When President Obama threw his weight behind a proposal to extend fiduciary responsibilities to advisors working with retirement plans, investor advocates cheered the endorsement of what they call a needed consumer protection.
Meanwhile, several industry groups have warned the proposal could amount to a ban on commonplace and benign practices of the brokerage sector.
It's been a white-hot debate, to be sure, but at this stage, it's impossible to say who might be right. That's because not only have the rules not taken effect, they haven't even been made public.
Industry opposition played a major role in derailing the Department of Labor's first proposal for expanding fiduciary rules under the Employee Retirement Income Security Act to cover retirement advisors, which the DoL issued in 2010 and withdrew the following year.
If the statements several industry groups issued this week are any indication, it seems a safe bet that the criticism won't let up. Equally assured is that consumer advocates will press on in favor of new regulations to mitigate conflicts of interest in the retirement space.
So now that the rule has been re-proposed, what does the road ahead look like?
WHITE HOUSE REVIEW
A source at the Department of Labor confirms that officials sent the draft of the conflict-of-interest rule proposal to the Office of Management and Budget's Office of Information and Regulatory Affairs on Monday. That begins the White House review of the regulation, which is tentatively slated to take up to three months, but could easily run longer. According to the Financial Services Institute, which opposes the regulation, OMB reviews of DoL proposals on average take nearly four months to complete.
During that time, the groups that have been advocating for and against the proposal can be expected to seek an audience with the OMB officials reviewing the rules, though those conversations tend to be rather one-sided affairs, according to Barbara Roper, director of investor protection at the Consumer Federation of America
"They listen more than they talk," Roper says of the team at OMB that reviews the regulatory proposals.
Following the OMB review, the fiduciary proposal will return to the Department of Labor, where officials will review any tweaks the White House suggests.
Then, likely in fairly short order, the DoL will for the first time make its proposal public, and solicit comments from industry groups, investor advocates and other interested parties.
This figures to be a noisy period, as critics in industry and in Congress will make their voices heard as they digest the substance of the proposal. Since it began wrestling with this issue five years ago, the Labor Department has come under fire from prominent trade groups for ignoring their warnings about adverse and unintended consequences the rules might produce.
"Given the lack of coordination with the industry on this very difficult issue, serious concerns will remain until the re-proposal is made public," says Kent Mason, a partner with the law firm Davis & Harman who has been lobbying against the rules.
As part of the public comment process, the Labor Department is planning to hold a hearing where interested parties can weigh in on the proposal in person, part of what the White House promises will be an inclusive process of crafting the final regulation.
"The administration welcomes and invites stakeholders from all perspectives to submit comments as the proposal moves forward," the White House says in a fact sheet circulated this week. "Only after reviewing all the comments will the administration decide what to include in a final rule -- and even once the Department of Labor ultimately issues a final rule, it will not go into effect immediately."
When the Labor Department first proposed its expanded fiduciary rule in 2010, it set a comment period for 90 days, but kept the record open for months afterward, and also held a public hearing on the issue after the three-month window had been slated to close.
This time around, some observers believe that the proceedings will run on a tighter schedule.
"I'm not sure they're going to be as generous this time," says Duane Thompson, senior policy analyst at fi360, a fiduciary training firm. "I'm not sure you're going to see the same deference paid to comments that are made after this deadline."
So what's the rush?
"The looming deadline here that I think everyone has as the endgame is Jan. 20, 2017, in the sense that we have a new administration. Whether it's a Democrat or a Republican, the leadership at the DoL is almost certainly going to turn over," Thompson says.
"If this rulemaking gets prolonged for too long, they run the risk of having the next administration that comes in changing it. Unless [Democratic Sen. and consumer advocate] Elizabeth Warren runs for president and wins," he adds, "if there's an opportunity to get rid of this rule because it's still hanging out there, there's a good chance it goes away."
With nearly two full years before the next administration will take office, it would seem that there is ample time to write and implement the rules. But regulating under the Administrative Procedure Act is a slow, plodding process, and the months eaten up by the OMB review, the initial revision and public comment period, and then the final revision and issuance of the rule all add up. Then tack on the delay in implementation the administration is promising, and 2017 doesn't look too far away.
In the meantime, the rules could come under fire on a couple of other fronts.
One is in Congress, where scores of lawmakers from both parties have attached their names to letters expressing concerns with the proposal or outright opposition over the past several years. That was, of course, before Obama spoke out on the issue. But then Republicans will hold majorities in both chambers for the rest of his presidency. That raises the specter of fresh efforts to derail the fiduciary proposal, either through legislation barring the new rules or language in an appropriations bill prohibiting the use of any funds to further their implementation.
Then there is the looming prospect of a lawsuit industry groups might bring challenging the Labor Department's fiduciary regulation, a near certainty if the final rules include significant checks on the current brokerage model, according to Thompson.
"It's going to be a tough rule and what that means is you're going to see litigation," he says. "I think it's almost a given that the DoL's not going to water this down very much. You have a lot of money at stake -- a lot more than the cost of litigation."
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