Hester Peirce, Senior Research Fellow and Director, Financial Markets Working Group at the Mercatus Center at George Mason University, discusses the arguments for and against the Fiduciary Rule—and its likely fate.
1. What is the Fiduciary Rule?
The Fiduciary Rule is the short name for a thousand-pages of rules adopted by the DoL (Department of Labor) in April 2016. The Fiduciary Rule governs the provision of investment and rollover advice in connection with retirement plans under the ERISA (Employee Retirement Income Security Act) and IRAs (Individual Retirement Accounts). The new rule departs substantially from the prior DoL approach, which was in place for more than four decades, by expanding the class of activities and communications that make a person an “investment advice fiduciary”. Those who fall into this fiduciary category would be precluded from engaging in many types of transactions, including receiving commissions.
The Fiduciary Rule therefore includes new and revised prohibited transaction exemptions, the most important of which is likely to be the BIC (Best Interest Contract) exemption. The BIC exemption permits fiduciaries to receive types of compensation that are currently standard in the industry but are prohibited transactions under the new rule. It is a multi-track exemption that is conditioned on numerous substantive limitations and requirements related to compensation, documentation, compliance policies and procedures, contract terms, disclosure, and recordkeeping. Other exemptions likewise include detailed conditions.
2. What are the arguments for the Fiduciary Rule?
Proponents of the Fiduciary Rule argue that it simply asks financial professionals to work in the best interest of retirement investors. The head of the Center for American Progress, which hosted DoL’s rollout of the rule, explained that “the fiduciary rule will help ensure that financial advisers prioritize their clients’ best interests over their own bottom lines.” Proponents point to research, such as a study by the Council on Economic Advisers that they claim shows an annual $17 billion of investor harm from “conflicted advice.” Many argue that the fiduciary standard embodied in the rule is preferable to the suitability standard that governs broker-dealers under securities law and see the rule as a long-overdue leveling of the retirement advice playing field.
3. What are the arguments against the current Fiduciary Rule?
Critics of the rule (full disclosure: that includes me) don’t dispute that regulatory action should be taken to strengthen protections for retirement investors, but take issue with the DoL’s intensely complex approach wrapped in over-simplified rhetoric. The complexity of the DoL’s directive makes working with retirement investors a legal minefield for well-intentioned financial professionals. Opponents of the rule worry that it will actually harm investors—particularly less wealthy investors—by denying services, products, and methods of payment that work well for them and could increase the price they pay for the services and products they receive. The DoL’s conception of fiduciary duty is so rigid that it is likely to stifle customer-driven innovation and end many normal, beneficial interactions between financial professionals and retirement plans and investors. They question the above-mentioned economic analysis undergirding the rule. Finally, the rule represents a jurisdictional power grab by the DoL, which lacks the expertise to understand the ramifications of its rule for all investors, not just retirement investors.
4. What are the proposed changes or alternatives to the Fiduciary Rule?
Proposed changes include a substantial delay to ease implementation headaches or outright repeal. Trimming the rule to make compliance more straightforward is less likely as the rule’s essence is its complexity. An alternative to the DoL’s Fiduciary Rule would be to allow the SEC (Securities and Exchange Commission), which is the primary regulator responsible for most of the retirement landscape, to craft a rule.
In a February memorandum, President Trump directed the DoL to take another look at the fiduciary rule to see whether it is harming investors. In response, the DoL delayed key parts of the rule by two months. The brevity of the delay—which was driven by the DoL’s insistence that investors are being harmed as they await “the imposition of fiduciary status and adherence to basic fiduciary norms”—suggests that the DoL remains committed to the rule. However, the President’s nominee to head the DoL was confirmed on 27 April, and he may change the DoL’s course. Jeb Hensarling, Chairman of the House Financial Services Committee, released draft legislation that would rescind the Fiduciary Rule, require the DoL to wait for the SEC to act, and establish certain parameters for the SEC’s action in this area.
5. Do you think that we will see substantive reform to the Fiduciary Rule? If so, what will that look like?
The future of the Fiduciary Rule is uncertain. If, as the President has directed, the DoL takes a truly fresh look at its rule I expect that it will be repealed and the DoL will go back to the drawing board.
Another possibility is a further extension to accommodate concerns about the difficulty of implementing the rule. It is also possible that a legislative solution along the lines of the Choice Act would succeed in shifting the primary responsibility for fiduciary rulemaking to its more natural home – the SEC. In any case, coming into compliance with the rule is a herculean task, which has already begun and will be costly to reverse. Regardless of whether the rule stays on the books, the Fiduciary Rule will have a lasting impact on the financial services industry.
Bonus Question: What is the best book that you’ve read recently?
A book I am reading now is The First Congress by Fergus Bordewich, which provides an interesting glimpse into discussions by the first US Congress. It is particularly fascinating to read this history in light of the present discussions about the constitutionality of entities like the Bureau of Consumer Financial Protection. Based on concerns they expressed more than two centuries ago about governmental power, I don’t think the Founding Fathers would have embraced today’s financial regulatory bureaucracy.
About Hester Peirce
Hester Peirce is a Senior Research Fellow and Director of the Financial Markets Working Group at the Mercatus Center at George Mason University. Before joining Mercatus, Peirce served as a staffer on the Senate Committee on Banking, Housing, and Urban Affairs and at the Securities and Exchange Commission. She is an editor of, and a contributor to, Reframing Financial Regulation: Enhancing Stability and Protecting Consumers and Dodd-Frank: What It Does and Why It’s Flawed. Hester Peirce earned her BA in economics from Case Western Reserve University and her JD from Yale Law School.