The Department of Labor has now put one of the Obama administration’s most debated regulations on hold.
The Obama administration attempted to give the agency more oversight of the relationship between financial advisors and retirees, sparking several objections from the critics who had said that it would drive up costs. The Labor Department was expected to deliver and implement the new rule on Jan. 1st, 2018, but will postpone that process until July of 2019.
The Department says that the delay is needed to reevaluate the scope and specifics of the regulation, which would have placed the increased scrutiny on a financial advisor’s incentives and that of the prospective retirees too. The department said that it needs to take a longer-term look at the practical implications of its past regulatory judgment in light of huge criticism from the industry and President Donald Trump’s call to revisit the rule.
“The Department will not pursue claims against fiduciaries working diligently and in good faith to comply with the Fiduciary Rule and PTEs, or treat those fiduciaries as being in violation of the Fiduciary Rule,” DOL had said in a press release. “The extension gives the Department the time necessary to consider public comments submitted, including whether possible changes and alternatives to exemptions would be appropriate in light of the current comment record and potential input from, and action by the Securities and Exchange Commission, state insurance commissioners and other regulators.”
A 2016 Chamber of Commerce study had estimated that the rule would price many of the prospective retirees out of the market of hiring financial professionals to manage their own savings as they head into their senior years. The regulation would also limit commission-based operations, causing the financial firms to embrace fee-based management.
This could hinder those with much smaller accounts from gaining access to retirement advice because of the “substantial threat of unwarranted litigation,” according to the Chamber’s analysis. As many as 7 million retirement account owners “could lose access to investment advice altogether” and 92 percent of investment firms “could limit or restrict investment products for their customers, which could ultimately affect some 11 million households.”
The department had established the Fiduciary Rule in 2016 under the leadership of the then-Labor Secretary Tom Perez, who now leads the Democratic Party. Perez had hailed it as “historic” in an exit memo posted to the White House website. He had said that the rule would protect the consumers from financial advisers who steer them toward investments that come with more lucrative fees, rather than those who are best suited for their future plans.
“In 2016, the Department took a historic step to protect the savings of America’s workers—the conflict of interest rule makes sure that professionals providing retirement investment advice have to give advice that’s in the best interest of their clients and not divert their clients’ hard-earned income into their own pockets through hidden fees and conflicted advice,” he had said.
The proposal instigated more opposition from investment firms and lawmakers, who said that it would lead firms to abandon small dollar clients to avoid pushback from the regulators. In May, Representative Phil Roe, a member of the House Committee on Education and the Workforce, sent a letter to Labor Secretary Alexander Acosta asking him to block its implementation. Roe had also welcomed the department’s delay on Monday. He had called it “a step in the right direction,” but also said that dismissing the rule is the only way to ensure that the retirees have access to affordable financial advice.
“While an 18-month delay to the [proposal] is a welcome relief, it must be followed by a clear signal that the department intends to amend the rule to ensure their affordable retirement advice is preserved,” Roe had said in his statement. “I continue to believe implementing this rule at any point in the future will cause nothing but higher costs and fewer options for our low- and middle-income investors, the folks who need the assistance most.”
Roe is the author of the Affordable Retirement Advice for Savers Act, which had strictly define conflicts of interest between an investment advisor and his client. Representative Virginia Foxx, the chairwoman of the House Education and Workforce Committee, had said that the Fiduciary Rule outlined by the Obama administration failed to properly weigh the practical consequences of curtailing the incentives for financial advisors.