Views on the integrity of global capital markets
20 March 2018

DOL Fiduciary Rule: Dead or Do-Over?

Posted In: Fiduciary Duty

It is not altogether certain the Department of Labor’s (DOL) fiduciary duty rule is dead after an appeals court voted 15 March 2018 to vacate it, though the national applicability of the court’s opinion suggests it is certainly in trouble.

As part of the Fifth Circuit Court of Appeals’ ruling, Judge Edith Jones stated, “Transforming sales pitches into the recommendations of a trusted adviser mixes apples and oranges.” Therefore, the rule should not apply to brokers. By using this logic, the DOL should ban brokers entirely from this sphere or, alternatively, it could create a vacuum where anything goes and anyone can play. Neither is desirable.

On a more realistic basis, the immediate questions for the DOL are (a) whether to seek a stay of the decision until a higher court hears the case, and (b) whether to appeal the decision to said higher court. Neither appears likely given the Administration’s dim view of the DOL rule, though the head of the DOL is a wild card who is said not to be entirely in sync with the Administration’s approach on other matters.

In the meantime, the SEC seems intent on going its own way with a fiduciary duty rule, if for no other reason than to forestall state efforts at creating their own, distinct rules. Such bifurcation times 50 would be especially bad for the industry and investors. So, the SEC pretty much needs to act to halt this.

One big reason the DOL rule remains to this date is that it had completed a full rulemaking process in 2015 and 2016, and was enacted nearly two years ago. To unwind it now would require that entire process in reverse, something the DOL did not want to address immediately. A second big reason is that firms had spent the latter nine months of 2016 and early 2017 preparing for its implementation and would not appreciate those costs going for naught. To avoid dealing with these issues, everything has been put on hold. The court’s decision may dislodge this hold.

A similar sequence of events took place in 2005 and 2006 on a fully implemented SEC rule. After a Washington, DC Court struck down a narrow provision within the rule, the Commission withdrew the entire rule without going through the rulemaking process. It would seem similar conditions apply here, and that this decision may, therefore, also allow the DOL to pull the rule without messing with rulemaking.

Ultimately, it should not surprise anyone if the DOL takes advantage of this court decision to pull the rule so it can start over with something that justifies at least partially those earlier investments and addresses other concerns. If that is the case, CFA Institute will re-engage with the DOL very soon.

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Photo Credit: ©Getty Images/Enis Aksoy

About the Author(s)
Jim Allen, CFA

Jim Allen, CFA, is head of Americas capital markets policy at CFA Institute. The capital markets group develops and promotes capital markets positions, policies, and standards.

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