July 30, 2018

Regulating a Trillion Dollar Market: Fifth Circuit Strikes Down the Fiduciary Rule

Sitting in New Orleans on the banks of the Mississippi River, the United States Court of Appeals for the Fifth Circuit recently issued a hotly-anticipated mandate certifying its decision on the Department of Labor’s Fiduciary Rule. The mandate in Chamber of Commerce of the USA v. U.S. Department of Labor, No. 17-10238 (5th Cir. Jun. 21, 2018) explained the court’s reasoning for entirely vacating the Fiduciary Rule, which would have imposed tighter regulations on individual retirement accounts (IRAs) and plans covered by the Employee Retirement Income Security Act (ERISA)—a trillion-dollar market that touches almost every employed American.

Inclusion in the New Fiduciary Rule

Addressing a perceived conflict of interest, the Fiduciary Rule required that people who receive commissions for recommending stocks and other securities for IRAs and ERISA plans act in the best interest of the account holder.

Under the regulatory scheme in place prior to the issuance of this new Fiduciary Rule, only persons who give clients advice on a “regular basis” that is a “primary basis” for clients’ investment decisions are fiduciaries in the context of IRAs and ERISA. (Here is the DOL's full test for ERISA fiduciary status based on the provision of investment advice, as it stood prior to the Fiduciary Rule.) The new Fiduciary Rule eliminated the “regular basis” and “primary basis” requirements, expanding the definition of “fiduciary” to include many more people who are paid to give investment advice to holders of IRAs and ERISA-covered plans—in particular, bringing broker-dealers within the scope of the “fiduciary” definition for the first time. (Here is how the test looked after implementation of the Fiduciary Rule.)

Fifth Circuit Strikes Down the Fiduciary Rule

Echoing the Crescent City’s laissez-faire approach, the Fifth Circuit rejected the increased regulatory burden entirely. The court accused the DOL of attempting to “hide elephants in mouseholes” by making a small semantic shift with massive ramifications. By changing the definition of “fiduciary” to include practically anyone who gives investment advice for a fee, the court said, the DOL expanded its authority in a trillion-dollar market in “vast and novel ways.”

Support for the Fiduciary Rule came mainly from consumer advocacy groups, who argued that it would prevent abuses of power by people recommending securities to future retirees. Investment industry advocacy groups opposed the new rule, arguing that compliance would be onerous, costing tens of billions of dollars. Moreover, from a separation-of-powers perspective, the opposition argued, DOL had overreached into an area Congress had entrusted to the Securities and Exchange Commission (SEC).

The SEC's Regulation Best Interest

The SEC is now in the drivers’ seat. Soon after the Fifth Circuit’s initial mid-March decision on the Fiduciary Rule, the SEC proposed a retooled Fiduciary Rule called Regulation Best Interest. Regulation Best Interest is open for public comments until August 7, 2018.

Submitting a professionally-written comment on a proposed rule change is one of the most effective tools a private citizen has for participating in our democracy. Ziliak Law can help you understand the issues, evaluate your points of leverage, and write a comment to the SEC. Contact me at jhudson@ziliak.com with “Regulation Best Interest” in the subject line to get started.

Article by Jesse Hudson


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