Thought Leadership in Action

An Obama-era regulation that required all advisers working on retirement accounts to act as fiduciaries was overturned in court last year, but questions remain about what shape the proposal may still take moving forward.

The rule created by the U.S. Labor Department required that broker-dealers consider only the client’s best interests — rather than commissions or fees — when providing retirement advice.

Although the regulation was overturned, investment advisers should be aware of potential effects and its status in the halls of Washington, D.C. Here are five developments to keep in mind.

The Rule Is Gone but Not All of Its Effects Are

The fiduciary rule, under the Employee Retirement Income Security Act (ERISA), was announced in 2016 after years of discussion and development. The Obama administration had argued that adviser conflicts of interest had cost investors billions.

Consumer groups lauded the rule, saying it would prevent brokers from pushing unnecessary high-commission products at the expense of clients. Opponents, including a wide range of industry groups, argued the change would spike compliance costs and be so burdensome that many firms could no longer operate some brokerage accounts.

 Although a legal cloud hovered over the rule from its introduction, advisory and brokerage firms still spent millions, consolidated some of their services and reconfigured fee structures to comply.

A Federal Appeals Overturned the Rule

The 5th U.S. Circuit Court of Appeals vacated the fiduciary rule in March 2018, with Bloomberg News reporting that the Labor Department’s action in establishing the rule was declared “arbitrary, capricious, not in accordance with the law, and in excess of its statutory authority and limitations.” The ruling came in the wake of multiple federal court rulings upholding all or portions of the fiduciary rule.

In its 2-1 decision, the 5th Circuit said the rule had “spawned significant market consequences, including the withdrawal of several major companies, including Metlife, AIG and Merrill Lynch from some segments of the brokerage and retirement investor market.”

The Government Didn’t Challenge the Ruling

The Labor Department, which stopped defending the rule in court after the election of Donald Trump, didn’t appeal the decision to the Supreme Court.

The decision to abandon the legal defense of the rule came as little surprise, given that Trump had asked the department to halt the proposed regulation in 2017.

Congressional Democrats Are Pushing Back

Democratic lawmakers have asked the Government Accountability Office to examine the “fallout” from the decision not to defend the fiduciary rule.

“Today, plan sponsors, financial services professionals, and investment advisors must decide whether to retain the new policies and procedures they developed, often at considerable expense, in response to the 2016 Rule,” Sen. Patty Murray, D-WA, and Rep. Bobby Scott, D-VA, wrote in a letter. “Meanwhile, plan participants may experience difficulty in understanding the various duties owed to them by those giving retirement advice and may be receiving conflicted advice.”

The Labor Department Is in Limbo

Then-Labor Secretary Alex Acosta indicated earlier this year that the department would collaborate with the SEC to issue a new fiduciary rule this year in conjunction with the SEC’s recently adopted best-interest rule. That regulation says a broker-dealer is required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.

That timeline, however, was thrown into doubt when Acosta stepped down in the wake of revelations about his role in a plea deal for alleged sexual offender Jeffrey Epstein when Acosta was a U.S. attorney in Florida.

Trump has indicated he will nominate Eugene Scalia, son of former Supreme Court Justice Antonin Scalia, as Acosta’s replacement. Eugene Scalia served as part of the legal team for the financial industry's lawsuit that led to the appeals court ruling against the rule. In September 2019, Scalia was confirmed by the Senate and was sworn in. Despite his past role in the lawsuit, government ethics attorneys have cleared Scalia to participate in rewriting the rule.