It now appears that the new fiduciary rules proposed by the Department of Labor (DOL) back in June of 2016 are all but dead. Late last week, the Fifth Circuit Court of Appeals rejected a last-minute appeal of its March 15th decision to toss the DOL rules. The appeal was filed by the AARP and three states (New York, California, and Oregon), not the DOL.
The original March decision was something of a bombshell. Not only did the Fifth Circuit reject the rule in its entirety as conflicting with ERISA’s fiduciary definition, but it also held that the DOL superseded its rulemaking authority and infringed on SEC turf. The Court concluded that the DOL fiduciary rule bears all the “hallmarks of unreasonableness” and was an “arbitrary and capricious exercise of administrative power.”
The decision to deny the last minute appeal essentially kills the rule. While the Court could decide to re-hear the case on its own, this is unlikely given the harsh language in the March opinion. The Department of Justice could also petition the U.S. Supreme Court to hear the case. However, that seems even more unlikely since the Department of Justice never even filed an appeal within the circuit by the April 30thdeadline. The Department of Justice has until June 13th to file the U.S. Supreme Court petition.
Nevertheless, despite the Court’s decision, the DOL issued a field assistance bulletin on May 7, 2018 that would maintain the temporary enforcement policy put in place last year when the regulation partially went into effect. In the bulletin, the DOL stated that it would not pursue claims against fiduciaries “who are working diligently and in good faith to comply with the impartial conduct standards.” This policy would remain in effect until other administrative guidance is issued.
Meanwhile, the SEC has stepped into the vacuum and is taking public comment on its newly proposed standards of conduct for brokers and advisors. Those rules were released in late April. However, rather than simplifying the applicable standard, the new proposal spans hundreds of pages and raises new questions. Unlike the DOL rule, financial advisors are not considered fiduciaries under the SEC rules. Instead they are required to act in the “best interest” of their clients, a standard which really isn’t defined in the new proposal. The new SEC proposal would also require broker-dealers and investment advisors to provide customers with a new customer relationship summary (CRS). The CRS would highlight the applicable standards of care, conflicts of interest, fees, and the primary differences in the services provided.
So with the rule all but gone, determination of fiduciary status will revert to the DOL’s old five-part test. This means that IRA advisors and broker-dealers will not be considered fiduciaries when providing services to IRA owners. Additionally, one-time rollover advice will no longer trigger fiduciary status as it did under the DOL’s new rule.
Of course, the landscape is still shifting. The SEC proposal has not been finalized, some states have begun exploring expansion of their own fiduciary standards, and it is likely that some members of Congress will advocate for more stringent regulation of financial professionals. In the end, while the waters have been clarified, it is almost certain that the debate over the regulation of investment advice will continue.