”

|

Potential cost of delay to retirement investors

Under one scenario raised in a comment letter acknowledged inLabor’s proposal, a delay of the rule will reduce the incentive ofasset managers to roll-out lower-cost, better-performinginvestments.

That would potentially cause investors decades of compoundedlosses if they are put in more expensive, poorly performinginvestments during the proposed extended transition period.

“I don’t think there can be any doubt that the delay will allowmutual fund managers and others to proceed more slowly,” said FredReish, a partner with Drinker Biddle.

“However, that could be offset by lower costs due to morethoughtful and longer term solutions,” he added, referring topotential new exemptions for level-fee investments Labor says it isconsidering.

Erin Sweeney, an attorney with Miller & Chevalier, saidLabor sidestepped the question of whether or not slowed innovationunder the proposed delay will cost some investors access to betterproducts.

“The proposal instead focuses on DOL’s conclusion that theimpartial conduct standards will protect investors,” saidSweeney.

“Apparently, the DOL concludes that all financial institutionswill comply with the impartial conduct standards and that losseswill be relatively small even if there is no enforceablecontract. This statement is really pyramiding premise onpremise without providing a solid basis for the conclusion,” addedSweeney.

She says Labor failed to make a citation of authority to backits claim that investor losses “could be relatively small” underthe delay.

If the full rule is further delayed, financial institutionswould presumably retain the flexibility they now have in complyingwith the impartial conduct standards, per regulatory guidance Laborissued this summer.

That lack of cohesion, along with Labor’s pledge to grant firmsregulatory latitude that are making good-faith efforts to complywith the impartial conduct standards, could result in inadvertentor intended loophole’s in the application of the best intereststandard, explained Sweeney.

When the Labor Department delayed the implementation of theimpartial conduct standards by 60 days earlier this year, itestimated investors would lose $147 million.

Now, the Department is estimating losses will be negligibleunder an 18-month delay.

“It is interesting that the DOL concluded that a 60-day delaywould reduce investor gains by $147 million in the first year, butthat the adoption of the impartial conduct standards without anenforceable contract and without enforcement by the DOL wouldchange the $147 million in investor losses to an unquantified‘relatively small’ amount of investor losses,” noted Sweeney.