The Evolution of the Fiduciary Rule and What's Next
BY: EMILY SNELL ON SATURDAY, MAY 04, 2019
If you're investing for your retirement in an IRA, 401(k), or some other type of plan, it's important to understand the fiduciary rule and how it impacts you. The fiduciary rule, which was scheduled to go into effect in 2017, was struck down by a court in 2018. Despite the rule being vacated, there are still some possibilities bringing portions of the rule back into play again. Here are some things investors should know about the recent changes to the fiduciary rule.
Fiduciary Rule Background
During President Obama's administration, the fiduciary rule was expanded to include brokers and dealers. The basics of the rule stated that financial professionals working on behalf of another person for a retirement portfolio must put the client's best interest first. For brokers and dealers, this meant they would have to disclose their commission rates and plans with clients. Many financial professionals worried that the rule would cut into their income.
Department of Labor
Despite the misgivings from the financial industry, the updated fiduciary rule was approved in 2016 by the Department of Labor and President Obama. In 2017, Congress approved a proposal to delay the rule going into effect for two years. During that two-year waiting period, Republican President Trump was elected, and a fully Republican Congress maintained power in Washington. Both the president and Congress expressed concern about the financial regulations from the previous administration, including the fiduciary rule.
Battle in Court
Before the rule was slated to start impacting financial professionals, the Fifth Court of Appeals in New Orleans, Louisiana, vacated the rule in 2018. The rule was the subject of several lawsuits launched by companies in the financial services sector, and in one of these lawsuits, the firms prevailed. The court found that the rule was unreasonable for the financial industry and gave brokers and dealers a little sigh of relief. Because of the court's decision, smaller firms without lots of resources breathed a little easier and felt less pressure on their commission income.
The Rule's Next Steps
While the fiduciary rule is officially dead because of the Appeals' Court decision, there is a possibility the Department of Labor could seek an appeal of the judgment. Advisers are taking interest in finding out what happens with a potential appeal. It's possible a higher court, such as the United States Supreme Court, could end up hearing another appeal of this rule and make a decision.
Now that the rule is dead, the financial services industry may be working to create their own industry standards to help those planning for retirement feel more secure with their financial advisor's services. One possibility is a rule developed by the Securities and Exchange Commission to help make investing products more trustworthy by the general public. The SEC has presented some proposals to give the industry and financial professionals some more guidelines.
Regulation Best Interest
The SEC has proposed an initiative called the Regulation Best Interest. This standard would apply only to brokers in the financial industry, not advisors. Essentially, the standard would dictate that brokers act in the best interests of their clients. The principles of the regulation wouldn't be as strict as the fiduciary law, but it would offer some peace of mind to investors worried about getting bad advice.
The fiduciary regulation was struck down on the federal level, however, some local regions and states have discussed implementing their own versions of the rule independently. States such as Maryland, Nevada, and New York have introduced legislation in their state lawmaking houses to cover the financial industry and require some of the same standards as the Department of Labor's fiduciary rule.
Even though the fiduciary rule is dead, there are still some potential reincarnations of the regulation. Investors and those in the financial services industry may see these regulations come back to life in a different form.