The Labor Department’s proposed 18-month delay for the fiduciary rule’s major compliance requirements and enforcement mechanisms is needed for regulators to complete a full review of the rule, according to language in Labor's proposal released today.

This week, the Office of Budget and Management signed off on the proposed delay after an expedited review of the proposal. OMB took less than four weeks to green light a delay.

Reviews of proposed rule-making commonly take up to three months.

Stakeholders have until September 15 to comment on the proposed delay.

Regulators said the “primary purpose” of the delay is to give the Labor Department the necessary time to consider possible changes to the rule, and potential alternatives to its Best Interest Contract Exemption and other prohibited transaction exemptions.

“The Department is particularly concerned that, without a delay in the applicability dates, regulated parties may incur undue expense to comply with conditions or requirements that it ultimately determines to revise or repeal,” the proposal says.

Last February, President Trump ordered a review of the rule. Labor says that can’t be completed by January 1, 2018, the scheduled full implementation date for the rule.

Whether or not changes to the rule will be made won’t be known until the review is completed, the proposal said.

But in the same paragraph, the proposal says, “the Department also anticipates it will propose in the near future a new and more streamlined class exemption built in large part on recent innovations in the financial services industry.”

Labor considered other options to the 18-month delay, including not delaying the January 1, 2018 implementation date, the proposal said.

But regulators settled on the 18-month delay, saying it was the best way to avoid disruption in the investment advice market, facilitate the innovation of fiduciary-friendly investment products, and minimize investor losses.

'Relatively small losses' to retirement investors

In rationalizing the delay, Labor said, “investor losses from the proposed transition period extension could be relatively small.”

The proposal bases that belief on the fiduciary rule’s impartial conduct standards, which went in effect in June.

Those standards would remain in effect during the proposed delay. They require brokers, advisors, and insurance agents recommending investment and insurance products in qualified retirement accounts to give advice in investors’ best interests, and prohibit unreasonable compensation and misleading statements from investment providers.

Under the impartial conduct standards, investment providers in the IRA market are not required to disclose their fiduciary requirements in writing. Nor are the impartial conduct standards backed by the BIC Exemption’s required warranties and private right of action provision.

Consumer advocate groups, including AARP, lobbied Labor to not delay the rule on the grounds that investors would be exposed to continued conflicted advice without the BIC Exemption’s full warranties.

“The proposal’s quantitative analysis is shoddy and not supported by logic or fact,” said Micah Hauptman, an attorney with the Consumer Federation of America, which has advocated for full implementation of the rule as scheduled.

“Without an effective enforcement mechanism, there’s no way to ensure firms and advisers will comply with the rule and no way to hold them accountable if they don’t comply,” added Hauptman in an email.

When the rule was finalized in 2016, the Obama-era Labor Department estimated it would result in $33 billion to $36 billion in IRA investors’ gains over 10 years, due to the rule’s prohibition on conflicted advice.

Labor says those gains will “remain intact” during the proposed delay, so long as investment providers “fully adhere” to the impartial conduct standards.

Hauptman says that reasoning is questionable.

“The assumption that investors will receive the total gains of the rule without an enforcement mechanism is belied by the facts on the ground,” said Hauptman. “There is a segment of the industry that is sitting on the sidelines and failing to come into compliance, waiting for the DOL to gut the rule.”

Potential cost of delay to retirement investors

Under one scenario raised in a comment letter acknowledged in Labor’s proposal, a delay of the rule will reduce the incentive of asset managers to roll-out lower-cost, better-performing investments.

That would potentially cause investors decades of compounded losses if they are put in more expensive, poorly performing investments during the proposed extended transition period.

“I don’t think there can be any doubt that the delay will allow mutual fund managers and others to proceed more slowly,” said Fred Reish, a partner with Drinker Biddle.

“However, that could be offset by lower costs due to more thoughtful and longer term solutions,” he added, referring to potential new exemptions for level-fee investments Labor says it is considering.

Erin Sweeney, an attorney with Miller & Chevalier, said Labor sidestepped the question of whether or not slowed innovation under the proposed delay will cost some investors access to better products.

“The proposal instead focuses on DOL’s conclusion that the impartial conduct standards will protect investors,” said Sweeney.

“Apparently, the DOL concludes that all financial institutions will comply with the impartial conduct standards and that losses will be relatively small even if there is no enforceable contract.  This statement is really pyramiding premise on premise without providing a solid basis for the conclusion,” added Sweeney.

She says Labor failed to make a citation of authority to back its claim that investor losses “could be relatively small” under the delay.

If the full rule is further delayed, financial institutions would presumably retain the flexibility they now have in complying with the impartial conduct standards, per regulatory guidance Labor issued this summer.

That lack of cohesion, along with Labor’s pledge to grant firms regulatory latitude that are making good-faith efforts to comply with the impartial conduct standards, could result in inadvertent or intended loophole’s in the application of the best interest standard, explained Sweeney.

When the Labor Department delayed the implementation of the impartial conduct standards by 60 days earlier this year, it estimated investors would lose $147 million.

Now, the Department is estimating losses will be negligible under an 18-month delay.

“It is interesting that the DOL concluded that a 60-day delay would reduce investor gains by $147 million in the first year, but that the adoption of the impartial conduct standards without an enforceable contract and without enforcement by the DOL would change the $147 million in investor losses to an unquantified ‘relatively small’ amount of investor losses,” noted Sweeney.