By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as scribbles occasional travel pieces for The National.
Trump is “maniacally focused” on fulfilling his campaign pledges, chief strategist Steve Bannon told The Guardian in a piece published yesterday. This has resulted in a flurry of executive orders and a plethora of tweets, the latter often emanating in the wee hours of the Washington morn.
Yet as Yves has written, the legal force of some of these measures– no matter how couched in legalese they may appear– has no greater weight than would mere issuance of a press release. During the campaign, Trump promised to roll back the Dodd-Frank financial regulatory edifice, and on February 3, he issued an executive order purporting to be the first step in doing just that. But the president cannot just undo existing law, by by fiat, whether covered by the fig leaf of an executive order or not.
On the same day, Trump issued a Presidential Memorandum on Fiduciary Duty Rule, in which he directed the Department of Labor (DoL) to conduct an examination of the a new fiduciary rule, due to come into effect on April 10. This rule would impose a basic fiduciary duty standard on investment advisors, requiring them to act in a client’s best interest. The fiduciary rule replaces the previous suitability standard, which consumer advocates have criticised for allowing investment advisors to provide conflicted advice, motivated by fees. This suitability standard imposes costs estimated at $17 billion annually on investors and depresses investment returns on retirement savings by a percentage point. Brokerages and insurance companies rely heavily on commission-based compensation.
As reported by The Wall Street Journal in an article entitled Brokers Spared From Fiduciary Rule:
“Repealing the rule frees up brokers and insurance agents to go back to recommending what’s most profitable for them rather than what’s best for their customers,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “And it frees up firms to keep the toxic financial incentives in place that encourage and reward advice that is not in customers’ best interests.”
Yet as spelled out in a National Law Review article, Status of the Fiduciary Rule:
Contrary to popular perception, the Memorandum did not direct the Department of Labor (DOL) to delay the applicability date of the Fiduciary Rules. However, shortly after the Memorandum was signed by the president, the acting secretary of the DOL released a statement saying the DOL would be reviewing its legal options for delaying the applicability date.
While the DoL might in the long run not rescind the rule after all, in the short term, it’s widely expected that the agency will delay the rule’s April 10 compliance deadline. The situation has been further complicated by the withdrawal of Andrew Puzder’s nomination as Labor Secretary. Trump moved quickly to nominate Alexander Acosta, a former member of the National Labor Relations Board, who also served as a US Attorney for the southern district of Florida during the administration of President George W. Bush. Yet that nomination has yet to be confirmed by the Senate, and in the interim, business at the DoL will likely stall.
Congress might step in at any time and pass legislation to rescind the rule. Trump would almost certainly sign such a bill. Whether this would happen depends on what interim steps the DoL takes and the outcome of pending legal challenges, as well as whether opponents muster sufficient lobbying muscle to force such an outcome. This latter point may be less certain than it first appears. As I elaborate further below, some firms have already taken steps to comply with the framework that it was believed would apply from April 10 onward and they might not necessarily wish to unwind such arrangements now.
Meanwhile, at least four legal challenges have been filed concerning the fiduciary rule. If challenges were to succeed, and a court had overturned the rule– as federal courts have done with some Dodd-Frank provisions, for example– any DoL review of the rule could be rendered moot. The legal situation is a bit unusual in that since the Trump administration’s position on the rule is opposite to that of its predecessor– which promulgated this rule. So if the government were to lose one of these challenges, I’m guessing it would opt not to appeal any decision to vacate the rule. (My explanation might appear confusing unless one recognizes that these cases were pending before Trump became president, so that the government’s position in these actions thus far has been to argue in favor of the new fiduciary rule.)
So far, however, no federal district court judge has ridden to the Trump administration’s rescue, and in fact, the three federal district courts that have ruled– sitting in Washington DC, the northern district of Texas, and Kansas, respectively– have each granted the government’s motion for summary judgment, thus upholding the rule. Judges Randolph Moss (DC) and Daniel Crabtree (Kansas)– are Obama appointees, while chief judge Barbara Lynn (Texas) is a Clinton appointee. Various appeals remain pending and I decline to speculate on these at this time.
On Wednesday, February 22, federal district court Judge Susan Richard Nelson (of the district of Minnesota), rejected the Department of Justice’s (DoJ), request for a stay of the rule, pending the outcome of the DoL review. Judge Nelson is due to rule on a summary judgment motion on March 3. If I were to hazard a guess, it would be that Judge Nelson– also an Obama appointee– is likely to rule consistently with the other three decisions, and uphold the rule.
Chief Judge Barbara Lynn’s ruling in Chamber of Commerce v. DOL is the most comprehensive treatment of the issue handed down to date. This 81 page opinion suggests that the DOL will find it difficult to find grounds for rescinding the new fiduciary rule outright– although as I mentioned above, the DoL will likely seek to delay implementation beyond the April 10 implementation date. Losing counsel in this case, Eugene Scalia– son of the late Supreme Court Justice Antonin Scalia– has a “a strong track record for winning legal challenges to kill off unwanted Wall Street regulations“, according to Reuters, and these — include some Dodd-Frank provisions.
What Happens Next?
With the legal status of the new rule remains uncertain, where does that leave investment advisers? Procedures for complying with such a complicated framework are not developed overnight, and many investment advisers had already taken steps to conform theirs to the new framework that was slated to come into effect in April. The WSJ article quoted above suggested that some brokerages would proceed with at least some their plans to institute new procedures or retain those already in place. In particular:
Merrill Lynch, which has more than $2 trillion in client assets, has said it would stick with its plan, announced in October, to end commission-based retirement accounts even if the rule gets killed. The Bank of America Corp.-owned brokerage will instead charge a fee based on a percentage of assets.
Morgan Stanley recently told its brokers it would move ahead in any political scenario with changes to product pricing, such as lowering the price of commissions tied to stocks and exchange-traded funds.
How long these and other firms would retain such resolve, however, is an open question, in the event that the DoL finds sound legal grounds to rescind or alter the fiduciary rule. I should point out as well that despite the sound and fury occasioned by Trump’s February 3 memorandum on the new rule, actual financial sector practices depend not only on the letter of the law, but also are shaped by the enforcement climate. That has been notoriously lax since the financial crisis– despite rhetoric to the contrary. Where the Trump administration will come down on this crucial issue remains unresolved.