Fate of DOL Fiduciary Rule in Question After Court Ruling
March 16, 2018 by Melanie Waddell
The U.S. Court of Appeals for the 5th Circuit’s Thursday ruling to strike down the Labor Department’s fiduciary rule has industry watchers divided on what it signals for the rule’s final implementation. Meanwhile, observers say, it will prompt the Securities and Exchange Commission to re-evaluate its fiduciary rulemaking.
Neil Simon, vice president of government affairs for the Investment Adviser Association, told ThinkAdvisor Friday morning during the group’s compliance conference in Washington that the 5th Circuit ruling “appears to be an extremely significant decision, and is likely to give pause to the SEC with regard to its own fiduciary rulemaking.”
The ruling, Simon said, appears to signal that full implementation of Labor’s rule is likely over.
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With the court’s 2-1 decision to vacate the rule, Labor’s fiduciary rule “now appears to be on life support,” added Greg Valliere, chief global strategist for Horizon Investments, in his Friday morning Capitol Notes.
“The anti-regulation Trump administration has been reviewing the Obama-era changes to financial advice and retirement plans,” Valliere said, noting the delay in full implementation of the rule until June 2019.
As it stands now, the rule will likely be “in limbo for the foreseeable future” and may eventually wind up in the Supreme Court, “or the Fifth Circuit could instruct all of its judges to review it,” Valliere continued.
Another option: Labor could “accept the ruling, which then would begin a lengthy process of rewriting (and softening) it,” perhaps with input from the SEC.
The “original” Labor Department fiduciary plan “will never be fully implemented,” Valliere opined. ”Its legacy may be that while it burdened small firms, it has prompted tougher self-regulation by the industry as a whole.”
But Erin Sweeney, an attorney with Miller & Chavalier in Washington, said that “the decision is unlikely to derail or even slow down” Labor’s revision process.
Why? ”Because of the uncertainty of the two decisions issued within two days, one from the 10th Circuit upholding a portion of the regulation and the 5th Circuit decision vacating the regulation,” Sweeney opined.
The Labor Department on Tuesday won a case in federal court brought against its fiduciary rule by Market Synergy Group, an insurance distributor.
The U.S. Court of Appeals for the 10th Circuit ruled that Labor did not “arbitrarily treat fixed indexed annuities differently from fixed annuities” under its final fiduciary rule.
Labor, Sweeney added, ”will most likely continue its revision process as a hedge, while the regulation winds its way through the Supreme Court process.”
The 5th Circuit decision, she continued, “will have negligible impact on the SEC rulemaking because the SEC needs to continue to move forward on its fiduciary project regardless of the resolution of the DOL fiduciary rule litigation.”
The nine plaintiffs in the 5th Circuit case included the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Institute.
The appeals court struck down the entirety of the fiduciary rule.
Lawmakers who fought against Labor’s rule applauded the 5th Circuit’s decision. Labor’s next move is to decide whether to ask the full appeals court to rehear the dispute, or take the case to the U.S. Supreme Court.
“The flawed DOL fiduciary rule is the epitome of regulatory overreach that would harm the very people it’s allegedly intended to help,” said House Financial Services Committee Chairman Rep. Jeb Hensarling, R-Texas.
“It is vital that we preserve access, choice and affordability for retirement planners, and in doing so, empower these hardworking Americans to make financial decisions that work best for their families,” Hensarling said, adding that he looks forward to continuing to work with Rep. Ann Wagner, R-Mo., — a vocal fiduciary rule opponent — “to enact a clear and workable standard that empowers Americans with their own futures, as opposed to unelected, unaccountable bureaucrats.”
Wagner said in a Friday statement that the 5th Circuit ruling “reaffirms what I have always said, the Department of Labor fiduciary rule was an ill-advised, top-down assault on local financial advisors and broker-dealers.”
The rule, she said, was an “Obama-era attempt to regulate virtually every aspect of the financial sector” that “cost tens of thousands of jobs, increased prices for consumers seeking financial guidance, and limited choices and options in the marketplace.”
The Securities and Exchange Commission, Wagner said, “is the rightful regulator of the fiduciary rule and must fill that role in a way that protects consumers from bad actors, while allowing hardworking Americans access to affordable, sound financial advice to prepare for the future.”
Judge Edith Jones, who wrote the 5th Circuit decision for the majority, stated that “DOL has made no secret of its intent to transform the trillion-dollar market for IRA investments, annuities and insurance products, and to regulate in a new way the thousands of people and organizations working in that market.”
Large portions of the financial services and insurance industries, Jones wrote, “have been ‘woke’ by the Fiduciary Rule and [best-interest contract] exemption. DOL utilized two transformative devices: It reinterpreted the 40-year-old term ‘investment advice fiduciary’ and exploited an exemption provision into a comprehensive regulatory framework.”
