DOL Fiduciary Rule Strikes Out — Is the SEC Up Next?


In another twist to evolving fiduciary standards in the securities industry, a 2-1 decision of the U.S. Court of Appeals for the 5th Circuit vacated the entire Department of Labor’s “fiduciary rule” last Thursday. The DOL rule would extend a fiduciary standard to brokers, insurance agents, and anyone else offering “advice” regarding retirement accounts.

We’ll likely see media spin from both sides:

This is a victory for Wall Street over Main Street allowing those not already held to a fiduciary standard to continue to operate under a suitability standard, which allows recommendations of merely suitable products, even if they pay the salesperson more than other options.

“The court has ruled on the side of America’s retirement savers, preserving access to affordable financial advice.” Industry groups argue that expanding the fiduciary standard will increase costs and limit access to advice for less-than-wealthy individuals.

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Nobody is arguing that putting investors’ interests first is a bad thing. It is apparent, in reading the court’s ruling, that the court quashed the DOL rule on the basis that the Department of Labor does not have the authority to pass such a comprehensive rule that overturns so many years of established industry standards. “The DOL interpretation, in sum, attempts to rewrite the law that is the sole source of its authority. This it cannot do.”

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Going forward, the DOL can ask the full appeals court to re-hear the case or appeal to the U.S. Supreme Court. While a case on a much narrower provision of the rule was upheld in the 10th Circuit and there is still an active case in the D.C. Circuit, a spokesman for the Labor Department has said that “pending further review [of the 5th Circuit’s ruling], the department will not be enforcing the fiduciary rule.” This, of course, doesn’t mean that firms should abandon compliance efforts; the path may be in question, but there seems to be little doubt that the fiduciary role of the financial services professional is expanding.

The DOL could continue to defend the current rule or work to revise the rule. Many believe it is more likely, and appropriate, that the SEC steps forward with a fiduciary rule. SEC Chair Jay Clayton has repeatedly indicated that providing clarity and guidance regarding a uniform fiduciary status for all retail investment advice is a high priority. Clayton has also said that the 5th Circuit ruling “hasn’t affected the way I’m approaching this…as far as I’m concerned, we’re moving forward.” Given that the Dodd-Frank Financial Reform Act provided the SEC with authorization to do so and that the DOL rule has struck out (at least temporarily), it seems more likely that the SEC will go to bat and work with the DOL. Though the SEC has not provided guidance, it is whispered that we may see an SEC fiduciary rule by mid-year.

As we’ve before and will likely say again… keep your eyes on this space for continued updates!