The ultimate fate of the Labor Department’s fiduciary rule became even more uncertain in mid-March after the U.S. Court of Appeals for the 5th Circuit voted to vacate the rule in its entirety.
Employee Retirement Income Security Act attorneys and industry watchers were feverishly digesting the 65-page ruling — in which the three-judge panel was split 2-1 — and now are prognosticating what the ruling means for the full implementation of Labor’s rule as well as how the Securities and Exchange Commission will proceed with its fiduciary rulemaking in light of the 5th Circuit ruling.
The nine plaintiffs in the 5th Circuit case included the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Institute. The ruling came one day after Labor won a case in federal court brought against its fiduciary rule by Market Synergy Group, an insurance distributor.
“There are still cards to be played” after the 5th Circuit decision, Fred Reish, partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group in Los Angeles, told me after the ruling in mid-March.
Labor, Reish said, “needs to decide whether to request an en banc review by the full 5th Circuit, to file a petition with the Supreme Court, or to drop the matter.” There is a “delay in the [5th Circuit] decision to allow time for that.” Reish believes that Labor will request an en banc review, which means a rehearing to reconsider the decision by the full court of appeals judges.
“Regardless of what the 5th Circuit does, the losing party will most likely request the Supreme Court to take the case,” Reish opined. “It could be more than a year before we know whether the rule is effective, as is, or whether the old rule is restored.”
As a result, Reish warned, “there is risk in not complying with the provisions of the new rule before this is finalized.”
Karen Barr, president and CEO of the Investment Adviser Association, agreed during her comments at the group’s annual compliance conference in mid-March in Washington, that advisors “shouldn’t do anything differently based on the decision” at this time, as the next post-ruling move won’t be known “for several weeks, at least.”
While pondering potential further court action, Reish said that Labor will likely “propose to amend the [fiduciary] regulation and exemptions, acting in coordination with the SEC.”
SEC’s Next Move?
Neil Simon, vice president of government affairs for the IAA, told me during the group’s compliance conference, that the 5th Circuit ruling “appears to be an extremely significant decision, and is likely to give pause to the SEC with regard to its own fiduciary rulemaking.”
The ruling, Simon said, is likely to prompt some reconsideration by the SEC “of its fiduciary rulemaking,” and appears to signal that full implementation of DOL’s rule is likely over.
Barr added in comments at the IAA conference that “folks at the SEC are furiously reading the DOL decision, to see if SEC has statutory authority to do what it’s doing” in its own fiduciary rulemaking. As it stands now, the SEC, in cultivating its fiduciary rule, is taking a four-pronged approach, she explained.
The first part includes the agency writing a separate rule under the Securities and Exchange Act of 1934 to require a best-interest standard for broker-dealers; the second step is a disclosure document for brokers and advisors, which will be “short and concise” and will be given to investors; the third step is “interpretive guidance” under the Investment Advisers Act of 1940 setting out what it means to be a fiduciary; and the fourth component would be a provision on the use of titles.
Rick Fleming, the SEC’s Investor Advocate, who spoke at the IAA meeting, stated that while the SEC “will have to look at [the 5th Circuit decision] very carefully,” the agency “has very different statutory grounds [than Labor] to impose a fiduciary duty,” on brokers, and that he doesn’t see the ruling to vacate Labor’s rule creating “an impediment to the SEC” as the agency writes its own fiduciary rule.
Nuts & Bolts of Decision