Despite suffering a major blow when it was struck down Thursday by a federal appeals court, the Labor Department's fiduciary rule could still live on. Uncertainty, though, will continue to surround the measure as it morphs its way into the future.
Its fate depends on whether the agency will continue to defend the rule in court, even as it has delayed full implementation of the regulation while it conducts a reassessment ordered by President Donald J. Trump that could lead to major changes.
"While this is an important
victory in the courts, we won't know the outcome for several more months," said Brad Campbell, a partner at Drinker Biddle & Reath, and the former assistant secretary of Labor for employee benefits and former head of the Employee Benefits Security Administration under President George W. Bush. "The DOL rule will still be in effect until we know what's going to happen with appeals."
The Fifth Circuit Court of Appeals ruled, in
a split decision Thursday, that the DOL rule, which requires brokers to act in the best interests of their clients in retirement accounts, was "unreasonable" and demonstrated "arbitrary and capricious exercises of administrative power."
The DOL has several options now. It could file for a review of the decision by the entire Fifth Circuit, appeal the case to the Supreme Court or end its defense of the rule.
A Labor Department spokesman only said, "Pending further review [of the court decision], the department will not be enforcing the fiduciary rule." The DOL previously had said it would not enforce the provisions that are in place during its own assessment of the measure, as long as financial firms are making a good-faith effort to comply.
Mr. Campbell predicts the agency will keep up the fight against several lawsuits by industry opponents — as it has for about two years across the Obama and Trump administrations.
"Even as they defend it, they'll continue to revise it through the regulatory process," Mr. Campbell said. "It's likely they'll want to continue their work."
Another former DOL official also said the agency will forge ahead.
"I don't think the fiduciary rule is dead," said Erin Sweeney, a member of Miller & Chevalier, and a former senior benefit law specialist for the Division of Fiduciary Interpretations at the DOL. "We're all going to be back in the trenches for another year."
She said the Labor Department will defend the rule because if it doesn't, a group advocating for the measure could try to step in as the defendant and keep the matter going in court.
"DOL wants to control this litigation," Ms. Sweeney said. "You want to make sure the agency has the ability to regulate. They want [a revised rule] to be a regulation that withstands legal scrutiny."
But Kevin Walsh, an attorney at Groom Law Group, foresees the Fifth Circuit ruling — the first legal win for industry opponents — as the death knell for the regulation.
"It's unlikely that the DOL will appeal the Fifth Circuit decision, and shortly it will become clear that the rule is dying," Mr. Walsh said.
Steve Hall, legal director and securities specialist at Better Markets, an advocate for the rule, said it won't be easy for the Labor Department to step back.
The agency allowed parts of the rule to become
applicable last June, when it said it had no legal justification to delay provisions that extended the scope of fiduciary duty to all advisers of retirement accounts, and set impartial conduct standards for them.
"It's difficult to see how DOL could let it stand without challenging it," Mr. Hall said. "The Fifth Circuit decision is vulnerable. It's just plain wrong on the law."
Better Markets itself could be a group that steps up in court if DOL steps down.
(More:
Point/Counterpoint: Industry leaders weigh in on DOL fiduciary decision)
"It's something we'll be taking a close look at," Mr. Hall said.
The DOL rule has sparked fierce political battles
since it was first introduced during the Obama administration in 2010. It was pulled back and then reintroduced in 2015 and finalized in 2016.
It then generated numerous industry lawsuits and also a circuit split with potentially more to come.
The 10th Circuit Court of Appeals
upheld the rule Tuesday, although on a much narrower question than the broader suit in the Fifth Circuit, which is based in New Orleans. A hearing on another suit against the rule is pending in the D.C. Circuit Court of Appeals.
It's unclear whether there has been enough activity at the circuit level for the Supreme Court to take up the Fifth Circuit Appeal.
What is clear is that more uncertainty has been created by the Fifth Circuit's decision, said Joshua Lichtenstein, a partner at Ropes & Gray.
"While the government decides whether to request an en banc review of the ruling, appeal the case to the Supreme Court or take no action, financial institutions are forced to decide how to react — especially if part of their operations is located in the Fifth Circuit," Mr. Lichtenstein said in a statement. "This possibility of having the rule apply in some parts of the country but not in others creates new risks and compliance challenges for institutions, reopening the period of uncertainty around the rule."
Meanwhile, the Securities and Exchange Commission is poised
to propose its own fiduciary rule later this year. The attention should shift to the SEC, according to one of the industry plaintiffs in the Fifth Circuit case.
"The Court's ruling now presents an opportunity for policymakers to properly update the standards by which Americans receive investment advice by adopting 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," Kenneth E. Bentsen Jr., president and chief executive of the Securities Industry and Financial Markets Association, said in a statement.
But the outcome of the DOL rule could affect how the SEC approaches its own regulation.
"The pressure on the SEC evaporates if the DOL rule is taken off the table," said Barbara Roper, director of investor protection at the Consumer Federation of America. "The fight continues in other arenas, regardless of what happens at the DOL."
