Fiduciary Rule on Shaky Ground After Fifth Circuit Ruling

An Obama-era Department of Labor (DOL) rule aimed at protecting retirement investors has been overturned by the Fifth Circuit Court of Appeals, casting further doubt on the rule’s future.

The fiduciary rule would require advisers to act in the best interests of retirement investors.

The DOL’s fiduciary rule, which would require financial institutions to act in their clients’ best interests when recommending retirement investments, had its implementation delayed under the Trump administration amid heavy pushback from financial services groups. Based on the ruling, the DOL says it will stop enforcing the rule, but that doesn’t mean the rule is officially dead.

In light of this setback for the fiduciary rule, retirement investors should seek out advisers who are willing to act in their best interests. Advisers still owe their clients certain professional duties, including recommending suitable investments, and can be held accountable for misconduct that causes investment losses.

If you lost significant money on an investment due to a financial adviser’s or institution’s misconduct, contact the Business Trial Group for a free case review.

Fifth Circuit Reverses Rule, Citing “Overreach”

The Fifth Circuit Court of Appeals voided the DOL fiduciary rule in a 2-1 split decision filed March 15. The majority agreed with the plaintiffs—a group that includes the U.S. Chamber of Commerce and the Financial Services Institute—that the rule was too burdensome and costly and could discourage lower-income Americans from receiving financial advice.

Writing for the majority, Judge Edith Jones said that the fiduciary rule was “unreasonable” and demonstrated “arbitrary and capricious exercises of administrative power.”

The fiduciary rule would provide stronger investor protections than the current suitability standard.

Chief Justice Carl Stewart wrote in dissent that the rule was “well within the confines set by Congress in implementing the challenged regulatory package.” Stewart cited a dramatic shift in the retirement-investment market away from private pensions controlled by large employers and money managers and toward individually controlled accounts that give investors greater responsibility for their own retirement savings. “This sea change within the retirement-investment market also created monetary incentives for investment advisers to offer conflicted advice,” said Stewart.

The fiduciary rule would provide a check on advisers offering conflicted advice by requiring them to act in the best interests of their clients when recommending retirement investments. This is stronger than the current standard, which only requires advisers to recommend investments that are suitable for their clients.

Consumer groups such as Better Markets have championed the rule, calling it a “simple, common sense principle.” Opponents claim the rule would make managing the accounts of small investors too expensive due to an increase in compliance costs and liability expenses for firms. They also claim the rule would limit the investment products that can be sold to retirement investors, since some firms would reduce their services, products, and offerings to comply with the higher standard of care.

What’s Next for Fiduciary Rule?

President Trump signed an administrative memorandum in February 2017 directing the DOL to perform an updated economic and legal analysis on the fiduciary rule. The order’s focus was whether the rule was “likely to cause an increase in litigation and an increase in the cost of retirement services.”

In November 2017 the DOL delayed implementation of the rule’s enforcement mechanisms from January 1, 2018 to July 1, 2019. Two provisions of the rule, however, were implemented in June.

Responding to press inquiries about the Fifth Circuit’s decision, a DOL spokesperson said, “Pending further review, the Department will not be enforcing the fiduciary rule.”

While the rule is not officially dead, many see the Fifth Circuit decision as the final nail in the rule’s coffin. The appeals court decision could be heard and overturned by the Supreme Court. The Securities and Exchange Commission (SEC) could also come up with its own version of the fiduciary rule. Some states, including Nevada and Maryland, are pressing ahead with fiduciary laws in lieu of federal action.

How Retirement Investors Can Protect Themselves

With the fiduciary rule on shaky ground, retirement investors should know how to act in their own best interests. Many financial institutions already act as fiduciaries to their clients and use this distinction as a marketing advantage. When looking for an adviser to handle your retirement investments, ask them whether they will act as a fiduciary on your behalf.

Other ways to screen prospective advisers include:

• Perform a background check on FINRA’s Broker Check. Complaints and disciplinary actions are red flags.
• Ask the advisor how they are paid. Large commissions can be a sign that the broker is motivated to sell you products that benefit them more than you.
• Understand the investment products being suggested to you or used, and how they are managed.
• Know how the adviser is registered. Someone registered as a representative of an investment adviser must act as a fiduciary, while someone registered as a representative of a broker-dealer only needs to follow the suitability standard. Advisers who are dual-registered may follow either standard. In the case of a dual-registered adviser, find out which role they are assuming when advising you.

Contingency-Fee Investment Loss Attorneys

The Business Trial Group’s securities litigation attorneys represent clients on a contingency-fee basis nationwide. We charge no upfront fees, and no fees at all unless we recover compensation for our clients.

If you suffered investment losses due to possible adviser misconduct or securities regulations violations, contact us for a free case review.