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Fiduciary Rule’s Court Setback Isn’t End of Story

By Alex Padalka March 21, 2018

The Fifth Circuit Court of Appeals’ ruling earlier this month to vacate the Department of Labor’s fiduciary rule is certainly a major blow to the agency’s attempt to impose the best-interest standard on retirement accounts, but it’s not the end of the rule just yet, the law firm Stroock & Stroock & Lavan LLP writes in a special bulletin.

For starters, the Fifth Circuit’s decision doesn’t go into effect until the end of the window during which the DOL can contest the decision, expected to close by May 7, according to the law firm. And if the DOL were to seek a Supreme Court review, even further delays are likely, Stroock & Stroock & Lavan writes.

On the other hand, despite several recent court victories by the DOL, including a decision upheld earlier this month by the Tenth Circuit Court of Appeals in the DOL’s favor, other previous cases are likely to be seen as having a narrower focus and therefore don’t create a “split,” according to the law firm. And if the DOL were to agree to the Fifth Circuit Court’s decision, it could pave the way for the SEC to roll out a rule that would apply not just to retirement account advisors, as the DOL rule does, but to a broader swath of retail advice, Stroock & Stroock & Lavan writes.

Regardless, however, going back to the 1975 rule that the DOL was trying to modify with the fiduciary rule isn’t without challenges, Stroock & Stroock & Lavan writes. For starters, many financial firms “have been literally living and breathing” the rule for years, according to the law firm. They will remain in a state of uncertainty until there’s more clarity about whether the DOL contests the Fifth Circuit decision or about the details of an SEC rule, Stroock & Stroock & Lavan writes. This uncertainty extends to compensation of financial representatives, distribution and other relationships with product manufacturers, permitted products and services under the rule, transactions in products that would have been covered by the best interest contract exemption of the DOL’s rule, which allows advisors to sell some commission-based products after signing a best-interest contract agreement with their clients, and more, according to the law firm.

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Even if there is no contest to the Fifth Circuit decision, going back to the old rule isn’t going to be easy, Stroock & Stroock & Lavan writes. For one, many companies have changed their business models to comply with the rule, which included removing some products that were allowed during the old rule, according to the law firm. And many firms have embraced the fee-based model, which makes it challenging to return to the old model. Other firms have adopted the best interest contract exemption, and some firms have orphaned or terminated smaller accounts, leaving it unclear how they would re-establish relationships with them under the old rule, Stroock & Stroock & Lavan writes.