Fiduciary rule's next stop: Supreme Court?
The fiduciary rule, struck down in a strongly worded appeals court decision that encouraged opponents, may get a second chance at life because of the sweeping nature of the judges' ruling.
"My suspicion is that the DoL will in fact request a rehearing not so much because they are supporting the rule, though I suspect parts of the DoL do, but because the way the ruling is written it really challenges their rule making authority," says Bruce Ashton, a partner at law firm Drinker Biddle & Reath.
A decision by the Labor Department to fight the court ruling could come as late as May, setting up a potential showdown at the Supreme Court and standing somewhat at odds with the agency's ongoing review of the regulation that might result in revisions or repeal.
Put a different way, the Labor Department faces a turf battle it may not want to concede even if it wants to walk back its regulation.
"An agency generally doesn't want to see its role circumscribed," says Josh Lichtenstein, a tax & benefits partner at law firm Ropes & Gray.
Any future ruling might have to be narrower in scope, Lichtenstein adds.
The most recent twist in the ongoing battle over the fiduciary rule came after the 5th U.S. Circuit Court of Appeals, in a two-to-one decision, vacated the rule. This followed a lower court's decision to uphold it in the face of a challenge from several trade groups, including SIFMA, FSI, the U.S. Chamber of Commerce, the American Council of Life Insurers and the National Association of Insurance and Financial Advisors, among others.
Judge Edith Jones, writing for the majority, said the fiduciary rule bore the hallmarks of "arbitrary and capricious exercises of administrative power."
The department, she wrote, "has made no secret of its intent to transform the trillion-dollar market for IRA investments, annuities and insurance products, and to regulate in a new way the thousands of people and organizations working in that market."
She also highlighted what she said was agency overreach.
"When Congress has acted with a scalpel, it is not for the agency to wield a cudgel," the judge said.
The court vacated the fiduciary rule in its entirety.
"As we understand this [most recent ruling], it would restore the status quo ante, which means it puts back in place the 1975 regulation that governed this area for more than 40 years," says attorney David Ogden, an attorney with law firm Wilmer Hale, who represented one of the plaintiffs in the case.
What approach the Labor Department will take is still uncertain. A spokesman did not respond to multiple requests for comment.
President Trump ordered the agency in February 2017 to review the regulation and consider revising or rescinding it.
The SEC, meanwhile, is working on its own higher standard of care.
But in addition to its incentive to defend its authority, the Labor Department has already been defending the fiduciary rule in court. Indeed, the regulation has survived several court challenges and was upheld by another appeals court earlier this month, albeit on narrower grounds. Another appeal in a federal court in Washington D.C. is still pending.
"Because they have been defending it, there will be a stronger push to continue to defend it than you would quite imagine," Ashton says.
While the department deliberates, the industry could be left with some uncertainty as to what the regulatory framework will be.
Fiduciary advocates and opponents have paid keen attention to the SEC's rule-making process. The commission has been authorized to craft a fiduciary rule since the Dodd-Frank Act passed in 2010, and SEC Chairman Jay Clayton, appointed by Trump, has said he will make crafting a new standard a priority.
Many fiduciary rule opponents have repeatedly stated that the SEC should take the lead on this issue. In a call with reporters on Friday morning, ACLI Executive Vice President and COO Gary Hughes reiterated his group's support of a best interest standard, which is different than fiduciary.
"We've chosen suitability as a starting point and worked with the states to understand how it could be enhanced to become a best interest standard. Suitability only takes you so far," he says. "It's not meant to mirror what the DOL came up with."
Some fiduciary advocates, meanwhile, have expressed concern that an SEC standard might not be stringent enough.
"We know the SEC is adopting a standard and we assume they will deal with conflicts of interest and not merely deal with it just through disclosure ― or that is the hope at least," says Christine Lazaro, professor and director of the Securities Arbitration Clinic at St. John's University School of Law.
She adds that "the SEC does not have authority over insurance providers. So part of the market will be left out."
And even as Clayton's SEC moves closer to a creating a new standard, it's worth noting that the agency has said such a standard was a priority but failed to put forth a rule.
At the same time, several states, such as Nevada, have made moves to introduce their own fiduciary regulations. Massachusetts is also attempting to enforce the Labor Department's rule, charging Scottrade with violating the rule just weeks ago.
A spokesman for Scottrade said the company was evaluating the recent appeals court decision and declined to comment on its legal case involving Massachusetts. The state's securities regulator urged the Labor Department to appeal the court's ruling vacating the fiduciary rule.
"In the meantime, my office will continue to pursue our cases against Scottrade, which involves violations of their own internal policies and my office retains the authority to pursue investigations involving dishonest and unethical practices," Secretary of the Commonwealth William F. Galvin said in a statement.
More states might step into the void if the fiduciary rule dies a quick death, Ashton says.
"We've already seen Nevada and New York take strong stands," he says. "My suspicion is that if the DoL [rule] goes away in a sweeping way, then we might see California and other states impose a fiduciary standard partly because we don't have anything from the SEC."
--With additional reporting from Sean Allocca.