The “fiduciary rule” is officially dead.
The Labor Department rule, conceived by the Obama administration, was meant to ensure that advisers put their clients’ financial interests ahead of their own when recommending retirement investments.
The rule’s fate was all but sealed with the election of President Donald Trump, who generally opposes financial regulations. Just two weeks into his presidency, he ordered a review of the rule “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.”
Then this past March, the rule was dealt a serious blow when a federal appeals court hearing a challenge to the rule by business groups vacated it in a split decision, overturning a lower court. The majority argued, in part, that the Labor Department had overstepped its authority in reinterpreting a fiduciary standard that had been on the books for decades.
In late April, the Trump administration allowed a deadline to seek a rehearing to pass without taking action. A few days later, the rule went on life support after the same court unanimously denied a motion by California, New York, Oregon and AARP to replace the federal government in defending it.
Finally, on Wednesday, the last deadline for resuscitating the fiduciary rule passed when the government declined to ask the U.S. Supreme court to reconsider the appeals court’s decision.
One procedural step remains: The court clerk must formally vacate the fiduciary rule by issuing a so-called mandate. To resurrect the rule before that occurs, the Fifth Circuit would have to take the unlikely step of challenging its own decision.
“As a literal matter, anything’s possible, but we regard the mandate as a mere formality,” says Andrew Oringer, a lawyer in Dechert LLP’s fiduciary practice.
The prospect of holding advisers accountable to retirement savers hasn’t disappeared entirely, though. The Securities and Exchange Commission is considering its own version of the fiduciary rule, known as the best-interest rule.
Dechert’s Oringer says the SEC’s effort will be daunting. “The SEC can now write its rule on a clean slate,” he said. “But without the Labor Department rule lurking in the background, the SEC is likely to find it even more daunting to find consensus and compromise as the various parts of the market continue to fight and claw and scratch over their different views of what’s best.”
A Labor Department spokesman referred questions to the Justice Department, noting that it represents the government in such cases. The Justice Department declined to comment.
Business groups, including the U.S. Chamber of Commerce, were fierce opponents of the rule, while many groups representing small investors, including AARP, had supported it.
Wall Street spent years preparing to comply with the Labor Department fiduciary rule. The government estimated that preparation would cost banks and investment advisers as much as $3 billion. An industry group said the number was closer to $5 billion.
Bank of America Corp.’s Merrill Lynch is among the financial companies that started moving toward fee-based advisory models in response to the emerging Labor Department rule and continued on that path even after Trump ordered his review.
“At the very least, from a PR standpoint, it would be difficult to go back to the old ways of doing business,” Brian Gardner, an analyst at Keefe, Bruyette & Woods Inc., told Bloomberg Businessweek. “It just looks bad.”
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