Fiduciary-Rule Fight Drags on for Financial Firms
March 22, 2018 by Lisa Beilfuss
The fight over a fiduciary rule for the financial-services industry is far from over.
Late Thursday, the Fifth Circuit Court ruled in a two-to-one decision that the Labor Department overreached by requiring brokers and others handling investors’ retirement savings to act in their clients’ best interest. The court, which covers Texas, Louisiana and Mississippi, found fault with the government’s broadening standard of what is considered financial advice, who provides it and that the Labor Department would regulate it.
Another circuit court decision has taken an opposite tack, though, meaning the continuing fight over the rule could be headed to the Supreme Court. Given the legal uncertainty, financial firms are unlikely to change current practices crafted to meet the rule’s requirements while potential actions by other regulators and state government may become more important.
“It’s not easy to turn on a dime,” said Charles Goldman, head of AssetMark, a group that supports financial advisers. “I don’t think this changes a whole lot of anything,” he said of the latest court ruling.
Mr. Goldman and others say the fiduciary rule has been around long enough now that firms recognize it will survive in some form. “Most are on the path towards a fiduciary standard and are not going back. That’s too shortsighted,” he said, referring to a lower “suitability” standard that preceded the fiduciary rule and remains for those handling nonretirement money.
The fiduciary rule, unveiled in 2016, requires those handling retirement savings to put their clients’ interests before their own commissions. It went into partial effect in June, holding brokers to a so-called best-interest standard.
The Labor Department last year launched a review of the regulation at the direction of President Donald Trump and delayed full compliance until mid-2019. Since then, the fiduciary rule hasn’t been enforced at the federal level.
Opposition to the Obama-era rule, especially from the financial industry, has been fierce, playing out in courts across the country, in a host of states and before the Securities and Exchange Commission.
Industry executives and consumer advocates alike say the Fifth Circuit’s decision puts more focus on the SEC, which has said it is writing its own version of a best-interest standard for brokers. The SEC’s rule would likely try to raise the standard of care that brokers must currently meet, for all accounts, while preserving their ability to charge sales commissions and sell in-house products.
The decision also puts more attention on state regulators and legislators, who have in recent months stepped up efforts to protect consumers from conflicted financial advice. Some have said they are watching more closely for cases of improper conduct as the federal rule’s fate is increasingly uncertain.
This “has emboldened states,” said Erin Sweeney, an attorney at Miller & Chevalier Chartered who counsels firms regarding fiduciary obligations. She added that they “are free to make their own rules” regardless of the federal government’s stance.
Massachusetts Secretary of the Commonwealth William Galvin said Friday that regardless of the court’s decision to strike down the Labor Department’s regulation, he and other state securities regulators will continue to pursue cases against those violating state rules around financial advice.
“We always have the opportunity to bring a case if there are unethical practices,” he said. Mr. Galvin last month took action against Scottrade, a unit of TD Ameritrade Holding Corp., for violating fiduciary policies. Scottrade has declined to comment on the case.
Write to Lisa Beilfuss at lisa.beilfuss@wsj.com
