By Daniela Pessoa Valdes
On March 15, 2018 the U.S. Court of Appeals for the Fifth Circuit issued its mandate to vacate the Department of Labor’s (“DOL’s”) fiduciary rule for advisors working with retirement accounts. (Chamber of Com. of the United States v. United States DOL) This decision dealt a massive blow to the protections in place for senior investors and their retirement accounts.
The DOL’s fiduciary rule attempted to make two major changes to regulations pertaining to retirement accounts. First, the rule broadened the definition of a fiduciary to include an individual who, in the Fifth Circuit’s interpretation, “‘renders investment advice for a fee’ whenever he is compensated in connection with a ‘recommendation as to the advisability of’ buying, selling, or managing ‘investment property.’” Second, the rule created a Best Interest Contract Exemption (BICE) which required providers of financial and insurance services for retirement accounts to affirm their fiduciary status with clients, incorporate the duties of loyalty and prudence into their policies, avoid misleading statements to clients, and charge no more than “reasonable compensation” in account fees.
While the DOL conceded that these changes presented a potential for increased liability against financial advisors, it argued that the changes also served to protect investors from engaging in transactions that were not in their best interest, simply because their adviser recommended the transaction. Nevertheless, the Fifth Circuit found that the BICE came at too high of a price.
The opinion, which was the result of a 2-1 split, reasoned that if Congress intended to encompass any financial services provider who managed retirement accounts in its definition of a fiduciary, then Congress would have simply written ERISA to cover all persons giving any investment advice for compensation. In response, the DOL warned the Court of the need for the fiduciary rule, arguing that if it were revoked “many investment advisers would be able to play a central role in shaping retirement investments without the fiduciary safeguards [in place] for persons having such influence and responsibility.” Nevertheless, the Court held that a “perceived need” did not empower the DOL to craft de facto statutory amendments or to act beyond its expressly defined authority under ERISA.
As a result, senior investors now have less safeguards in place to protect them from taking investment advice that may be fraudulent or not in their best interest. As Judge Stewart warned in his dissent, the dramatic shift in the retirement-investment market has created monetary incentives for investment advisers to offer conflicted advice, which is a problem that “the controlling regulatory framework was not enacted to address.” Thus, the Fifth Circuit’s decision to vacate the fiduciary rule has essentially left senior investors with little to no remedy for holding their retirement account advisers liable for recommendations and advice that are not in the investor’s best interest. Advisors in retirement accounts must only comply with a duty to recommend suitable investments.