The Department of Labor's fiduciary rule is dead and buried, its passing a mixed blessing for investors and the financial services industry.
The deadline for appealing the 5th Circuit Court of Appeals decision that struck down the rule passed June 13. And just last week, the court issued a mandate making its March 15 decision effective to officially strip the fiduciary rule from the books.
The rule would have given individuals investing in retirement accounts protection from those financial advisers in the industry who might take advantage of them by recommending investments that served the interests of the advisers more than the interests of the investors.
Most at risk were individuals investing in individual retirement accounts or those rolling assets out of corporate defined contribution plans upon leaving the employment of the plan sponsors. That's when they could have become vulnerable to sales pitches.
The DOL rule provided a layer of protection by declaring to be fiduciaries anyone who, for compensation, provided advice to individuals on how to invest such accounts, including brokers, with all the legal implications of that designation.
But it imposed burdens and possible litigation costs on the broker-dealer industry, which have now been lifted.
However, the DOL fiduciary rule did not apply to advisers providing services to individuals about their non-retirement-related investments.
The Securities and Exchange Commission's Regulation Best Interest, on the other hand, requires that broker-dealers and those employed by them place the interests of the clients above those of the broker-dealers, and applies to "retail customers.''
That is, it applies to brokers advising clients on their non-retirement assets. However, there could be confusion about whether or not regulation also would apply to clients investing their retirement assets.
When do individuals withdrawing assets from employers' retirement plans become retail customers? The SEC should make explicit when such investors become retail customers. If this is not done, it could leave a gaping hole in investor protection — the hole the DOL sought to close.
Meanwhile, the broker-dealers who had begun to adapt their business practices to the DOL rule now must decide whether to repeal the changes. Possibly the best approach is to do nothing until the SEC Best Interest Rule is finalized. Then they can decide what is in the best long-term interests of their clients.
