President elect Donald Trump favors reducing the amount of regulations that govern financial companies and advisors. One of the key actions that his advisors have stated that he would like to take is repealing or curbing the new fiduciary rule that was handed down by the Department of Labor earlier this year. However, this will require considerable effort as any new legislation that is introduced to kill the rule would have to go through Congress.
And simply rescinding the rule would require another entire rulemaking process as well. However, Trump has a third alternative that may be far more doable if he intends to stop the rule from taking effect. (For more, see: Can Trump Roll Back the Fiduciary Rule?)
The rule that Trump would like to repeal deals with the fiduciary status of firms and advisors who work with retirement plans and accounts. The Securities and Exchange Commission (SEC) currently requires all Registered Investment Advisors (RIAs) to adhere to a fiduciary standard in their conduct with clients, but brokers who work on commission and are not RIAs have only been held to a much lower suitability standard in the past. The Department of Labor sought to redress this discrepancy by issuing a new fiduciary rule that automatically elevates all financial companies and advisors who work with retirement plans or accounts in any capacity to a fiduciary status.
Several financial groups have filed lawsuits in federal courts in an attempt to block the fiduciary rule. These groups are contending that the rule is too complicated and expensive, and that the Department of Labor has overstepped the bounds of their authority by implementing this rule. Most of these groups are in favor of some sort of fiduciary rule, but they would like it to come from the SEC or FINRA instead. These lawsuits give Trump another alternative that he can use to block this rule. All Trump has to do is simply cease to defend the rule against the plaintiffs and allow the courts to rule against it.
Norm Champ, a partner at Kirkland & Ellis and a former Securities and Exchange Commission official, told InvestmentNews that, “It's something the administration could do right away without jumping through rulemaking hoops. If you think about it from a political capital perspective, you could do a few things like that that don't cost much.” (For more, see: Lawsuits Aim to Overturn DOL's Fiduciary Rule.)
Steve Feldman, a partner at Murphy & McGonigle echoed Champ’s sentiment in the InvestmentNews article. “By dropping their defense, they're accepting the relief that the other side is asking for. It allows a court, based on the plaintiffs' papers, to decide where it wants to come down,” he said.
A federal court in Dallas held a hearing on one of the lawsuits now in progress. A federal court in Washington also recently upheld the rule and the plaintiff, the National Association of Fixed Annuities, is appealing the decision. Other cases are currently being tried in Kansas and Minnesota. The Obama Administration has staunchly defended the rule on the grounds that it helps to protect American workers from receiving conflicted advice that can reduce the returns that they earn in their retirement savings.
The Bottom Line
Time will tell how the lawsuits that have been filed will play out in court. The results of these proceedings may not be uniform - some courts may elect to uphold the law while others elect to abolish all or part of it. Some advisors believe that this issue cannot truly be settled in court and will require Congressional action in order to be completely extinguished. Advisors and their firms will be closely following the developments of the court cases as they will have a substantial impact on their business. (For more, see: The New Fiduciary Rule: Will Lawsuits Overturn It?)