Uncertainty Surrounds the DOL Fiduciary Rule As States Seek to Have Their Say

The Department of Labor (“DOL”) Fiduciary Rule, which requires brokers to act in the best interest of their clients in providing investment advice regarding retirement accounts, was partially implemented by the Department of Justice on June 9, 2017. The rule requires brokers who have clients with retirement accounts to:

  • proffer advice that is in the best interest of the customer
  • charge reasonable compensation
  • disclose any potential conflicts of interest
  • not make misleading statements

For investment advisors who work with fee-based discretionary accounts, this is largely old news. The biggest adjustment will be for brokers and insurance sales professionals who service commission-based nondiscretionary accounts. Under the old rules these commission-based brokers did not owe a fiduciary duty rule to retirement account holders.

The Fiduciary Rule has faced substantial opposition from financial industry professionals, arguing that the DOL rule is too costly and complex and will result in brokers deserting clients with small retirement accounts. Since last June, the ensuing inconsistencies between the DOL rule and state laws have become the center of numerous debates in the financial world.

Despite major parts of the regulation scheduled to be implemented in 2019, opponents of the DOL fiduciary rule have filed several suits against the DOL, seeking to halt implementation of the rule. The most high profile legal action was filed in federal court in Dallas. The plaintiffs include the U.S. Chamber of Commerce, the American Council of Life Insurers (“ACLI”), the Securities Industry and Financial Markets Association (“SIFMA”), the Financial Services Institute (“FSI”) and the Financial Services Roundtable.

The plaintiffs lost that suit last year and are appealing the lower court’s ruling in the Fifth Circuit Court of Appeals. The plaintiffs filed an additional document in the Fifth Circuit last week in response to the recent complaint filed against Scottrade by William Galvin, head of the Massachusetts Division of Enforcement.

In a letter drafted by Eugene Scalia, a partner at Gibson Dunn & Crutcher and the lead attorney, he explains how the Scottrade case illustrates the urgent need to vacate the fiduciary rule, pointing out that this is just one example of how the rule is intensifying the risk of litigation by allowing private plaintiffs the opportunity to exploit the rule on a state level.

“Far from the uniform, federal standard of liability that Congress intended, the Fiduciary Rule is now spawning claims that will be enforced ‘under the splintered laws of fifty States,’” writes Scalia. “A decision by this Court will put a halt to that, while also providing important guidance to the Labor Department in any future rulemaking proceedings.”

Below if a quick recap on some recent developments surrounding the DOL Fiduciary Rule:

  • On November 27, 2017, the DOL released their decision to delay enforcement of the rule from January 1, 2018 to July 1, 2019. This delay was ordered by President Trump and aims to give the agency more time to reassess the impact of the regulation on savers and the financial industry as a whole.
  • On November 30, 2017, the DOL wrote to the Fifth Circuit informing them that they would not enforce the rule during the delay.
  • On December 8, 2017, the plaintiffs in the lawsuit against the DOL rule pointed out in a letter to the Fifth Circuit that parts of the rule have already been implemented, and the delay of regulation should not slow down their appeal. Plaintiffs cited two provisions of the rule that were implemented in June; the significant expansion of the number of advisers who are deemed fiduciaries and the impartial conduct standards they must follow when working with retirement clients. They went on to argue that the DOL lacked authority to promote the fiduciary rule and have illegally established a private right of action for clients to sue their brokers.

The DOL’s announcement on November 30 that they will not enforce the rule during the delay has not prompted state lawmakers to follow suit.

Maryland is the latest state to craft a bill known, as the Financial Consumer Protection Act. On February 22, 2018, members of the Maryland state legislature met to discuss the bill, which would require fee-based brokers to act in the best interest of their clients.

New Jersey legislators have also introduced a bill that is making investment advisers question the future of the commission-based investment model in New Jersey. The bill would require non-fiduciary advisers to make a declaration of that status in a compulsory statement to clients: "I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you." Opponents feel this disclosure is phrased in a way that automatically portrays financial advisors in a negative light and may result in unnecessary increase in litigation.

Momentum for state level fiduciary laws seems to be unstoppable now that states such as New York and Nevada have also sent proposals requiring brokers to act in their clients best interests when recommending recent retirement savings products. The recently proposed bill in New York is entitled “Suitability in Life Insurance and Annuity Transactions.”

SEC Chairman Jay Clayton has stated his intention to bring “clarity and harmony to the investment advisor, broker-dealer standard.” The SEC overview for fiduciary duty rules for brokers is set to come out near the end of the second quarter in 2018.

If you have questions or concerns concerning the Fiduciary Rule, contact the securities attorneys at Lubiner, Schmidt & Palumbo fro a free consultation.