President Trump issued a presidential memorandum on Friday seeking to block the implementation of President Obama’s “fiduciary rule,” which barred financial consultants from steering clients toward high commission/high fee investments, contrary to the best interest of the client. Is this move perceived as one that hurts the older middle-class investor and benefits the Wall Street asset managers?
Undoubtedly. In a nod to the financial services industry, the presidential memorandum opens the door to the reversal of one of the most needed and significant protections for retirement investors – a rule requiring, among other things, that a financial adviser recommend investments in their client’s best interest (as opposed to their own), charge only reasonable compensation for their advice, and disclose all material conflicts of interest. Although the rule became effective last year, the Department of Labor provided the financial industry with a year “implementation” period, until April 10, 2017. To be sure, the memorandum does not expressly delay implementation, but rather, ordered an extensive review of the Department of Labor rule, and the costs and benefits of implementation.
However, the Department of Labor has already conducted extensive research, review, and analyses over the course of nine years prior to issuing its final rule in the first place. The Department of Labor received over 3,000 comments in connection with the proposed rule, over 300,000 letters, held multiple days of hearings (in 2010 and 2015), received numerous reports and analyses showing the costs of conflicted advice, as well as the costs of implementation of the rule. The Department of Labor concluded that while the rule will create some compliance burdens and costs on the financial industry, the costs of conflicted advice to retirement investors cannot be understated – looking at the mutual funds segment alone, the Department of Labor estimated that underperformance due to conflicts of interests could cost IRA investors between $95 billion and $189 billion over the next 10 years alone.
What is the difference between an executive order and a presidential memorandum? Does this end the Obama’s April rule change or are there measures that can be taken to ensure the consumer protection that the rule sought?
An executive order and a presidential memorandum are similar in that both instruct agencies and other members of the executive branch to take some action. Executive orders are more formal in that they are numbered and required to be published in the federal register (memoranda are not).
Neither an executive order nor a presidential memorandum could have overturned the fiduciary rule since it became effective on June 7, 2016. However, by ordering the Department of Labor to conduct an extensive review of the rule, the Department of Labor could issue a delay of the implementation date, allowing allow the Department of Labor to revisit its earlier conclusions, and issue a new regulation either revoking or modifying the rule. Given President Trump’s prior executive order on regulations and his statement on Friday regarding rolling back Dodd-Frank, I think the Department of Labor’s fiduciary rule is likely to die a slow death.
The silver lining in all of this is the fact that many financial firms have already implemented the changes required under the rule, in anticipation of the April 10 compliance date. Many firms have embraced the higher, fiduciary or “best interest” standard, and are not going to go back. So the best course for investors while this rule remains in a regulatory quagmire is to take action themselves: give your business only to a financial firm or adviser that will agrees in writing to serve as your fiduciary.
Why is the Consumer Financial Protection Bureau a prime target of the of the Republicans?
It is a target because it is a powerful new advocate for consumer financial protection that fills an enforcement gap not addressed by the SEC, FDIC or other government agencies. The CFPB is empowered to review potential abuses in the banking and consumer lending industry and enforce the law through penalties and other relief. The CFPB’s case against Wells Fargo last year for its widespread and illegal practice of opening up unauthorized accounts on behalf of its customers is a compelling example of the need for the agency in the first place. This is among the conduct that falls within the CFPB’s purview and its swift investigation led to a $100 million fine against Wells Fargo. Such cases send a shock wave through the banking industry.
Teresa Verges is director of the University of Miami Investor Rights Clinic. Prior to joining the Law School, Professor Verges served as Assistant Director of Enforcement for the Securities and Exchange Commission at the Miami Regional Office, where she led investigations of potential violations of the federal securities laws, including cases involving financial fraud, pay-to-play and municipal securities offerings, market manipulation, insider trading, offering fraud, violations by broker-dealers and investment advisers, and violations of the Foreign Corrupt Practices Act.