Delaying the DOL fiduciary applicability date is proving complicated
MARCH 30, 2017, UPDATE:
The Department of Labor (“DOL”) sent its final rule to delay the applicability date of the fiduciary rule to the Office of Management and Budget (“OMB”) for review. Once the OMB completes its review, assuming it approves the rule, it will send it back to the DOL to be published in the Federal Register.
Since the text of the final rule is not yet available, neither the precise contours of the final rule nor the DOL’s handling of the various complications delaying the rule posed are yet clear. The rule proposal, of course, was for a 60-day delay of the applicability date that would be “effective on the date of publication in the Federal Register.” So, while it remains an extraordinarily tight timeframe – OMB can take up to 90 days to review a rule proposal – it remains feasible that OMB approves the rule in the next week or so and DOL is able to publish a final rule delaying the applicability date by the end of next week.
MARCH 13, 2017, UPDATE:
The DOL issued a Field Assistance Bulletin (No. 2017-01) on March 10 that promises not to initiate an enforcement action for failures to comply with the rule if the DOL does not implement an applicability date delay until after April 10 or if the DOL ultimately decides not to delay the applicability date.
The bulletin affirmed that the DOL intends to decide whether to implement an applicability date delay prior to April 10. It responds to concerns expressed by financial services institutions that “investor confusion and other marketplace disruption” may result from uncertainty about when and whether the DOL will implement an applicability date delay.
More specifically, should the DOL not implement a rule delaying the current April 10 applicability date until after April 10, the temporary enforcement policy states that the DOL will not initiate an enforcement action because an adviser or financial institution failed to comply with the rule during the period between April 10 and the date the applicability date is delayed, including a failure to provide retirement investors with disclosures.
The temporary enforcement policy also provides clarity should the DOL decide against delaying the applicability date. In that case, the DOL will decline to initiate enforcement actions for failing to comply with the rule through a “reasonable period” after the department decides not to implement a delay. The policy also will not affect firms’ ability to take advantage of a 30-day cure period under the BIC Exemption under the Principal Transactions Exemption.
When President Donald Trump issued his Feb. 3 memorandum that directed the Department of Labor (DOL) to prepare an updated economic and legal analysis of its new fiduciary rule, the president signaled his administration’s animus to the rule, and the fiduciary rule seemed all but dead.
We covered the most recent step in that process last week when the Office of Management and Budget (OMB) published for comment a rule proposal to delay the applicability date of the fiduciary rule. The rule proposal was expected to clarify the path toward certain delay. Instead, it demonstrates just how difficult federal rulemaking requirements have made even implementing a delay of the applicability date.
The next step will be for the DOL to publish a final rule; for now, the April 10 applicability date remains effective. Presumably a final rule will be published before April 10, although the DOL has a daunting amount of work to do between here and there. In addition to the key question of when the DOL will file the final delay rule, other questions remain: Presumably it will file it as an interim final rule; if so, how does it demonstrate “good cause”? Will the final rule still include a 60-day delay or a different time period? And what will the regulatory impact analysis (RIA) look like? Will it be one that stands up to scrutiny? These issues are discussed in more detail below.
APA, executive orders continue to complicate the delay
The first setback in implementing an applicability date delay was the implicit acknowledgement by the administration that the Administrative Procedures Act (APA) prevented Trump from simply ordering the delay in an executive order. An earlier draft of the Trump memorandum had included a 180-day delay of the rule’s applicability.
Now the DOL’s proposal has been scaled back to a 60-day delay. Even a 60-day delay created an estimated economic effect that caused the OMB to upgrade the delay rule to “economically significant.” This creates additional requirements for the DOL, which, under Executive Order 12866, now has to include in its rulemaking:
- an assessment, including a quantification, of the benefits of the regulation,
- an assessment, including a quantification, of the costs, and
- an assessment of the costs and benefits of alternatives to the planned regulation and an explanation of why the rulemaking is preferable to the alternatives.
OMB also labeled the rule proposal a “major” rule, which requires an effective date 60 days after the rule is published in the Federal Register. This would mean the applicability date delay would become effective over a month – and perhaps almost two months – after the current April 10 applicability date. The DOL says in its proposal that the delay will be effective on the date the final rule is filed, which likely means that the agency intends to issue an “interim final rule.” The APA authorizes agencies to issue such rules for “good cause” and requires that the agency demonstrate its good cause in the rule filing.
The DOL began sketching out its good cause argument by worrying that, should the review mandated by the president cause it to rescind or revise the current rule, “retirement investors and other stakeholders might face two major changes in the regulatory environment rather than one.” Two changes in such short order might well “disrupt the marketplace, producing frictional costs that are not offset by commensurate benefits.”
Request for comment
The DOL proposed rule filing seeks comments on the costs and benefits of the 60-day delay proposal. It also asks whether it should delay the applicability of all, or only part of the rule, suggesting that, by way of example, it could delay the notice and disclosure provisions while not delaying the impartial conduct standards set forth in the exemptions. Finally, it asks whether a different delay period would better serve investors and the industry.
The proposed rule’s current RIA
To estimate the costs and benefits of the delay rule, the DOL used the Obama administration RIA, which estimated that the fiduciary rule would save retirement investors $33 billion to $36 billion while imposing $16 billion in compliance costs. The DOL filing uses this RIA to estimate that the 60-day delay could reduce investor gains from the rule by $147 million this year (and by $890 million over 10 years) while saving $42 million in compliance costs.
In short, the DOL’s rule proposal estimates that the 60-day delay will have a net negative cost to society of $105 million this year. The equivalent figures for a 180-day delay are costs to investors of $441 million this year and $2.7 billion over 10 years with savings of $126 million – a net cost to society this year of $315 million. This $210 million difference in cost estimates may explain why the DOL proposed a 60-day delay rather than the 180 days most had expected.
Presumably, comments received during the comment period will change these estimates. Of course, the easiest way to change the numbers in this cost-benefit analysis would simply be to move away from the Obama administration RIA. But the whole rationale for the delay is to give the DOL time to do precisely that: If the DOL could produce a new RIA by April 10, it would likely just revise or rescind the rule on the basis of this new analysis instead of implementing applicability date delays. This reality seems to be acknowledged in the DOL filing in which the agency seeks comment on a variety of aspects of the Obama administration RIA in the 45-day comment request on the fiduciary rule, which ends seven days after the current applicability date, but not specifically in the 15-day request on the delay proposal.
The comment period ends 24 days before the April 10 applicability date. The combination of the calendar, the Obama administration RIA, and the finding by OMB that this is a major, economically significant rule make the DOL’s task difficult. While Trump’s administration has made clear that it wants to delay and then modify or rescind the rule, the actual rule proposal from the DOL makes clear that there remains quite a bit of work between here and there – and potentially a few more twists and turns.