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March 16, 2018 at 06:02 PM
Morgan Stanley and Principal Financial Group Inc. were among banks and insurers that rallied after a U.S. appeals court struck down a sweeping Obama-era rule that aimed to protect millions of Americans from conflicted investment advice.
The rule, imposed by the Labor Department, would have added an extra layer of scrutiny for the industry and increased compliance costs. The 5th U.S. Circuit Court of Appeals in New Orleans said that the rule bears the hallmarks of “ unreasonableness,” and the decision released late Thursday could increase the likelihood of a longer legal battle that could reach as far as the U.S. Supreme Court, according to Keefe, Bruyette & Woods analysts including Brian Gardner.
The Obama administration issued the regulation, called the fiduciary rule, in 2016 to force brokers to put their clients’ interests first when offering retirement advice. Industry groups sued that year to block the regulation.
(Related: Fate of DOL Fiduciary Rule in Question After Court Ruling)
“The regulation deflation theme is in full effect and is one of the reasons we think financial stocks should do well,” Evercore Partners Inc. analysts including Glenn Schorr said Friday in a note to clients.
The S&P 500 Life and Health Insurance Index climbed 0.8% at 1:12 p.m. in New York, surpassing the 0.3% gain in the broader S&P 500 Index, after the ruling. Brokerage LPL Financial Holdings Ltd. rose 1.7% and banks with large wealth-management units, including Morgan Stanley, also advanced. Bank of America Corp., Morgan Stanley and Principal Financial each gained close to 1%.
Donald Trump’s presidential victory in 2016 added to uncertainty about the rule’s future, as the administration delayed implementation of some parts of it. The Securities and Exchange Commission, Wall Street’s top regulator, has been working on its own version of the rule to address the fact that the regulation only impacted brokers providing retirement advice.
An SEC rule would likely be broader, affecting the entire industry. Financial firms have largely been supportive of the SEC’s efforts, partly because they believe whatever it comes up with will be less burdensome than Labor’s standard.
