DOL Fiduciary Rule Appears Headed for the Supreme Court
March 16, 2018 by Mason Braswell and Jed Horowitz
The Fifth Circuit Court of Appeals on Thursday overturned the Department of Labor’s fiduciary rule in a split decision that is reverberating throughout the securities industry.
The decision, following a series of courtroom victories for fiduciary rule proponents, adds uncertainty about the controversial rule and opens the door to probable litigation at the highest level, the U.S. Supreme Court, according to several lawyers.
Whether it will convince any firms to change policies limiting or prohibiting the use of commission-based retirement accounts remains to be seen. (Editor’s Note: After publication of this story, Merrill Lynch said it is standing by its no-commision individual retirement account policy.)
The two-to-one decision handed down Thursday evening upends a Dallas district court decision last year upholding the DOL’s statute. The district court called the rule an example of “regulatory abuse of power.”
The Texas court focused on the strings attached to the best-interest contract [BIC] exemption, which allows brokers to receive variable compensation (instead of fixed fees) if they sign contracts binding them to act in clients’ best interests. Much of the securities industry view that exemption as an invitation for class-action lawyers to bring expensive litigation.
Even though the Trump administration has delayed the effective dates of important parts of the rule, such as the BIC, the DOL is likely to fight for preservation of the fiduciary standard rather than risk being sued by advocates of the rule, according to some observers.
“The AARP [American Association of Retired Persons] has said over and over again that if the DOL doesn’t defend its regulation that it is going to,” said Erin Sweeney, a pensions and retirement account lawyer with Miller & Chevalier in Washington D.C. “You wouldn’t want another entity bringing forth your lawsuit.”
A spokesman for the Department of Labor did not return a request for comment.
“It’s not the death knell” for the fiduciary rule, agreed Marcia Wagner, a lawyer in Boston who specializes in retirement account law and who believes that the Fifth Circuit vacature applies only in Texas, Louisiana and New Mexico where the court holds sway. “This is a huge regulatory issue and the Supreme Court should really rule on it.”
Other lawyers have opined that the district court ruling rescinds the rule nationally.
“It’s now up to @SCOTUS to resolve,” Jason Roberts, an ERISA lawyer who is CEO of the Pension Resource Institute, wrote on his LinkedIn blog.
The Fifth Circuit decision is the first court loss for the DOL rule, according to Wagner. As recently as Tuesday, judges on a Tenth Circuit appeals panel in Kansas denied a Topeka insurance agency’s attempt to overturn the rule’s prohibiton on sale of fixed-index annuities.
The Fifth Circuit majority ruled in favor of the U.S. Chamber of Commerce and industry trade groups, including the independent broker dealers’ Financial Services Institute and the Securities Industry and Financial Markets Association. The plaintiffs had argued that the Labor Department went beyond its statutory authority under the Employee Retirement Income Security Act in the way it imposed the requirement that brokers act in their clients’ “best interests” when handling retirement accounts.
“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,” the majority opinion said. “It is not hard to spot regulatory abuse of power….”
The circuit court took issue with the agency’s Best Interest Contract Exemption, which includes a private right of action for customers who assert that brokers did not act in their best interest. The DOL under Trump has delayed implementation of the BIC section of the rule until January 2019, and the Securities and Exchange Commission has said it is working with the DOL on cobbling out a broad fiduciary rule going beyond retirement accounts.
The part of the rule requiring brokers to abide by standards of prudence and loyalty—which include charging “no more than reasonable compensation” and making accurate representations about investments, conflicts of interest and compensation, took effect in June last year.
Industry groups urged the SEC to quickly follow up on the decision with its version of a fiduciary standard.
“The court has ruled on the side of America’s retirement savers, preserving access to affordable financial advice,” the Chamber and four other plaintiffs in the case said in a prepared statement. “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.” [Editor’s Note: SEC Chairman Jay Clayton said at an industry legal conference on Monday, March 19, that the appeals court decision has not changed his view that his agency should take the lead on writing a fiduciary standard rule.]
Several states, including Nevada and Massachusetts, have been preparing their own fiduciary rules and guidelines, and are prosecuting alleged violations of the existing rule.
“I strongly urge the federal government to appeal this ruling, to provide certainty to customers and their advisers,” William Galvin, Massachusetts’ top securities regulator said in a statement on Friday. “In the meantime, my office will continue to pursue our cases against Scottrade, which involves violations of their own internal policies, and my office retains the authority to pursue investigations involving dishonest and unethical practices.”
