Fiduciary Rule Is Now In Effect, Sort Of

When President Donald Trump took office, many in the financial industry were confident that a looming retirement-savings rule they had opposed for years would soon be dead. To their dismay, the core principle of the rule was implemented Friday.

The resilience of the so-called fiduciary rule is partly attributable to delays in appointing senior officials at the Labor Department, the rule’s creator, who would be capable of unwinding a major regulation so close to its implementation, according to industry representatives and consumer advocates involved in the process.

Labor Secretary Alexander Acosta didn’t take up his post until late April, after Mr. Trump’s first pick for the role withdrew from consideration. Other top positions at the Labor Department remain vacant, leaving career officials—who had helped to write the original rule—to shepherd a review of the rule that the president requested in February.

Aversion toward the risk of litigation from consumer groups has also made the administration reluctant to delay the rule long enough to allow for an overhaul or kill it altogether, industry representatives and consumer advocates say.

White House representatives did not provide comment.

Mr. Acosta, a former law-school dean, followed the required rule-making procedures strictly, rather than taking a risk in delaying the rule.

The Labor Department is implementing the regulation in two stages. The core principle that went into effect Friday—two months after the original date set by the Obama administration—requires brokers and advisers who work with tax-advantaged retirement savings to be “fiduciaries” who act in the best interest of their clients. Previously, they were required to offer guidance that was “suitable,” a looser standard.

The rule’s operational requirements, such as disclosure of conflicts of interest to investors, will become applicable in January. The regulation is aimed at avoiding conflicts of interest, which can come about with commission-based compensation.

The rule’s critics say it would punish smaller savers in the form or reduced access to financial advice and higher costs.

THE ROAD TO THE FIDUCIARY RULE 

• September 2010: Labor Department releases first version of the rule, withdrawing it a year later amid industry opposition.
• February 2015: Labor Department reproposes the fiduciary rule after being urged to do so by President Barack Obama.
• April 2016: Labor Department releases the final version of the rule, planning for it to be “effective” June 7, 2016, and “applicable” April 10, 2017. Full compliance is required by Jan. 1, 2018.
• October 2016: Anthony Scaramucci, a close associate of Donald Trump, calls the fiduciary rule ‘the dumbest decision to come out of the U.S. government’ in decades.
• Jan. 20, 2017: President Trump takes office.
• Feb. 3: Trump issues a memo requesting re-evaluation of the fiduciary rule.
• Feb. 15: Andy Puzder, Trump’s first pick for Labor Secretary, withdraws.
• March 2: Labor Department proposes a 60-day delay for the rule.
• April 4: Labor Department announces new “applicability” date of June 9, delayed from April 10.
• April 27: Alexander Acosta confirmed as labor secretary.
• May 22: Acosta announces the rule will go live June 9 in a Wall Street Journal opinion piece.
• June 9: The core element of the fiduciary rule is implemented.
• Jan. 1, 2018: The rule’s operational requirements are set to become applicable.

But some in the industry say it is too late.

“We have growing concerns about the ability to fix or significantly alter the fiduciary rule now that it is set to begin on Friday,” said Edward Mills, an analyst at FBR Capital Markets & Co.

The rule’s survival shows the Trump administration’s difficulties in meeting its pledge to roll back regulations because it doesn’t have people in place to carry out the job. Hundreds of top government positions remain unfilled. At the Labor Department, nominations haven’t been made for the dozen or so positions that require Senate confirmation, including assistant secretary for employee benefits security, the overseer of the fiduciary rule.

“Many of the pieces were still missing at the DOL,” said Fred Reish, a lawyer at Drinker Biddle & Reath LLP who specializes in fiduciary issues. ”If Trump wants to implement his agenda through abolishing regulations, he’s going to have to fill a lot of positions.”

Unwinding the fiduciary rule was tough to begin with. Unlike some of the recent Obama-era rules that the Republican-controlled Congress has successfully overturned, it was already effective when Mr. Trump took office, just waiting to become applicable. That meant changing or delaying the rule required the department to go through a lengthy rule-making process again under the Administrative Procedure Act and prove that revising it would bring clear net economic benefit.

Even with the clock ticking, the action was slow to come. Mr. Trump’s memo asking for a re-evaluation of the rule was issued Feb. 3. Time was wasted over his first pick for labor secretary, fast-food executive Andy Puzder, who was opposed by labor unions and eventually withdrew in February amid allegations of domestic abuse. In early April, the department announced the main part of the fiduciary rule would become applicable in June. Meanwhile, consumer groups supporting the rule stressed that delaying it would be “arbitrary” and “capricious” and open the department to legal challenges.

By the time Mr. Acosta, a safe pick with known Democratic support, was confirmed on April 27, he had little time left. He declined all requests for meetings from industry executives who wanted him to put the rule on hold. On May 22, he said the rule would go live on June 9, writing in a Wall Street Journal opinion column that “Respect for the rule of law leads us to the conclusion that this date cannot be postponed.”

“Acosta is a smart lawyer. He is not an ideologue,” said Mercer Bullard, a law professor at the University of Mississippi who supports the rule. “If Puzder had been appointed, that rule probably wouldn’t have been implemented,” he said, adding that would have led to a lawsuit by the rule’s proponents, which the department would have lost.