Morgan Stanley and Principal Financial Group Inc. were among banks and insurers that rallied after a U.S. appeals court struck down a sweeping Obama-era rule that aimed to protect millions of Americans from conflicted investment advice.
The rule, imposed by the Labor Department, would have added an extra layer of scrutiny for the industry and increased compliance costs. The U.S. Court of Appeals for the Fifth Circuit in New Orleans said that the rule bears the hallmarks of " unreasonableness," and the decision released late Thursday could increase the likelihood of a longer legal battle that could reach as far as the U.S. Supreme Court, according to Keefe, Bruyette & Woods analysts including Brian Gardner.
The Obama administration issued the regulation, called the fiduciary rule, in 2016 to force brokers to put their clients' interests first when offering retirement advice. Industry groups sued that year to block the regulation.
"The regulation deflation theme is in full effect and is one of the reasons we think financial stocks should do well," Evercore Partners Inc. analysts including Glenn Schorr said Friday in a note to clients.
The S&P 500 Life and Health Insurance Index climbed 0.8 percent at 1:12 p.m. in New York, surpassing the 0.3 percent gain in the broader S&P 500 Index, after the ruling. Brokerage LPL Financial Holdings Ltd. rose 1.7 percent and banks with large wealth-management units, including Morgan Stanley, also advanced. Bank of America Corp., Morgan Stanley and Principal Financial each gained close to 1 percent.
Donald Trump's presidential victory in 2016 added to uncertainty about the rule's future, as the administration delayed implementation of some parts of it. The Securities and Exchange Commission, Wall Street's top regulator, has been working on its own version of the rule to address the fact that the regulation only impacted brokers providing retirement advice.
An SEC rule would likely be broader, affecting the entire industry. Financial firms have largely been supportive of the SEC's efforts, partly because they believe whatever it comes up with will be less burdensome than Labor's standard.
The U.S. Chamber of Commerce praised Thursday's decision and has said that the SEC should take the lead on creating a "workable" standard.
Brokers, insurers to save billions on ruling: Bloomberg Intelligence
Vanguard Group Inc., which was expected to benefit from the fiduciary rule as more clients turned to low-cost funds, said Friday that the firm would continue to advocate that advice should be in a client's best interest.
"Yesterday's decision introduces more uncertainty into a process that has been drawn out and fraught with ambiguity," Tom Rampulla, managing director of Vanguard Financial Advisor Services, said in an emailed statement. "Investors are already expecting and demanding change. Fortunately, much of the industry has already shifted towards improved transparency, and we expect that positive momentum to continue."
Many companies have already prepared for the regulation, making it unlikely that the legal decision will spur a significant change in business practices, the Keefe, Bruyette & Woods analysts said.