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Split Rulings Create Uncertainty for the Future of DOL's Fiduciary Rule

Compliance
Article
04/04/2018
  • Within the span of days, the 10th Circuit Court of Appeals upheld the Department of Labor's (DOL's) fiduciary rule, and then the 5th Circuit Court vacated it.
  • It’s uncertain whether the U.S. Supreme Court will review the 5th Circuit's decision.
  • The DOL states that it will not enforce the rule "pending further review."
  • Reports suggest that the Securities and Exchange Commission is ramping up efforts to create its own fiduciary standards.
  • Some states are taking independent action due to the lack of federal-level enforcement.

The past few weeks have been extremely volatile for the Department of Labor's (DOL's) fiduciary rule. The rule requires financial services brokers and insurers — who receive sales commissions — to adhere to the same standard as registered investment advisers, who must put clients' financial interests ahead of their own. The DOL's rule is intended to prevent "conflicted compensation" by requiring brokers to provide objective advice.

The DOL issued its final rule in April 2016. The rule contained an explicit definition of "fiduciary," as well as a method for exempting certain prohibited transactions under specific conditions.

Publication of the fiduciary rule came after a series of delays. It was set to take effect on June 7, 2016, with an applicability date of April 10, 2017, to give the financial industry time to prepare. Congress tried to block the rule, but then-President Obama vetoed that action, and efforts to override the veto failed. In February 2017, an executive order by President Trump directed the DOL to conduct a review of the fiduciary rule, which was followed weeks later by a DOL-proposed rule and request for postponement of the applicability date by 60 days, to June 9, 2017. The DOL stated in April 2017 that it would not enforce the rule in the short term.

On June 9, 2017, a portion of the DOL's fiduciary rule went into effect. The impartial conduct standards were implemented for individuals providing advice to retirement investors, requiring them to give counsel in clients' best interest, and only for reasonable compensation. The second part of the regulation — the best-interest contract exemption provision, as well as certain other transaction exemptions — will apply on July 1, 2019.

Since the fiduciary rule was issued, opponents have contested it in court several times, but the DOL has always prevailed. However, the rule's journey took yet another turn as U.S Courts of Appeals handed down two opposing verdicts:

  • On March 13, the 10th Circuit Court decided to uphold the rule, which was the latest in a series of court victories for the regulation.
  • However, just two days later, the 5th Circuit Court issued a 2-1 decision to vacate the rule, citing conflicts with the Employee Retirement Income Security Act (ERISA) in its identification of what parties are considered an "investment advice fiduciary."

This latest development has generated uncertainty. The financial industry awaits additional guidance that will dictate the standards by which its members conduct business.

Regulation's future is unclear

The fiduciary rule's fate appears unpredictable, since the various entities involved have a number of options. In the wake of the March 15 Appeals Court decision, the DOL has announced that it will not enforce the fiduciary rule pending further review.

Actions available to the DOL include:

  • Appealing the decision of the 5th Circuit case. The original decision passed with a 2-1 ruling. It's possible that the full 17-judge panel could agree to rehear the case and hand down a decision;
  • Asking the U.S. Supreme Court to hear the case; or
  • Letting the decision stand, vacating the current fiduciary rule.

Securities and Exchange Commission involvement

The federal Securities and Exchange Commission (SEC) has been independently working to craft its own fiduciary rule, which was congressionally mandated by the Dodd-Frank Act of 2010. That act made the government responsible for regulating the financial industry. The latest developments with the DOL rule may prompt the SEC to escalate its efforts to produce a rule by the second quarter of 2018.

However, the SEC does not have jurisdiction over investment products such as fixed annuities, which are not securities, but can be found in retirement accounts. This could create a situation in which various products in a retirement account are subject to different fiduciary standards.

States attempting to take their own actions

In absence of enforcement of the DOL rule — and now the lack of a rule — some states have moved to create their own fiduciary standards. This poses potential conflicts with ERISA, which sets minimum standards for most voluntarily established pension and health plans in private industry to protect investors. ERISA supersedes state regulations. Nevertheless:

  • Nevada enacted a law last year that established rules for investment advisers in dealing with clients.
  • The Massachusetts State Securities Division recently took legal action against Scottrade, arguing that salespeople participating in a sales contest violated DOL-established impartial conduct standards.
  • Maryland was in the process of enacting standards of fiduciary conduct, but placed those efforts on hold after the latest federal rule developments.

States may also create standards for insurance salespeople for products that don't fall under the SEC's jurisdiction.

Industry implications

For some time now, the financial industry has made moves to comply with the fiduciary rule's standards. Most large broker-dealers have adjusted their sales and compensation approaches. Although the DOL fiduciary rule has an ambiguous future, it is unlikely that financial organizations will abandon these changes. Regardless of whether a regulation exists, investors have come to expect a certain code of conduct from their financial advisers.

We will continue monitoring developments regarding fiduciary regulations to keep you informed.

Jessica curtin headshot

Jessica Curtin, QKA, CPFA, TGPC, Retirement, FSA, and HSA Compliance Analyst

Jessica joined the Compliance Risk organization of Paychex in October 2016 as a Retirement, FSA, and HSA Compliance Analyst. In this role, she is responsible for regulatory compliance of the Paychex retirement and Section 125 products, government and industry group relations, and business partner consulting.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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