The last 40 years have seen a marked change in retirement benefits, with fewer employer-sponsored defined benefit plans, more defined contribution plans (including 401(k) plans and Simplified Employee Pension (SEP) plans), and a proliferation of individual retirement accounts (IRA). These changes have raised questions among regulators about the protections available to employees who are now increasingly responsible for managing their own retirement funds.
The US Department of Labor’s Fiduciary Rule
The US Department of Labor (DOL) wrote rules in the 1970s to regulate trustees of pension funds and those providing investment advice to the funds as fiduciaries. DOL began working on updated regulations under President George W. Bush and again under President Barack Obama to address a perceived gap between the standards applied to pension fund investments and to newer forms of retirement accounts. The resulting “Fiduciary Rule” became final in April 2016 and was scheduled to phase in by January 1, 2018. President Trump asked for a review of the rule shortly after taking office, and implementation has been delayed.
A key feature of the Fiduciary Rule imposes a fiduciary standard not only on investment advisers (who provide ongoing advice for a fee) but also broker-dealers and insurance agents who may recommend a single security or transaction to a retirement investor. The Fiduciary Rule requires all of these professionals to recommend only transactions that are in the best interest of the retirement investor. Under the Fiduciary Rule, unless an exemption applies, professionals cannot receive commissions for those transactions, because commissions create a conflict of interest between the professional and the investor. Finally, the Fiduciary Rule exempts commissions on the sale of fixed rate annuities under more lenient provisions than fixed indexed and variable annuities.
The Fiduciary Rule in Court
Because brokers and insurance agents are traditionally paid on a commission basis per transaction, rather than receiving fees for ongoing advice, the DOL’s Fiduciary Rule raises concerns among those professionals about costs of compliance and potential lost revenue. Several lawsuits have challenged provisions of the Fiduciary Rule and DOL’s authority to write the rule. In a decision issued March 13, 2018, the United States Court of Appeals for the Tenth Circuit upheld the Fiduciary Rule against a challenge to its provisions differentiating fixed indexed annuities from fixed rate annuities. Two United States District Courts, one in Texas and one in the District of Columbia, also upheld the Fiduciary Rule in decisions issued February 8, 2017, and November 4, 2016, respectively. Unlike the Tenth Circuit case, the Texas and DC cases challenged the entirety of the Fiduciary Rule as beyond DOL’s authority.
The Texas case was appealed to the United States Court of Appeals for the Fifth Circuit, which issued an opinion on March 15, 2018 that vacated the Fiduciary Rule. Two members of a three-judge panel found that the statutes relied on by DOL do not authorize it to write the Fiduciary Rule. DOL has until April 30 to move for rehearing before the full Fifth Circuit, and it has until June 13 to ask the United States Supreme Court to review the decision.
Regardless whether DOL challenges the Fifth Circuit ruling, other regulators are poised to write protections for self-directed retirement accounts. The United States Securities and Exchange Commission has already said that it is looking at regulating in this area and may announce a rule in the second quarter of 2018. State regulators may become more active, as well, if they feel that federal protections are not forthcoming or not robust. For now, investors and financial services professionals should watch for DOL’s decision on whether to challenge the Fifth Circuit decision as a sign of how DOL views its future role in protecting retirement investors.
On April 18, 2018, the United States Securities and Exchange Commission proposed rules that would require all broker-dealers and associated persons to act in the best interest of retail customers when recommending a securities transaction or investment strategy, in addition to requiring enhanced disclosures from both broker-dealers and registered investment advisers of the nature of their services, the fees and costs for those services, and conflicts of interest. The SEC’s rules are broader than the DOL’s Fiduciary Rule in that they are not limited to retirement accounts. They also lack the specific restrictions on commissions and certain annuities that have made the Fiduciary Rule so controversial.
DOL failed to seek rehearing by the full Fifth Circuit by the April 30 deadline. While it is still possible that DOL will ask the U.S. Supreme Court to review the decision, it appears likely that any effort to revive the Fiduciary Rule will require intervention by investors or others representing their interests.
Mary L. O’Connor’s practice focuses on representing companies and their officers and directors in commercial litigation and arbitration, securities litigation, internal investigations, and regulatory investigations and enforcement proceedings.
During the course of her career, Mary has been named to the list of Best Lawyers in Dallas by D Magazine, and to the list of Texas Super Lawyers (a Thomson Reuters service) by Texas Monthly Magazine.