It may be show time for the U.S. Department of Labor’s (DOL’s) Fiduciary Rule (the “Rule”), but don’t expect an elaborate production.  Think frustrated, reluctant actors on a bare stage with no lights or scenery implementing the previous Administration’s regulatory approach to protecting retirees and retirement savings from conflicted investment advice.

After a long and contentious preview run, the rising curtain reveals that parts of the Rule won’t become effective before January 1, 2018, DOL won’t enforce the rule before that date, and, during this transition period, DOL will continue to consider whether to revise or repeal the rule.  Further, the Securities and Exchange Commission (“SEC”) has shown interest in a major role – or at least an attention-grabbing cameo – that could complicate the production further.

Nonetheless, the show has opened.  Under the Rule, beginning June 9, 2017, those who provide investment advice to retirement savers are fiduciaries and the scope of activity that constitutes investment advice is broader than in the past.   The Best Interest Contract Exemption and the Principal Transactions Exemption will allow financial institutions and advisors to engage in transactions that would otherwise be prohibited under the Employee Retirement Income Security Act and the Internal Revenue Code (the “Code”).  Qualifying for these exemptions, through the end of the year, will require compliance with only “impartial conduct standards” – giving advice in retirement savers’ best interest; charging no more than reasonable compensation; and making no misleading statements about investment transactions, compensation or conflicts of interest. Full compliance, which is set to kick in on January 1, 2018, requires written disclosures, implementation of policies to protect retirees from investment advice that is not in their best interest, new rights and protections for IRA investors, and satisfaction of additional conditions.  Of course, new scenes could be added or the show could close completely before then.

The recent history of this storied rule began with a February 3, 2017 Presidential Memorandum ordering the Secretary of Labor to review the Rule.  In response, DOL requested public comments on the Rule and delayed the April 10 applicability date until June 9 to provide additional time for review.   While on May 22, 2017, DOL Secretary Alexander Acosta announced that the June 9 applicability date would not be further delayed, his agency issued guidance indicating that it would continue its review of the Rule and seek additional public comment on “specific ideas for new exemptions or regulatory changes” and implementation issues.   The guidance also announced a non-enforcement policy stating that DOL will not “pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions” until the January 1, 2018 full compliance date.  The IRS had previously adopted a non-enforcement approach with respect to corresponding provisions in the Code.

Secretary Acosta’s announcement, an opinion piece in the Wall Street Journal, was far from an endorsement of the Rule.  It was, in contrast, a reluctant legal conclusion that the Rule’s implementation must go forward – at least for the time-being. Acosta was clear, however, that the Rule “may not align with the President’s deregulatory goals.”

And there is more.  On June 1, 2017, SEC Chairman Jay Clayton issued a statement recognizing the possible effects that the Fiduciary Rule could have on retail investors and entities regulated by the SEC.  He highlighted the SEC’s mission of (a) protecting investors, (b) maintaining fair, orderly and efficient markets, and (c) facilitating capital formation as part of his request for public comment on the standards of conduct that apply to investment advisers and broker-dealers when they provide investment advice to retail investors.  The Chairman presented 17 areas for public comment to facilitate an updated assessment of the current regulatory framework, the current state of the market for retail investment advice, and market trends.  This is familiar ground for the SEC, which has reviewed these matters a number of times over the last decade or so and received a broad range of recommendations for action in response to their efforts.   While changes in the marketplace may justify a need for updated information, it is worth noting that previous efforts have not produced significant regulatory action in this area.  Whether a new SEC effort to address standards for conduct by investment advisors and broker-dealers in the retail space will be more productive and how it will affect the DOL Fiduciary Rule is not predictable at this point but will certainly provide fodder for a sequel to the current show.

Congress, too, has moved into the Fiduciary Rule spotlight. On June 8, the day before the Rule’s applicability date, the US House of Representatives voted to repeal the Rule until the SEC produced its own fiduciary standard.  The Fiduciary Rule repeal was part of a larger bill repealing the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The same day, Republicans introduced another bill to block the Fiduciary Rule.  This one would establish an alternative, disclosure-based, set of rules to govern fiduciaries and prevent conflicts of interests.  Neither the Fiduciary Rule repeal provision in the House-passed bill nor the newly-introduced bill is likely to progress much further.