Fiduciary Rule’s future remains uncertain

The regulation will be partially effective from June, but could still face a ‘full-scale rewrite.’

The Trump administration could still scrap a rule that will largely prevent financial advisors recommending private equity investments to savers in individual retirement plans, despite its partial entry into force in June, analysts predict.

US labor secretary Alexander Acosta said “[the Department of Labor] found no principled legal basis to change the June 9 date [of entry into force of the Fiduciary Rule],” even though it continues to conduct a public consultation on its details.

This consultation was ordered alongside a call for a delay to the rule’s entry into force by President Trump in February.

Full implementation of the rule, which is designed to prevent investment advisors from giving conflicted advice relating to individual retirement plans, is now scheduled for January 1, he said.

But he added the regulation was “controversial” and “may not align with President Trump’s deregulatory goals”.

Analysts expect the rule will either be re-written, if not scrapped, before its full entry into force.

“This surprising development is a near-term negative for an industry that had expected more immediate regulatory relief, but all indications are that this rule will ultimately be relaxed,” analysts at Compass Point Research and Trading said in a client note. “We maintain our view that the likeliest outcome for the fiduciary rule is a revamped construct that lessens the associated legal liability.”

Analysts at FBR called the move “a speed bump in the ultimate reworking and fundamental rewriting of the fiduciary rule.”

It added a “full-scale rewrite” is likely with rules drawn up not just by the Labor department, but also with input from the US Securities and Exchange Commission.

Private equity firms could expect a multi-billion-dollar capital investment windfall if the rule is scrapped. Firms have been keen to tap into the lucrative 401(k) market, which traditionally shuns the asset class because of its illiquidity and large minimum investment products.

An estimated $6.8 trillion is currently held in individual retirement plans. This means if advisors allocate the same proportion of capital to the asset class as other US retirement schemes, an average 7 percent, around $476 billion could be ploughed into private equity funds.