Simons Says: Is the DOL Fiduciary Rule Dead?

Timothy M. Simons, CFA, CIPM, CSCP
Focus 1 Associates LLC
March 28, 2018


Is the DOL Fiduciary Rule Dead? The correct answer is, “pretty much.”

On March 15, 2018, the Fifth Circuit Court of Appeals, vacated (that means struck down in its entirety) the DOL’s fiduciary rule in a 2-1 decision, saying it constituted “unreasonableness,” and that the Dept. of Labor’s implementation of the rule constitutes “an arbitrary and capricious exercise of administrative power.”

Prior to the industry’s appeal, the District Court dismissed the suits of industry organizations (the U.S. Chamber of Commerce, the Financial Services Institute, the Securities Industry and Financial Markets Association, and others) who then appealed to the Fifth Circuit Court of Appeals. Since the Court’s decision was rendered by only three of the Judges rather than the full Court, it could be referred to the full Court, work its way to the Supreme Court, or be rewritten by the DOL and resubmitted.

View Opinions indicated that a DOL spokesman stated to them that, “Pending further review, the [Labor Department] will not be enforcing the 2016 fiduciary rule.” I don’t think they have a choice. Of course, that would not preclude the DOL from appealing to the U.S. Supreme Court.

Many of us considered the DOL’s fiduciary rule to be over-reach or a “turf-grab” by the DOL into the SEC’s backyard. It was suggested that perhaps the DOL and SEC could work together to develop a rule that would focus on SEC registrants who provide advice to ERISA accounts that fell under the protection of the DOL.

At the Practising Law Institute’s SEC Speaks in February, SEC Chairman Jay Clayton said, “I don’t think it’s any secret that we’re going to make a big effort to try to bring clarity and harmony to the investment adviser, broker-dealer standard of conduct regulation — something that’s important to me. I think it’s something that regulators need.” Chairman Clayton did not mention a timetable.

Chairman Clayton did indicate that an ideal fiduciary rule would:

1. Describe the standard that would apply to a particular relationship, providing investment advice or selling a product;

2. Enhance protection of the client/investor; and

3. Achieve regulatory coordination with state insurance commissioners, state securities
regulators, FINRA, the SEC, the DOL, and potentially other agencies.

”Having that many people with different standards and a different lens around that same relationship — I think that we can bring some regulatory harmony to that place.”

One of the things that concerns members of our industry as well as investors, is the different titles used by members of the industry and the lack of consistent use. For example: the difference between an investment adviser and an investment advisor, one registered with the SEC and the other not necessarily registered with the SEC, one required to disclose certain information about their firm and conflicts that may exist, and the other not so much. The SEC will have to be creative in trying to address what titles are appropriate and what requirements will be need to be met for each title.

Organizations that have expressed the need for uniform usage of titles include the CFA Institute, the Investment Adviser Association, and the Consumer Federation of America. Barbara Roper, of the Consumer Federation of America, has said, “the central problem in the market for investment advice is not that investors are confused, it’s that investors are being actively misled” because “broker-dealers have been permitted to rebrand themselves as advisors, offer extensive advisory services, and market their services as if investment sales were solely incidental to advice, rather than the other way around, all while being exempted from the fiduciary standard of conduct appropriate to that role.”

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“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.”

Rep. Ann Wagner, R-Mo., said 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.”

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Melanie Waddell, on March 23, in an article in Think Advisor (see link below), talked about her interview with Eugene Scalia, the lead attorney who argued against the DOL rule before the U.S. Court of Appeals.

Do you see Labor asking for a rehearing by the 5th Circuit?

“I’d be very surprised to see Labor seek rehearing. This was an extraordinarily controversial rule by the prior administration. The [fiduciary] rule is a leading example of the kind of regulatory overreach that the White House counsel and other White House officials have criticized.”

The 5th Circuit “judges in the majority in the case are very well-regarded, and have a lot of admirers at the Justice Department.” Also, “from a policy perspective, one of the challenges in any new presidential administration is moving past your predecessor’s priorities. Having the Obama-era fiduciary rule vacated is an opportunity to move past the last administration’s priorities.”

The 5th Circuit ruling isn’t effective until May 7. Correct?
“Unless rehearing is sought by the Labor Department, the mandate [to vacate the rule] will issue on May 7.”

In terms of next steps?

“This [fiduciary issue] is a matter that ought to be addressed by the SEC; Dodd-Frank made clear that the question of a uniform fiduciary standard is under the SEC’s purview. Eyes now turn to the SEC, and Labor can go back to focusing on the areas that Congress put under its responsibility. Likewise, state regulators have always been the primary regulators of insurance products, another aspect in which this [fiduciary] rule had the Labor Department straying beyond its responsibilities.”

Will this case eventually land at the Supreme Court?

“Given where things stand now, I’d be very surprised to see this [case] reach the Supreme Court. The court’s decision is right in the mainstream of Supreme Court jurisprudence regarding the review of agency rules. I don’t see the 5th Circuit decision as one that would surprise or attract the attention of the Supreme Court.”

Does the 5th Circuit decision impact fiduciary actions being taken in the states?

“I think the place to focus on now is the SEC. Congress has identified the SEC as the proper regulator for broker-dealers. The 5th Circuit decision does not prevent states from taking fiduciary-related measures.”

Former Labor Secretary Tom Perez and Assistant Secretary of Labor Phyllis Borzi maintained that the rule was designed to update the 40-year-old Employee Retirement Income Security Act to reflect changes in the retirement planning landscape.

“First of all, this rulemaking was not about ERISA. It was far and away mainly about IRAs and the tax code. What you saw [with the fiduciary rule] was a statement by Assistant Secretary Borzi and others that basically the law that Congress enacted wasn’t good enough. That kind of assessment is not the Labor Department’s job, yet they acted as if it was proper for them to step in [and rectify] what they saw as errors by Congress.”

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My Perspective

R.I.P. DOL Fiduciary Rule

I love Scalia’s answer to the last question.

The ball is in the SEC’s court.

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