If you are a financial planner or work in asset management, especially registered broker-dealers, then you are likely aware of big (and potentially scary) changes that occurred to your practice during the early summer of 2017. In particular, the Obama administration announced a new rule expanding the definition of “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974, essentially finding that financial professionals who provide retirement planning advice or work with retirement plans owe a “fiduciary” duty to their clients. The Department of Labor (or DOL) also announced new standards requiring financial advisors to act in the best interest of their clients, and to put their client’s interests above their own. The definition was expanded to include any professional making a recommendation or solicitation, and not just those providing ongoing advice. The new rule came with a host of complications for the industry, including new reporting requirements, disclosure requirements, and it potentially eliminated many fee structures that were likely standard in the industry.
The future of the rule has always been murky. The Trump administration pushed back full implementation of the rule until July 2019 (although some parts have been in effect since June). Several courts across the country have upheld the new rules, including the Denver-based Tenth Circuit Court of Appeals just this week. But the tide appears to be changing some as the Fifth Circuit Court of Appeals in New Orleans ruled just yesterday that the Labor Department overstepped its bounds and vacated the rule. In a split decision, the Fifth Circuit held that the rule “fundamentally transform[ed] over fifty years of settled and hitherto legal practices in a large swath of the financial services and insurance industries” and was “unreasonable.” The Court went on to hold that the DOL focused unfairly on advisors working with individual retirement accounts (or IRAs) and impermissibly promulgated new rules without following the Administrative Procedure Act. The court concluded that the “the fiduciary rule has already spawned significant market consequences, including the withdrawal of several major companies, including Metlife, AIG, and Merrill Lynch from some segments of the brokerage and retirement investor market.” A full copy of the opinion can be found here.
The fate of the fiduciary rule is unclear. Given the “circuit split” that now exists, the U.S. Supreme Court may well be asked to address the issue soon. It is also unclear as to how much Trump’s DOL will defend the rule, as it already appears to be backing off significantly. The Securities and Exchange Commission (SEC) is in the process of preparing its own uniform fiduciary standard, which many in the industry believe is the more appropriate authority. The SEC is expected to release a proposed standard by this coming fall, so stay tuned. These changes of course don’t change what you may have already done with your practice, but it could change what products and services may be offered to your clients in the near future.