Political clock ticks as Labor readies next version of fiduciary rule

If the regulatory process had a soundtrack, it would be a ticking clock.

The American electorate has been pretty much evenly divided over the last few elections, with one party or the other gaining an advantage in the House or Senate by narrow margins. The hold on the White House is even more precarious, whether the chief executive is a Republican or Democrat.

Political uncertainty leads to regulatory uncertainty because each time the White House or Congress changes hands — and especially when they're both controlled by the same party — regulatory policy changes.

That’s because regulatory decisions are — at their heart — political decisions. The rules that govern investment advice ultimately depend on who’s in power. The latest example is the Department of Labor’s fiduciary rule.

The Obama administration promulgated a DOL fiduciary rule that the financial industry defeated in court. The Trump administration put one out that was less stringent but still resisted by the industry. Now, it’s the Biden DOL’s turn.

A couple of weeks ago, the agency sent the next version of that measure to the Office of Management and Budget for review.

The OMB’s assessment will take anywhere from a couple of weeks to 90 days. After the agency gives the rule its imprimatur, DOL can release it to the public for comment, a process that can take months.

A posting on the OMB website says the proposal “would amend the regulatory definition of the term fiduciary … [to] more appropriately define when persons who render investment advice for a fee to employee benefit plans and [individual retirement accounts] are fiduciaries.”

In other words, OMB wants to increase the number of financial advisors who are deemed fiduciaries under federal retirement law when working with customers or clients on retirement savings. It’s likely the agency will tighten rules around when a fiduciary relationship is established, making it clear that that relationship begins with a recommendation to roll retirement savings from a company plan to an individual retirement account.

The rollover decision is a coveted moment for the financial industry and a pivotal one for retirement savers. There’s a lot riding on the DOL's decision about the point in the process at which a fiduciary duty is owed to a customer or client building a nest egg.

Already, the insurance industry is waging a fierce campaign against the pending DOL fiduciary rule. The speculation is that DOL will revise or eliminate a so-called prohibited transaction exemption that applies to independent insurance agents. Under the new rule, they may be deemed fiduciaries.

But before any of that happens, DOL has to promulgate a final rule. We’re a long way from that point, and that’s why the clock is ticking.

During the notice-and-comment period, DOL likely will receive hundreds, maybe thousands, of comment letters about the fiduciary proposal. Collecting and reviewing them likely will take months.

Now we’re into next spring, when DOL could be running up against a deadline for the Congressional Review Act. Under the CRA, Congress can overturn a regulation with simple majority votes in the House and Senate. A filibuster can’t stop a Senate CRA vote.

Congress has 60 legislative days to act on a final rule it doesn’t like. That’s where things become tricky in an election year like next year. Congress will be in session even less than normal in an election year so that members can go home and campaign.

If a final rule is promulgated within 60 legislative days of the end of a congressional session, the next Congress can reach back and act against it within a fresh 60-day time frame after the new Congress is seated.

If Republicans win the House, Senate and White House in next year’s election, GOP lawmakers can scuttle the DOL fiduciary rule if it hasn’t been finalized before the CRA deadline.

“It’s really a complicated equation to know when the clock hits,” said Bryan McGannon, managing director of US SIF Sustainable Investment Forum.

DOL needs to hurry up.

“The clock is never your friend in the rulemaking process,” former assistant labor secretary Phyllis Borzi said in a recent webcast sponsored by the Institute for the Fiduciary Standard.

Borzi is known as the mother of the Obama administration’s DOL fiduciary rule, which was struck down by a federal appeals court in 2018. Normally, rulemaking takes 18 months to two years to complete. DOL has some discretion in how quickly it works through the process.

“It depends on how much the department wants to accommodate the inevitable pleas for extended comment periods,” Borzi said.

The Obama DOL took its time and listened to everyone.

“We went out of our way to accommodate the hundreds of requests from stakeholders, especially industry stakeholders,” Borzi said.

Her fiduciary journey was a long one. The Obama DOL first proposed a rule in October 2010. It took until 2016 to release a final rule.

We heard time and again during that trek the financial industry’ s argument that the rule would price investors with modest assets out of the market for financial advice on their retirement savings because they wouldn’t be able to afford fiduciary advice.

The debate over that assertion has been going on for more than a decade. The Biden DOL is familiar with the arguments and likely disagrees that a fiduciary rule will hurt investors.

So there’s no need to tarry, DOL. Get through the regulatory process on the next version of the fiduciary rule as quickly as possible so that financial advisors will have some certainty about giving retirement savings advice regardless of which party does best on Election Day.