A US federal appeals court decision may have just dealt the knockout blow to the DoL Fiduciary Rule.
A US federal appeals court on Thursday overturned the Department of Labor (DoL) Fiduciary Rule Thursday in what could ultimately be a major regulatory shift for US funds. By a vote of 2 to 1, this decision overturns previous court decisions that favored retention of the rule. In announcing the judgement, the court stated that in its opinion the DoL acted “beyond its expressly defined authority” by altering the long-standing ERISA Act definition of “investment advice fiduciary” which amounted to “backdoor regulation.” The court also criticized the “best interest” clause, a key provision of the rule.
Initial industry reaction to the judgement has been positive. Many believe the Securities and Exchange Commission (SEC) should draft, implement, and oversee a new fiduciary standard, not the DoL. This decision added energy to that debate. As we know, financial regulation is inexorably intertwined with politics and this judgement marks another “win” within the Trump administration’s de-regulatory agenda. The DoL Fiduciary Rule was flagged in November’s Treasury Report on Asset Management and the treasury suggested the SEC should play a stronger role here.
The only thing that is now certain is that uncertainty will remain for the foreseeable future. The decision leaves the DoL with a tough choice to make. Does it accept the judgment and allow the SEC to frame an appropriate fiduciary standard for the industry? Or does it appeal again and potentially move the case all the way up to the Supreme Court? The SEC has already stated that its H1 2018 workplan includes a fiduciary rule proposal for retail investment advice. Interestingly, speaking just earlier this week at a conference, SEC Commissioner Hestor Pierce said the SEC will define what it means to “act in the best interests of investors,” aligning the commission with that contentious DoL proposed “best interest” clause.
The US Chamber of Commerce, Financial Services Institute, Financial Services Roundtable, Insured Retirement Institute, and Securities Industry and Financial Markets Association released a statement today in favor of the decision:
“The court has ruled on the side of America’s retirement savers, preserving access to affordable financial advice. Our organizations have long supported the development of a best interest standard of care and the Securities and Exchange Commission should now take the lead on a clear, consistent, and workable standard that does not limit choice for investors.”
The decision represents another expression of the US desire to take a pragmatic and business friendly approach to financial regulation. The de-regulatory agenda has not had much impact to date, but is gaining strength in recent months. But the DoL won’t go down without a fight. It seems likely they will continue to appeal the case, even if they have fewer people in their corner.