Recent judicial decisions have all but nullified the DOL’s proposed regulation, and the SEC’s Advice Rule appears poised to be the likely successor.  This post explores the recent turns in this ongoing saga and what it might mean for your firm.

Last year we posited the question, Will the fiduciary rule ever become law?  It appears that question has been emphatically answered in recent months.  On March 15^th, the Fifth Circuit of Appeals vacated the Department of Labor’s fiduciary rule with a split decision that overturned a Dallas district judge’s decision to uphold the proposed regulation.  By a 2-1 vote, the appellate judges ruled that the agency exceeded its statutory authority under ERISA in promulgating the measure.  A few weeks later, the same panel ruled that AARP (formerly the American Association of Retired Persons) and the states of New York, Oregon, and California could not intervene in a lawsuit against the fiduciary rule.

Recent Developments

The DOL proposal now appears to be on life support as the Department of Justice (acting on the DOL’s behalf) failed to appeal the Court’s decision by the April 30^th deadline.  The DOJ now has until June 13^th to petition the Supreme Court for a hearing.  Still, many legal analysts believe that’s unlikely given the DOJ’s lack of appeal and the DOL’s own delays in offering how to implement the proposed ruling.

These developments seem incomprehensible against a backdrop of public outcry for such a standard from a list of sources ranging from the Vatican to HBO, among many others.  The Pope will, however, be relieved that the proposal will likely be resurrected as the advice rule, similarly designed to clamp down on brokers’ ability to place their own interests ahead of clients.

A closer inspection of the SEC’s proposed ruling does reveal some subtle differences.  The advice rule, unlike its predecessor, is not a uniform standard for broker-dealers and investment advisors, effectively preserving this dichotomy.  Instead, brokers would be held to a “best interest” standard that is slightly more robust than existing rules that require an investment recommendation to merely be “suitable” for a client’s circumstances.  The proposal also precludes companies registered solely as broker-dealers (and their employees) from using the term “advisor” (or “adviser”) when communicating with retail clients while permitting dually registered firms (FINRA and the SEC) to present themselves as such.  Lastly, the advice rule would require brokers and advisors alike to provide investors with a document (no more than four pages long) summarizing their relationship with the client.

The recent rise and fall of the advice rule and fiduciary rule, respectively, will likely not impact most RIAs that already act as fiduciaries to their clients.  Registered broker-dealers, on the other hand, will now be more incentivized to also register with the SEC if they hope to continue presenting themselves as “advisors” to current and prospective clients.  This trend started long before anyone had even heard of the proposed advice rule, but now BD firms and their brokers should take a closer look at SEC registration if they haven’t already done so.  We expect this ruling, should it be passed, to accelerate this trend in future periods.

Conclusion

In summary, the advice rule appears poised to replace the fiduciary rule as the new standard for the profession, though there is still no guarantee that it will be signed into law.  There are still reports of disagreement on both sides of the political aisle regarding the efficacy and contents of the rule that will have to be ironed out.  At this point, it appears that the proposed regulation will become law, but we would have said the same thing about the fiduciary rule just one year ago.  We’ll let you know how this all shakes out in future posts.