Is the DOL Fiduciary Rule Really Dead?
The Obama-era fiduciary rule was meant to protect consumers and financial advisers by setting best-interest standards and establishing guidance on compensation. But in 2017 the rule faced lawsuits, including one by the U.S. Chamber of Commerce that progressed to the 5th U.S. Circuit Court of Appeals. In March the 5th Circuit vacated the rule; if the U.S. Labor Department does not request a review or petition the Supreme Court, the rule will be history.
“Advisers are in a teetering position right now as they try to balance what they think will pass in the future and what is best for their clients and their business,” says James Schramm of the Schramm Financial Group.
Here’s what you need to know.
Why Did the 5th Circuit Throw the Rule Out?
The 5th Circuit’s decision could signal its intentions to move away from regulations, says Brendan McGarry, a lawyer with Kaufman Dolowich Voluck. The majority opinion uses terms such as “burdensome” and “onerous” to describe the requirements placed on financial industry participants, McGarry says, which could signal a position stronger than one only about the Labor Department’s power to enforce the rule as written.
In addition, the action could indicate a shift in how courts approach business regulations in general. “The 5th Circuit’s action signals the new direction that the current administration is taking in response to too many regulations,” says Ryan Bradley, a partner at the law firm Koester & Bradley.
What Does It Mean?
Brokers will now revert to the so-called “suitability standard,” which represents a lower burden than a fiduciary standard, Bradley says. The proposed rule would have elevated the duties performed by brokers to that of registered investment advisers, but that has been eliminated. At the same time, it’s important for financial advisers to be aware that this lower burden is not a blanket defense against liability, and could possibly lead to more litigation rather than less, Bradley says.
“While the requirements from DoL Fiduciary will be lowered as noted, the need to act as a fiduciary will persist. Jay Clayton, chairman of the SEC, has made it clear that it intends to take many of the principles of the DoL fiduciary rule and apply them broadly to financial services distributors. Many of the operational and reporting changes from the DoL framework will likely transfer into the approach currently under development by the SEC” says Tom LeBleu, Vice President of Enterprise Solutions with Ebix Exchange. “The approach to review and compliance will be very different than it was under the DoL, but many of the requirements related to how to run a financial services business will likely remain in some form”.
In addition, greater awareness around the proposed rule could make individual investors wary about the role of the adviser. “Ultimately the behavior of the financial industry will be impacted by either litigation or regulation, and since the regulation has been repealed, litigation will likely ensue,” Bradley says.
What’s Next?
The Labor Department has until April 30 to file a request for a rehearing of the rule with the court’s full panel of judges; only three of the 17 5th Circuit judges made the decision. If the Labor Department decides not to file a request, the rule will die in May. If the DOL does request a rehearing and the 5th Circuit denies it, the DOL would have the right to petition the Supreme Court within 90 days of the denial.
In the meantime, opponents of the rule will likely see the 5th Circuit’s action as a victory, Bradley says, based on the apparent recognition of many of the issues opponents have been expressing since the rule was proposed. “It will be interesting to see if the DOL tries to appeal this decision, given the change in leadership since the rule was implemented,” he says.
