Fifth Circuit Court ruling: point/counterpoint
Industry leaders weigh in on the ruling that changed the fate of the Labor Department's fiduciary rule.
The Fifth Circuit Court of Appeals vacated the Labor Department’s fiduciary rule in a split decision announced Thursday, overturning a Dallas district court that was just as adamant in upholding the measure. InvestmentNews asked industry heavyweights to give us their thoughts.
The 5th Circuit’s decision is unfortunate because it perpetuates and increases uncertainty for everyone. It presents new obstacles on the path to greater professionalization of the field of investment advice. The current environment of regulatory roulette distracts from focusing on what clients want and expect —trustworthy advice.
Fi360 has always supported a strong fiduciary standard for financial services professionals. What we would like to see happen now is for the DOL to appeal and seek a stay of the 5th Circuit’s decision to allow the DOL and SEC time to pursue a comprehensive and well-coordinated solution firmly grounded in fiduciary principles.
At this juncture, advisers and financial services firms have three choices: revert to past practices, stay the course charted by the DOL rule as implemented last June, or step up to adopt fiduciary best practices that are not dependent on the vagaries of regulatory rulemaking.
Reverting to past practices is risky from both regulatory and client relationship perspectives. Staying the course is sensible. Stepping up to adopt fiduciary best practices is what we have always recommended because the professional that is closest to the client’s ideals will have the strongest, most lasting relationship. To make the right choice, the central question is, “What would clients want us to do?”
The Court correctly determined that the DOL overstepped with its well-intentioned but unnecessarily complex and punitive rule that would disproportionately harm those it intended to help. That shouldn’t be the end of the story. As we have said for nearly a decade, the SEC should act to regulate brokers who provide personalized investment advice subject to a best-interest standard. Just as the court ruled that Congress did not grant the DOL the authority to act, the court also acknowledged that the SEC does have authority to act. Recent statements by SEC chair Clayton and commissioner Peirce that the SEC intends to pursue such a standard are appropriate and due.
SIFMA’s members have long supported the development of such a best interest standard care. We have also long advocated for the SEC to take the lead on a clear, consistent and workable standard that does not limit choice for investors.
SIFMA favors an approach that would apply across all investment recommendations made to retail customers in all brokerage accounts (not just IRA accounts); enhance existing standards to create a heightened and more stringent “best interest” standard; ensure clients have a seamless experience with their financial professionals; build upon the existing and long-standing securities regulatory regime for brokers; and involve robust examination, oversight and enforcement by the SEC, FINRA and state securities regulators. It should also be a national standard, as a patchwork of state laws is sub-optimal to a national standard and would create more cost and confusion.
The SEC should now regroup and develop a best-interest standard that appropriately protects investors and preserves their ability to choose how they wish to select the services they need and want.
The Financial Services Institute (FSI) has fully supported an SEC-created uniform fiduciary standard since 2009 – before Dodd-Frank became law. While the court’s decision in our favor is critical because the rule would have pushed the cost of retirement advice and planning services out of the reach of many Main Street investors, our work is far from over.
We are now redoubling our efforts to support the SEC’s current push to create a uniform standard that protects investors and their full access to the advice, products and services they depend on to save for a dignified retirement, care for aging parents and educate their children. And we will be as loud in support of an SEC fiduciary standard as we have been in opposition to the DOL rule.
Our profession should also learn an important lesson from this process: When we work together, advocate with one voice and never give up on doing the right thing for clients, we will get the results we need. FSI members and their clients wrote over 200,000 letters to the Department of Labor and Congress, walked the halls of the U.S. Capitol to meet with their elected officials, made numerous phone calls and met in the district offices of their members of Congress. Our multifaceted approach to advocating on this issue had a tremendous impact and the court took the same position as we did during our meetings with elected officials and regulators.
The work is not over. Investors must have the clarity and protection they deserve and our members must have a workable regulatory environment that allows them to serve their clients. And we are proud to continue to lead our members through the often changing and challenging advocacy process.
It’s too early to tell how this will all play out, and whether this extreme outlier decision from a single circuit will be allowed to determine the fate of the Department of Labor’s conflict-of-interest rule. We certainly hope that the department will continue to defend both the rule itself and their authority to act to protect retirement savers from predatory practices.
In the meantime, however, the court decision does help to clarify the stark choice that investors face when they are deciding who to trust with their money. Brokers and insurers went into court and argued that they are nothing more than salespeople, and the court agreed. It is on that basis that the court determined that there is no relationship of trust and confidence between brokers and insurance agents and their customers, so no reason to trust their recommendations.
As a result, industry’s “win” in the 5th Circuit may do more to destroy the credibility of their business model than anything the fee-only purists could have concocted. After all, by imposing a real best-interest standard and reining in conflicts, the Department of Labor rule has the potential to turn the transaction-based advice model into one that offers real value to investors. But all that changes if this ruling stands and brokers and insurers are reduced to mere product pushers, free to recommend the products that are most profitable for them, rather than those that are best for their customers.
At that point, the message to investors is clear. They are on their own, and the only way to protect themselves is to seek out a true fiduciary adviser. The good news is that those services are available, often at very low cost, to even the smallest accounts.
As a former regulator with more than 30 years experience, it has been my belief from the very beginning that the Department of Labor’s fiduciary rule was an overreach and that a significant number of retirement savers would lose access to the financial services and products they need to plan for a secure and dignified retirement. The rule just did not strike the right balance between those essential services and protections for retirement savers. We now know even under a partial implementation of the rule, a large group of Americans have lost access to these vital services and products.
To be clear, we support a best-interest standard that ensures all Americans can receive the financial guidance and products they need. We commend SEC Chairman Jay Clayton for taking the lead on developing a uniform best-interest standard and prioritizing coordination among all regulators to develop a workable solution. IRI is committed to working with the SEC, the NAIC and others, to develop a clear, consistent, compatible best-interest standard that preserves consumer choice and access to affordable financial advice.
The decision reached by the 5th Circuit yesterday was a clear win for all American retirement savers and we are ready to move forward to construct a workable best-interest standard.
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