The Office of Management and Budget (OMB) announced today that it has concluded its review of a requested delay of the applicability date of the fiduciary regulation, as submitted by the Labor Department’s Employee Benefit Security Administration (EBSA) on February 9th.
Depending on the results of the OMBs review, the Department of Labor (DOL) could now be ready to publish the delay rule in the Federal Register or (in a more likely scenario) more analysis and time may still be required to achieve a delay.
In an important development, the OMB posted on its website this morning (Feb 28), that it has changed the designation of the delay to "economically significant," a more rigorous category than the "not economically significant" label it previously carried when it was originally submitted to OMB by the DOL. The “economically significant” designation is widely viewed as a win for Fiduciary Rule advocates.
“Economically significant” is not a legal term, but rather it is a management term – one of several thresholds for triggering review of a proposed or final rule by the Office of Management and Budget (OMB) Office of Information and Regulatory Affairs (OIRA) and other interested agencies.
The economically significant moniker requires a detailed cost-benefit analysis, including an assessment of the costs and benefits of potentially effective and reasonably feasible alternatives to the planned regulation. While unlikely, it is possible that these requirements may already be complete or at least in the late stages of development. Earlier communications from the DOL to a Texas judge requesting a stay in the U.S. Chamber’s lawsuit indicated that it would take until March 10th to provide a similar analysis.
In addition, it has been expected that the delay rule would have a two-week comment period, however the new classification of "economically significant” may require a longer comment period- potentially as long as 60 days.
The combination of having to conduct a more robust economic analysis and a comment period of longer than two weeks could mean that the DOL may not be able to push back the current rule’s applicability date before April 10th.
The DOL delay rule can take two forms, a “proposed rule” or an “interim final rule”. A proposed rule requires public comment before it can be published, while an interim final rule can be published first, with comment taken afterwards. While many expect the delay to take the form of an interim final rule, the reliance on the “good cause” exception brings additional litigation risks from rule advocates. It has been reported that the OMB is being cautious to minimize the risk of potential litigation from Fiduciary Rule advocacy groups who will likely sue if the OMBs review is flawed in any way.
Timing of the pending delay – assuming, in fact, that it is coming soon – has critical implications for the financial services industry. As of April 10th, the definition of fiduciary investment advice will apply and firms must begin transitioning existing accounts to Best Interest Contract Exemption accounts. As such, thousands of U.S. firms will be establishing best interest contracts from millions of retirement clients. Once in force, these contracts become immediately enforceable in a court of law. Any delay or repeal of the rule that is effective after BIC Exemption agreements are in place will have no impact on the firm and financial advisors’ contractual obligations.
This one is likely to come down to the wire, so stayed tuned. We will do our best to continue to provide meaningful updates when relevant.
Contact Steve Saltzman with questions or comments at firstname.lastname@example.org.