Court Critical of DOL Fiduciary Rule Leaves Labor Proposing Compliance Delay

September 30, 2017 by Amy E. Martinez, Esq.

In early August, the Department of Labor ran into a brick wall in the U.S. Court of Appeals for the Fifth Circuit when Judge Edith Jones hammered the agency over its fiduciary rule’s best interest contract exemption (BICE). Nine plaintiffs entered oral arguments against Labor in the U.S. Department of Commerce’s appeals case.

The plaintiffs, which include the Chamber of Commerce, the Securities Industry and Financial Markets Association, and the Financial Services Institute, argued that Labor’s fiduciary rule is “overly broad,” and asked the court to vacate the rule and its exemptions.

Eugene Scalia, the attorney for the plaintiffs, pointed out that the rule institutes the “most sweeping changes to the retail financial services sector since the 1940 enactment of the Investment Advisers Act.” Scalia also claimed that the rule is radically altering how broker-dealers and insurance agents can market IRAs to the public. He stressed the fact that these new onerous rules are being implemented not by Congress’ lawmaking authority, but rather by an unchallenged fiat from an agency which lacks the oversight authority to make such sweeping rule changes.

Those in attendance felt that the three-judge panel raised excellent questions in challenging Labor’s authority in expanding the definition of fiduciary duty to cover sales, regulate IRAs, and create new causes of action.

Financial advisors that offer IRAs have real concerns with how the DOL fiduciary rule will affect their business models. With the rule going into partial effect on June 9, certain circumstances within an advisor’s normal role may potentially open them up to violations under the new regulations. Advisors are already confused by the rule’s advertising restrictions. Any discussions regarding retirement account rollovers could put the advisor at risk of non-compliance if they do not follow the strict guidelines as laid out in BICE.

Under the new DOL rule, an advisor may be scrutinized under the fiduciary standard when he or she provides “investment recommendation” to clients in exchange for compensation. This will result in many advisors choosing not to offer advice to small businesses or individuals about retirement rollovers for fear of becoming the client’s fiduciary. If this scenario occurs, it could severely limit the number of financial investment choices available to that demographic.

If an advisor does offer investment advice that directs a client’s funds into a managed account, they will indeed become the fiduciary and be required to act in the client’s best interest at all times. This exposes an adviser to scrutiny from regulators for just about every action, unless they can gain an exemption from the rule, such as the best interest contract exemption (BICE) or the level fee exemption.

We do not yet know how the Fifth Circuit’s panel will rule in the case, but it now appears the Department of Labor is reassessing the implementation of the controversial Obama-era rule. The Labor Department announced that they are proposing delaying the rule’s compliance date by 18 months. That would push the compliance date out from January 1, 2018, until July 1, 2019, while seeking additional public comment.

As part of a lawsuit in the U.S. District Court for the District of Minnesota, Labor filed a document saying it is considering loosening some of the restrictions on the types of transactions that are currently prohibited under the rule. These transactions would include insurance products and rollovers of retirement accounts such as IRAs.

A delay would allow DOL officials more time to conduct a comprehensive review of how the rule would financially impact advisors and broker-dealers, and what effect, if any, it would have on the ability of small businesses and individual investors to prepare for retirement.