With the Department of Labor fiduciary rule facing a May expiration date after being invalidated by a court order, the focus now shifts to the Securities and Exchange Commission and a few states considering ways to fill the void.
"I think every option is under review. For plan sponsors and individual investors, the SEC could really come out with a very good, real fiduciary rule if they wanted to," said Kathleen M. McBride, a founder of the Rumson, N.J.-based Committee for the Fiduciary Standard — an advocacy group for the authentic fiduciary standard as established under the Investment Advisers Act of 1940 — and an accredited investment fiduciary analyst.
Despite fierce opposition from financial services firms and many Republicans in Congress, DOL officials in the Obama administration succeeded in finalizing a new standard in 2016 that expanded fiduciary status to more retirement market participants, including brokers and insurance agents in certain situations. Partially implemented in June 2017, the final pieces were slated to fall into place this summer.
That all changed March 15, when the 5th U.S. Circuit of Appeals in New Orleans vacated the rule, arguing the DOL had overstepped its legal authority and waded into the SEC's regulatory domain.
The court gave the DOL 45 days to appeal the ruling, but that is considered unlikely given the Trump administration's 2017 memorandum to reconsider the rule and the department's announcement after the court decision that it would not enforce the rule "pending further review."
Legal experts are now debating possible, if not probable, tactics that proponents of the rule could take to hold the order to vacate at bay, including having a third party ask the 5th Circuit to allow it to intervene and calling for a rehearing of the 2-to-1 decision by the circuit's full judicial panel.
Backers of the rule were encouraged by the dissenting opinion of Carl E. Stewart, the 5th Circuit's chief judge, who called the new rule "an expansive-but-permissible shift in DOL policy." The DOL, Mr. Stewart wrote, "acted well within the confines set by Congress in implementing the challenged regulatory package."
Another legal debate centers on whether the order is limited to the circuit court's jurisdiction — Texas, Louisiana and Mississippi — or applies nationwide.
Rule-backers also point to a narrower ruling from the 10th U.S. Circuit Court of Appeals upholding the standard over a provision related to fixed indexed annuities. Invoking that decision could be a possible tactic, however slim, for arguing that a circuit split warrants review by the Supreme Court.
If the court order goes into effect May 7, the standard reverts to the five-part test of what constitutes a fiduciary, which has been in place since 1975.
Under the five-part test, someone is a fiduciary if he or she regularly advises a retirement plan on investment decisions, has an arrangement with plan fiduciaries, and provides advice that serves as the main basis for investment decisions or provides advice tailored to a particular plan.
For plan sponsors worried about participants getting pressure to roll their 401(k) balances into individual retirement accounts, the distinction between ongoing vs. one-time advice is a critical one that will have to be addressed either by regulators or through legal challenges.
SEC Chairman Jay Clayton, who has made protecting "Mr. and Mrs. 401(k)" a top priority, is eager to get started on a new rule proposal that could come out by summer. "From my perspective, the sooner the better," he told a Securities Industry and Financial Markets compliance conference March 19.