Court kills rule for financial professionals

Labor Department overstepped its authority, judges say.

A federal appeals court ruled Thursday that the Department of Labor overstepped its authority when it wrote a rule that required financial professionals, including brokers and insurance agents, to put their customers’ financial interests ahead of their own.

The 5th U.S. Circuit Court of Appeals overturned a lower court’s ruling in a 2-to-1 decision siding with the plaintiffs, which include several groups representing the financial services industry.

“That times have changed, the financial market has become more complex, and IRA accounts have assumed enormous importance are arguments for Congress to make adjustments in the law, or for other appropriate federal or state regulators to act within their authority,” the majority wrote in their opinion. “A perceived ‘need’ does not empower DOL to craft de facto statutory amendments or to act beyond its expressly defined authority.”

The strongly worded decision is not necessarily the end of the fiduciary rule, lawyers said, but its future is highly uncertain.

“Even though the Trump administration is not a strong supporter of the fiduciary rule, it will likely continue to defend the fiduciary rule against legal challenges,” said Marcia S. Wagner, an employee benefits lawyer.

As a next step, the Labor Department may request that all of the judges in the appeals court hear the case, rather than the three-judge panel, lawyers said. Because there was at least one decision in another circuit court that conflicts with the most recent case, it is also possible the Supreme Court could weigh in.

“The outcome could continue to be uncertain for quite a while,” said Fred Reish, a lawyer who represents clients in fiduciary issues.

The Obama-era regulation, drafted over roughly six years, had thus far survived intense criticism and resistance from the industry, which argued that the rule would make it too costly to work with smaller investors. The rule, which took partial effect in June 2017, requires financial advisers to act as fiduciaries when providing advice related to a client’s retirement accounts, including individual retirement accounts and 401(k)s.

The future of the rule was already murky. The Trump administration’s Labor Department, which oversees retirement accounts, said last year that it was reviewing the regulation and pushed back its full implementation by 18 months, to July 2019.

Consumer advocates and others who are in favor of a strong fiduciary rule called the decision a blow to retirement savers.

“This case was wrongly decided,” said Micah Hauptman, financial services counsel to the Consumer Federation of America. “The industry opponents went forum shopping and finally found a court that was willing to buy in to their bogus arguments. This is a sad day for retirement savers.”

Several of the plaintiffs — including the U.S. Chamber of Commerce, Financial Services Institute, Financial Services Roundtable, Insured Retirement Institute, and Securities Industry and Financial Markets Association — said the court’s decision would preserve access to affordable financial advice.

The Securities and Exchange Commission is said to be working on its own rule. Consumer advocates have long said that the financial services industry would prefer that the SEC write a rule, which they believe would not be as strong as the Labor Department’s rule.