The Fifth Circuit Court of Appeals issued a ruling on Thursday vacating the controversial “fiduciary rule” enacted by the Labor Department during the Obama administration, which would have required financial advisors to act in their clients’ best interests when advising them about retirement. The ruling overturned a February 2017 district court decision upholding the regulation, with a three-judge panel ruling 2–1 that its implementation had violated the Administrative Procedure Act. Politico’s Morning Shift newsletter called Thursday’s decision “a victory for the financial services industry,” whereas labor activists were dismayed:
A range of business associations — including the U.S. Chamber of Commerce, a plaintiff in the case — said in a joint statement that the court “ruled on the side of America’s retirement savers.” The groups have thrown their weight behind an effort by the Securities and Exchange Commission to draft a separate standard for advisers, which they say should “not limit choice for investors.” On the other hand, Christine Owens, executive director of the National Employment Law Project, said the ruling “threatens the Labor Department’s very ability to protect retirement investors now and in the future” — and encouraged an appeal.
Thursday’s decision was handed down just two days after another federal court, the Tenth Circuit, issued a ruling in a separate case concerning the treatment of fixed indexed annuities under the rule. That court found that the Labor Department had satisfied its obligations under the Administrative Procedure Act in amending the rule to make sales of such annuities ineligible for Prohibited Transaction Exemption 84-24 (Proskauer attorneys outline the particulars of the ruling in more detail at JD Supra).
In agreeing with the department’s decision to amend one facet of the fiduciary rule, the Tenth Circuit’s ruling could be interpreted to implicitly uphold the regulation as a whole, although that was not at issue in the case. Yet another fiduciary rule case is still pending in federal court as well, so industry experts are advising retirement plan sponsors to remain compliant with the rule for the time being, Paula Aven Gladych notes at Employee Benefit News:
After US Secretary of Labor Alexander Acosta announced last month that the department could find “no principled legal basis” to delay it any further, the Obama administration’s controversial fiduciary rule went into effect on Friday, June 9 as scheduled—though its legal enforcement mechanisms will not become effective until January 1, 2018. The rule, which requires financial advisors to act in their clients’ best interests when advising them about retirement, may still be revised through regulatory or legislative action, but in the meantime, employers that sponsor retirement plans now have an obligation to ensure that their advisors are following the fiduciary standard, experts tell Paula Aven Gladych at Employee Benefit News:
At this point in the process, retirement plans should know if their adviser is working in their best interest or is a broker-dealer with potential conflicted advice offerings. If they don’t know that, they need to call their service providers to find out. Plan sponsors should also review the letters they receive from their plan advisers and take note of whether some services they were receiving in the past won’t be available because their service provider can’t provide them without having fiduciary status. …
The “fiduciary rule,” which the US Department of Labor announced this week will go into effect on June 9 as scheduled, will require financial advisors to act in their clients’ best interests when advising them about retirement—or in other words, it will forbid them from steering clients toward products that would maximize the advisor’s own commission or fee. Financial firms and business groups like the US Chamber of Commerce oppose the rule, which they say will hurt growth, lead to a deluge of frivolous lawsuits, and limit the options of employee investors.
Another reason financial institutions may dislike the impending rule, Bloomberg’s Hugh Son explains, is that it is forcing them to change their recruiting practices. Morgan Stanley, Merrill Lynch, and UBS have all said they are cutting back on the use of signing bonuses based on the revenue brokers generated in their previous jobs, which the government had warned them might go against the rule:
Last year, the Department of Labor briefed banks that the industry’s typical signing bonuses could run afoul of the agency’s incoming fiduciary rule. Upon joining a new firm, star brokers were often granted awards of more than three times the revenue they generated in the past year, with the bonus structured as a loan that’s forgiven as the employee stayed with the company and hit targets.
The briefing prodded firms including Morgan Stanley and Merrill Lynch to restructure their enticements, and now brokerages are moving to make more permanent changes.
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In an op-ed published at the Wall Street Journal on Monday, US Secretary of Labor Alexander Acosta announced that the “fiduciary rule,” a Labor Department regulation introduced by the Obama administration that requires financial advisors to act in their clients’ best interests when advising them about retirement, will go into effect on June 9 without further delay. The department will continue to seek public comment on the rule and how it might be revised, Acosta writes, and is broadly committed to President Donald Trump’s agenda of rolling back Obama-era regulations, but has “found no principled legal basis” under the Administrative Procedure Act to delay the rule any further (It was originally scheduled to go into effect in April, but was delayed 60 days to give the department time to complete a review ordered by Trump in February).
