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Fifth Circuit Vacates Fiduciary Rule

The Fifth Circuit Court of Appeals, in a 2-1 decision, vacated the Department of Labor’s fiduciary rule primarily on the grounds that the DoL unlawfully expanded the definition of the term “fiduciary” to include commissioned brokers.  The Court opined that the DoL departed from the common law and contextual definition of “fiduciary” and dispensed with the criteria used for the past several decades.  The Court agreed with business groups that argued that the Rule would cause many financial service providers to exit the market for retirement advice, thereby hurting the people that the DoL intends to protect.

OUR TAKE: We assume that the DoL will consider appealing this decision to the Supreme Court, which could take months/years.  In the meantime, our recommendation is to comply with the best interest standard that went into effect last June and see what happens in the courts, in Congress, and at the DoL.


Massachusetts Sues to Enforce Compliance with Fiduciary Rule

The Massachusetts Securities Division has commenced administrative proceedings against a large broker-dealer because it ran sales contests that violated its own policies adopted to comply with the Department of Labor’s fiduciary rule.  The DoL rule, which became effective in June 2017, requires firms to follow an “impartial conduct standard” including acting in the best interest of customers, charging reasonable compensation, and ensuring full disclosure.  In response to the rule, the BD adopted compliance policies prohibiting conflicts of interest when dealing with retirement accounts.  Following adoption of the new policies, the firm launched sales contests, which the MSD alleges involved misrepresentations and conflicts of interest.  The MSD alleges that the firm violated Massachusetts ethical conduct standards by failing to abide by its own policies and the DoL rule.

OUR TAKE: Even though he DoL won’t enforce the fiduciary rule, the impartial conduct standard applies to firms that recommend products to retirement accounts.  Nevada has already passed its own fiduciary legislation.  Now, Massachusetts uses its enforcement powers to compel fiduciary compliance.  Expect other states to follow.


SEC Chairman Commences Consideration of Uniform Fiduciary Rule

SEC Chairman Jay Clayton has solicited public comment concerning the standard of conduct applicable to retail advisers and broker-dealers.  The SEC seeks public input on such topics as the preferred standard of care, conflicts of interest, approaches to regulation, disclosure, technologies, and investor confusion.  Mr. Clayton asks, “If the Commission were to proceed with a disclosure-based approach to potential regulatory action, what should that be?  If the Commission were to proceed with a standards-of-conduct-based approach to potential regulatory action, what should that be?  Should the standards for investment advisers and broker-dealers be the same or different?  Why?”  Mr. Clayton notes that the SEC last solicited such information back in 2013 but that rapidly changing markets, participants, and regulations require updated information.  He welcomes coordination with the Department of Labor as it implements and re-considers the Fiduciary Rule.  The SEC has set up a webform and email box to receive comments.

OUR TAKE: The SEC should adopt a uniform fiduciary or best interest standard for all retail advisers and broker-dealers, and the DoL should incorporate that standard rather than create a separate regime solely for retirement products.  We hope that Mr. Clayton has begun the process to ending this internecine regulatory battle of agencies.


Fiduciary Rule Goes Live on June 9 without Specific Compliance Requirements

The Department of Labor has confirmed that its Fiduciary Rule will go into effect on June 9, although affected firms need not comply with all of the BIC exemption requirements until at least January 1, 2018.  In an FAQ, the DoL confirmed that financial institutions and advisers must comply with the “impartial conduct standard,” which requires a duty of prudence (professional standard of care) and loyalty (advice in the best interest of the customer).  However, firms have flexibility to determine how to ensure compliance with the best interest standard and may offer proprietary products with commissions if they ensure that they meet the impartial conduct standard and the advice is in the best interest of the customer.  Firms should “adopt such policies and procedures as they reasonably conclude are necessary.”  The DoL plans to seek additional information to determine whether to further delay full implementation or change the Rule, which applies to IRAs, ERISA plans, and IRC 4975 plans.

OUR TAKE: Can we stop now?  We actually think the current state of affairs makes the most sense i.e. require a best interest standard without specifically mandating how firms must comply.  The Investment Advisers Act takes that approach, and it has worked pretty well since 1940.