“The fiduciary rule is like a Hydra. You can cut off one head and two more pop up.”
A fellow lawyer was quoted as saying that in an article on the “death” of the DOL’s fiduciary rule as of May 7 (the effective date of the 5th Circuit decision invalidating that rule.) He did not appear to be a supporter of the Rule and was expressing his frustration. However, I have a different reason for considering the Hydra a good analogy. The DOL Rule, although flawed, fulfilled a perceived need for better protection of retirement plan investors. That is why so many other players have been taking steps to try to make sure that standards for advice are strengthened regardless of the Fifth Circuit decision. Those efforts to raise the bar-a broader class of fiduciary regulation- are bound to continue and maybe expand.
Is the Rule Really Dead?
This time it really may be. The Trump Department of Labor declined to pursue appeal rights in the Fifth Circuit, but has until June 13 to appeal the ruling to the Supreme Court. Nobody is betting on that, even though the decision is a major challenge to the DOL’s power to interpret the laws it enforces.
Three states and AARP tried to intervene in the case to appeal, but were shot down by the same judges that issued the decision. Will they have any further ability to pursue their arguments? Maybe not, but I leave that assessment to the litigators.
Why DOL Acted in the First Place
The rules that most practitioners think come back into effect now-the so-called “5 part test” to determine when fiduciary advice was being given-were issued before 401ks became the main source of retirement income for employees, and had loopholes. An adviser was not a fiduciary unless the advice was given on a regular basis and formed a primary basis for investment decisions. For example, one-time advice about rollovers was not covered if the adviser wasn’t already a fiduciary, even though rollover advice is often conflicted. Case law also found no fiduciary status where more than one person was giving advice, and imposed restrictions not reflected in the law or its history. For a good example of how courts confused the rules, see Tiblier v. Dlabal, also a Fifth Circuit decision.
The DOL determined that more protection was needed because a lot had changed since 1974. And every court besides this one that reviewed the rules found them to be a valid exercise of the DOL’s authority. However, the Fifth Circuit decision has national effect and cancels out all of those other decisions.
Why Aren’t We Back at Square One?
The Trump administration did not support the Rule, and the DOL kept delaying the effective dates of many of the new requirements. By failing to appeal the decision, the DOL appears to have abandoned the Rule. However, here’s why we are still not back at square one:
DOL could still adopt changes to the outdated 5 Part Test that are less sweeping but still provide an enhanced level of protection.
Recognizing the need for increased protections for retirement plan investors, some states have tried to enact their own state law protections, although there are genuine concerns whether federal law permits state regulation in this area. Nevada led the way by including brokers and advisers in its law covering financial planners, which creates a state law cause of action against brokers and advisers who give bad advice.
Massachusetts regulators are pursuing Scottrade in court for violating its procedures set up to comply with the Fiduciary Rule. Scottrade is trying to get the case transferred to federal court, saying that only federal law applies, but Massachusetts says this is a state law issue, not a federal matter, and its response points out that ERISA’s fiduciary responsibility provisions don’t apply to IRAs.
Firms that changed their practices when the Rule came into effect may also find it difficult to revert to their old position. How will they explain to retirement plan investors that they now want to have lesser responsibilities?
The SEC, of course, has now come out with its own “Best Interest” standard for retail investors, something the opponents of the DOL rule had been urging all along. See our recent post for a comparison with the DOL rule. Their argument then was that the DOL should cede regulatory leadership to the SEC, so it will be interesting to see whether they support the SEC’s more modest reforms or oppose them as well.
The Hydra Lives
One way or another, these new attempts at regulation will continue because the perceived need is still there. The Fifth Circuit Court of Appeals decision doesn’t change that.