Fiduciary rule, RIP? Fate looks dim after court overturns regulation
The fiduciary looks set to die a quiet death.
In a surprising turn of events, a federal appeals court vacated the fiduciary rule late Thursday, upending yet again a regulatory landscape that has changed dramatically since the Department of Labor put the regulation in effect last year.
Judges from the Fifth Circuit Court of Appeals ― in a two-to-one decision ― ruled that the Labor Department exceeded its regulatory authority in promulgating the regulation, which holds advisors to a higher standard.
The Labor Department itself is reviewing the rule with an eye to rescinding it, a move ordered by President Trump in February 2017.
The SEC, meanwhile, has been examining whether to craft its own higher standard of client care. Fiduciary advocates have expressed concern that this could be a watered-down version of the Labor Department rule, with less stringent requirements.
Some are calling for the CFP Board to get tough on conflicts and compensation as it finishes revisions to its standards of conduct.
"I think it's something that the market needs. I think it's something that regulators need," Jay Clayton says.
Massachusetts regulators accuse the firm of running afoul of the impartial conduct standard by holding sales contests.
A spokesman from the Labor Department could not be reached for immediate comment.
The judges' decision was unexpected as the Labor Department's fiduciary rule had survived repeated court challenges. In what many considered the most prominent case, several trade groups ― including the U.S. Chamber of Commerce, FSI and SIFMA ― challenged the rule's validity in a federal court in Texas.
That judge upheld the rule, prompting the trade groups to appeal the decision.
The Labor Department "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," the judges ruled.
Chief Judge Carl E. Stewart dissented.
"I would hold that the DoL acted well within its regulatory authority — as outlined by ERISA and the code — in expanding the regulatory definition of investment-advice fiduciary to the limits contemplated by the statute, and would uphold the DoL’s implementation of the new rules," Stewart wrote.
Fiduciary advocates were disappointed with the decision.
"The industry opponents went forum shopping and finally found a court that was willing to buy in to their bogus arguments. This is a sad day for retirement savers," Micah Hauptmann, financial services counsel at the Consumer Federation of America, said in a statement.
The plaintiffs, meanwhile, welcomed the news and reiterated their desire for the SEC to lead on this issue.
"Our organizations have long supported the development of a best interest standard of care and the Securities and Exchange Commission should now take the lead on a clear, consistent, and workable standard that does not limit choice for investors," the trade groups said in a statement.