Fiduciary Rule Dealt Blow by Circuit Court Ruling
March 16, 2018 by Lisa Beilfuss
A U.S. circuit court struck down the Labor Department’s fiduciary rule, dealing a blow to the retirement-savings regulation that has been in partial effect since June.
In a split decision, the Fifth Circuit Court—which covers Texas, Louisiana and Mississippi—ruled that the Labor Department overreached by requiring brokers and others handling investors’ retirement savings to act in clients’ best interest. “The Rule is unreasonable,” the decision read, with the court finding fault in the department’s broadening of what is deemed financial advice and who gives it, among other reasons.
The Labor Department didn’t immediately respond to a request for comment.
The decision issued late Thursday follows several circuit court decisions that came to different conclusions, ruling in favor of the government. Because of this split in circuit court decisions, attorneys specializing in fiduciary matters said the U.S. Supreme Court may be more likely to take up the case.
The fiduciary rule, enacted during the Obama administration, has proven controversial. The rule aims to place new requirements on brokers who handle retirement accounts to make them act in the best interests of clients, rather than just insuring they are offered suitable products.
Opponents of the rule have said it makes financial advice more costly and will prevent smaller investors from getting counsel. Proponents of the regulation have said conflicted financial advice costs American families $17 billion a year and shaves a percentage point off annual returns.
President Donald Trump last year ordered the Labor Department to conduct a new economic analysis of the retirement-savings rule, with an eye toward repeal or revision.
What happens next to the fiduciary rule, which has been under review since last year, is uncertain, though. Attorneys said the Labor Department has a few ways it could respond.
Aside from asking the Supreme Court to hear the case, the Labor Department could ask the fifth circuit to reconsider it decision. Under that scenario, all of the court’s judges would review it. The decision issued Thursday was based on three judges’ assessment.
Should the Labor Department appeal the decision, either with the fifth circuit or at the Supreme Court, it could meanwhile ask for a stay of the latest ruling—effectively hitting the pause button.
Alternatively, some attorneys said, the Labor Department could opt to let the decision stand without appealing it. “This decision makes it easier for them to start over, ” said Kevin Walsh, an attorney at Groom Law Group.
George Gerstein, a lawyer at Stradley Ronon Stevens & Young LLP, said the Labor Department is likely to appeal because the rule is already in partial effect. As of June 9, brokers and financial advisers had to adhere to the rule’s best interest standard, though enforcement was put off until next year.
“I don’t think the DOL will accept this and take their ball and go somewhere else,” he said. Mr. Gerstein added that industry professionals aren’t likely to change how they comply based on the ruling because it will take some time to see what happens next.
Mr. Walsh said the Fifth Circuit decision “could provide some fuel” for the Securities and Exchange Commission to write its own broader rule that would supersede that of the Labor Department. A SEC rule would cover the behavior of financial professionals in regard to nonretirement funds as well as retirement accounts.
Write to Lisa Beilfuss at lisa.beilfuss@wsj.com
