White House memo confuses Wall Street on fate of fiduciary rule

WASHINGTON/NEW YORK (Reuters) - Conflicting messages from the White House have left U.S. brokerage firms and lobbyists unsure whether a controversial rule governing retirement advice will ever be put in place, but they are taking no chances and complying anyway.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., January 23, 2017. REUTERS/Brendan McDermid

President Donald Trump’s Friday memorandum ordered the Labor Department to review the so-called “fiduciary” rule, which requires brokers to put their clients’ interests first when advising them about 401(k) plans or individual retirement accounts.

But that call for a review was significantly weaker than an earlier draft, seen by Reuters, that requested a 180-day delay in the scheduled April 10 effective date of the rule which is already on the books.

Trump’s memo did not go as far as White House early guidance to reporters that the memo would ask the department to “defer implementation” of the rule.

It is not clear just how quickly or easily the Labor Department can delay implementation of the rule.

And while a delay is expected, it still is not clear to Wall Streeters who have already started changing their business models whether they can count on a deferral or reversal of the regulation.

“There’s confusion because it injected a whole lot more noise into the system with very little specificity about what is to come,” said Michael Spellacy, the head of PWC’s wealth management consultancy, who said he spent most of his weekend on the phone with the heads of 35 U.S. brokerages discussing the memo and its implications.

Legal experts say the Labor Department likely will have to undertake a formal rulemaking process in order to delay the rule’s implementation and the lack of a permanent U.S. Labor Secretary may cause further delays.

Trump’s choice to be Labor Secretary, Andrew Puzder, has seen his own confirmation indefinitely postponed in the Senate amidst issues with his ethics paperwork.

One other possible problem that could impact the rule’s implementation is a pending legal challenge in a federal court in Texas. Last week, the judge said she plans to rule no later than Feb. 10.

The fiduciary rule is separate from the banking rules that were put in place after the 2008 financial crisis. Trump has also ordered a review of the 2010 Dodd-Frank reform.


In the meantime, lawyers are advising their financial services clients to continue preparing for the upcoming deadline.

“What is clear from the memo is that we don’t have certainty yet,” said Michael Kreps, an attorney with the Groom Law Group.

The White House did not explain why it scaled back its memo, but legal experts say it was most likely changed because the prior version may have violated the Administrative Procedures Act, a federal law that governs the rulemaking process.

That law requires public notice and a comment period before changes to a rule can be made.

Had Trump proceeded with the original plan for a 180-day delay, the change could have been vulnerable to legal challenges.

Legal experts say the Labor Department has a few possible options.

It can issue what is known as an “interim final rule,” which would immediately delay the effective date while seeking comments from the public on why a delay is justified.

Another option is to a proposed rulemaking to delay the rule’s compliance deadline, give the public 30 days to comment, and then issue a final rule.

A Labor Department spokeswoman reiterated on Monday that the department is reviewing its legal options to delay the rule, but declined to elaborate.

Kenneth Laverriere, an attorney at Shearman & Sterling, said he fully expects the rule to be delayed eventually, though it will come after companies have already spent a lot of money to comply.

Three of the biggest U.S. brokerages, Bank of America Corp’s BAC.N Merrill Lynch, Morgan Stanley MS.N and Wells Fargo Advisors WFC.N, said Friday’s memo will not change compliance plans the firms already have in place.

Of those, Bank of America intends to adopt the most aggressive changes with its plans to scrap selling brokerage IRA accounts starting in April.

Any attempts by the Labor Department to kill the rule will draw a fight from Massachusetts Democratic Senator Elizabeth Warren, who wrote the Acting Secretary of Labor Edward Hugler on Tuesday.

Warren said the nation's largest online brokerage Charles Schwab SCHW.K, Fidelity Investments, asset manager TIAA and around 10 other large wealth management firms told her office they are prepared to be compliant with the rule by the April 10 deadline.

“The genie is certainly out of the bottle,” Laverriere said.

(The story corrects asset manager’s name to TIAA in second-last paragraph from TIAA-CREF)

Reporting by Sarah N. Lynch in Washington and Elizabeth Dilts in New York; Additional reporting by Ayesha Rascoe in Washington; Editing by Linda Stern and Lisa Shumaker