Fiduciary Rule decision creates uncertainty for US retirement advice industry

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A US federal appeals court on Thursday ruled that the Department of Labor had “overreached” its powers in its establishment of its so-called fiduciary rule – a major piece of Obama-era legislation aimed at ensuring US retirement advisers give un-conflicted advice when recommending products – has created fresh uncertainty for such advisers and their providers across the country.

The 2-1 decision by the Fifth Circuit Court, which covers Texas, Louisiana and Mississippi, is the latest in a series of setbacks for the Fiduciary Rule since Donald Trump was elected president in 2016, on a platform of campaign promises that included getting rid of a number of regulations that companies and business groups argued were too burdensome, and which he said would make financial advice and investment products too expensive for lower-income Americans.

By the weekend, US industry observers were suggesting that the Fiduciary Rule battle in the US remains far from over, citing at least one other, earlier key circuit court decision that took the opposing view, which they said could see the entire matter heading to the Supreme Court – leaving US retirement product brokers, advisers and product providers having in the meantime to chart a path through an uncertain regulatory landscape.

At the time Trump took office in January, 2017 and set about delaying the implementation of the Fiduciary rule, the US retirement products and advice industry was already well down the road in terms of in preparing to adopt it, which the Labor Department had estimated would cost the industry US$31bn, and some said could potentially exceed that amount.

On Friday evening, the Reuters news agency quoted the head of Bank of America’s Merrill Lynch wealth management operation, Andy Sieg, as saying that it remained committed to its already-stated vow of adopting the “clients’ best interest” regulatory approach, in spite of the appellate court decision, citing an “internal memo” Reuters said had been sent to the company’s more than 14,000 US brokers.

Merrill Lynch was one of a number of US companies that has been bucking the US retirement product industry’s move to fight the Fiduciary Rule, by instead embracing it publicly as a sign of their interest in their clients’ welfare.

Merrill Lynch explained this in a posting on its website in the first quarter of 2017, in which it noted, “the Department of Labor’s Fiduciary Rule is now in effect. Your retirement account is essential to your future, and we are committed to helping you achieve your retirement goals”.

Merrill Lynch was seen by US industry observers as tapping into a growing consumer awareness of the Fiduciary Rule debate that began to spill over into the US consumer personal finance space last year, as consumers discovered with surprise, as US journalists typically put it in describing this phenomenon, that their advisers might not actually be placing their – the clients’ – interests ahead of their – the adviser’s – own.

‘Merit seen in several’ objections

Explaining the majority’s decision handed down on Thursday, Northern District of Texas circuit judge Edith Jones began by observing that the “stated purpose of the [proposed Fiduciary Rule] is to regulate in an entirely new way hundreds of thousands of financial service providers and insurance companies in the trillion-dollar markets for ERISA [Employee Retirement Income Security Act] plans and individual retirement accounts (IRAs)”.

She added: “The business groups’ challenge proceeds on multiple grounds, including the rule’s inconsistency with the governing statutes, [the] DOL’s overreaching to regulate services and providers beyond its authority, [the] DOL’s imposition of legally unauthorised contract terms to enforce the new regulations, First Amendment violations, and the Rule’s arbitrary and capricious treatment of variable and fixed indexed annuities.

“The district court rejected all of these challenges.

“Finding merit in several of these objections, we vacate the rule.”

‘Clients’ interests first’

As reported, the first stage of the Fiduciary Rule’s implementation took effect on 9 June 2017, two months after it had originally been due to come into force, after President Trump ordered the Labor Department to assess the unintended effects implementation of the rule could cause.

Full compliance was delayed until mid-2019, and thus far, the fiduciary rule had yet to be enforced at the federal level, and now is seen as unlikely ever to, unless and until something changes.

Registered Investment Advisors (RIAs) in the US have been held to a “fiduciary standard” since 1940, and many of them have argued that they see no reason why they and others should not being obliged to put their clients’ interests ahead of their own when selling them retirement products  – including individual retirement accounts (IRAs) and 401(k)s – as well as financial products. Until now this has not been mandatory.

The Obama Administration introduced the Fiduciary Rule in an effort to ensure that insurance brokers and others selling such products also were required to put their clients’ interests first, by replacing the lesser “suitability standard” they were required to adhere to, which permitted them to receive commissions on the sale of some of the products.

The US effort came as countries around the world were also moving to reduce the potential for conflicts of interest in the sale of investment and retirement products by the use of sales commissions and lack of transparency generally. Australia, for example, brought in a “best interests duty” similar to the US Fiduciary Rule concept as part of its Future of Financial Advice reforms, which came into force in 2013. In 2016 it began enforcing it.

The UK brought in its Retail Distribution Review, also in 2013, which banned commissions and otherwise introduced new rules governing the way investment advice is given, while the European Union updated its Markets in Financial Instruments Directive II in January.

Among the groups opposed to the US Fiduciary Rule, on grounds that it would increase their costs and ultimately, dissuade people from planning for their retirement, were the US Chamber of Commerce, the Securities Industry Financial Markets Association and other pro-industry organisations as well as many major retirement products providers.


By Sunday, US industry experts commenting on the latest Fiduciary Rule decision seemed to agree that in the short term, at least, it was likely to continue only as a market-led concept, promoted by companies like Merrill Lynch as a sales feature.

Long term, though, some thought support for the rule would ultimately win-out, and be reflected in state if not federal legislation, either by the DOL or the Securities and Exchange Commission, which oversees the regulation of US investment advisers (RIAs).

A number of state regulators and legislators have already begun to step up their own efforts aimed at protecting protect consumers from conflicted financial advice, in response to growing interest in the matter brought about by the increasingly public Fiduciary Rule debate, US commentators pointed out.

Some also suggested that at least for the short term,the ruling would turn attention away from the DOL to the SEC, which has been reported to be writing its own version of a best-interest standard for US retirement product brokers.

“Though this may not be the end of the DOL rule – the appeals court decision could still be heard and potentially overturned by the Supreme Court – it is the latest indication that the Trump-era SEC and not the DOL will be taking the lead on fiduciary issues moving forward,” an adviser to the Chicago-based advisory firm Envestment, Steven Boms, told MarketWatch, a Dow Jones publication.

Michael Kitces, a respected American adviser and blogger, tweeted that that the appellate court decision was “A dark day for consumers and real financial [advisers], not only for the overturning of the Fiduciary rule” but also for taking the “pressure off the SEC”.

Trump officials, not surprisingly, welcomed Thursday’s decision. “Pleased that the Obama administration’s fiduciary rule has been struck down by the courts. It was Obamacare for financial planners. This is more good news for the economy,” tweeted House speaker Paul Ryan. 

Named as appellants in the Court of Appeals case were the Indexed Annuity Leadership Council, the Life Insurance Company of the Southwest, the American Equity Investment Life Insurance Co., Midland National Life Insurance Co and the North American Company for Life and Health Insurance. The defendants were the US Department of Labor, and its secretary, Alexander Acosta.

To read the 65-page Court of Appeals judgment on the court’s website, click here.