The Labor Department followed up on Monday evening with a series of FAQ explaining how financial institutions and advisors must comply and when: While the rule goes into effect next month, a transition period is provided for, and certain provisions will not become applicable until January 1, 2018. According to the FAQs, that date may change:
The Department is also aware that after the Fiduciary Rule was issued firms have begun to develop new business models and innovative market products. Many of the most promising responses to the Fiduciary Rule, such as brokers’ possible use of “clean shares” in the mutual fund market to mitigate conflicts of interest, are likely to take significantly more time to implement than what the Department envisioned when it set January 1, 2018, as the applicability date for full compliance with all of the exemptions’ conditions. By granting additional time, and perhaps creating a new streamlined exemption based upon the use of clean shares and other innovations for example, it may be possible for firms to create a compliance mechanism that is less costly and more effective than the sorts of interim measures that they might otherwise use.
Despite Acosta’s insistence that the rule still remains subject to revision, Politico hears from lobbyists for the financial services industry that they are disappointed in the department’s decision not to delay it further. Advocates of the rule, meanwhile, are celebrating, Employee Benefit News reports:
Talent Daily/US DOL/Ed Brown/Wikimedia Commons
The US Senate on Thursday confirmed Alexander Acosta, the dean of the Florida International University law school who previously served on the National Labor Relations Board and as the head of the Justice Department’s Civil Rights Division, as Secretary of Labor, CBS News reports, finally completing President Donald Trump’s cabinet nearly 100 days into his presidency. Acosta was Trump’s second choice for the position after his first nominee, former fast food CEO Andrew Puzder, withdrew under controversy about labor practices at his company and events in his private life.
During his confirmation hearing before the Senate’s Health, Education, Labor and Pensions Committee last month, Acosta refrained from taking firm positions on the major controversies in labor policy today, but did say he was concerned about the stress the Obama administration’s stalled overtime rule change would put on the economy, opposed to redefining “joint employers” for liability purposes, and generally in favor of letting states set workplace policies rather than the federal government. His past public statements have also given some clues as to his positions on certain issues: For instance, he has spoken in favor of comprehensive immigration reform. Meanwhile, his record at the Justice Department shows that he has no qualms about rigorously enforcing anti-discrimination laws.
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The “fiduciary rule”, an Obama-era regulation that would require financial advisors to act in their clients’ best interests when recommending retirement savings plans, has been targeted for removal or reform by US President Donald Trump’s administration since February, when Trump ordered the Department of Labor to review the rule and possibly revise or remove it. The deadline for compliance with the regulation was originally April 10, but the department proposed delaying it by 60 days last month to give it time to complete the review. On Wednesday, the department confirmed that the new compliance deadline will be June 9, according to CNBC:
Legal experts said the Labor Department’s announcement still keeps intact the core of the regulation. Among those are requirements that advisors charge no more than reasonable compensation, avoid misleading statements and act in your best interest when recommending investments. “The DOL is effectively regulating IRAs,” said Marcia Wagner, managing director at The Wagner Law Group in Boston. “This is the DOL saying that this isn’t up for debate.” …
Other portions of the regulation concerning specific written disclosures advisors and financial services firms must make to clients won’t take effect until Jan. 1, 2018, according to the DOL’s post on the Federal Register.
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The controversial “fiduciary rule,” a Labor Department regulation introduced by the Obama administration that would require financial advisors to act in their clients’ best interests when advising them about retirement, has faced an uncertain future since the election of US President Donald Trump last November. A month after Trump ordered the department to review the rule, it is proposing to delay its implementation 60 days from April 10 to June, the Wall Street Journal reports:
The delay in the April 10 implementation gives the department time to re-evaluate the “fiduciary” rule[.] … Economists at the department will conduct a new analysis of the rule’s potential implications, looking specifically at issues raised by Mr. Trump’s executive order: whether the regulation is likely to restrict consumers’ access to financial advice, disrupt the financial-services industry and cause an increase in litigation. …
Arjun Saxena, a partner at PricewaterhouseCoopers, tells the Journal he doubts the Labor Department will discard the regulation, instead predicting that some parts of it will be kept while the parts considered most onerous to business are removed. The department will have to hustle to complete its review on time, however, one expert remarks to Forbes: