The Obama-Era Fiduciary Rule Upheld—For Now!

A 40 year-old rule—recently modernized by the Obama administration’s DOL—emerged victorious in court this month, only to face an uncertain future under the new administration.

The rule, known as the “Fiduciary Rule,” governs the relationship between financial professionals, such as investment advisors, and their clients—including individual investors and employee benefit plans.  Under the law, fiduciaries carry immense responsibility to act in the best interests of those they serve.  However, under the current standard, fiduciary responsibility is only imposed on financial professionals if they provide advice to clients on a regular, ongoing basis.  Even more alarming, certain advisors can even receive commission on the sale of financial products to their own clients due to an exemption under the law.

Under the Obama administration, the Department of Labor (“DOL”) undertook changes to modernize the Fiduciary Rule, which would greatly expand its coverage and combat conflicts of interest that are commonplace in the market. Specifically, the DOL redrafted the rule such that even limited one-time advice from a financial professional would fall within the category of fiduciary acts.  The Fiduciary Rule is set to go into effect this year.

As could be expected, the new Fiduciary Rule was met with strong resistance among certain groups.  Last year, the U.S. Chamber of Commerce, a lobbying group, and other financial industry groups, brought suit in the Northern District of Texas alleging that the new rules were too burdensome to comply with and that the DOL had exceeded its authority to adopt such a rule. On February 8, 2017, the federal judge presiding over the case issued a ruling upholding the new Fiduciary Rule. In a lengthy opinion, Judge Barbara M.G. Lynn ruled that the DOL acted well within its authority in drafting a rule that took account of “new marketplace realities.”  Moreover, Judge Lynn opined, the DOL had provided ample notice and time for comment from the industry. Accordingly, the Judge held that the DOL’s changes to the Fiduciary Rule were a lawful exercise of power that accounted for significant changes and practices occurring in the financial services industry over the last four decades since the old Fiduciary Rule went into effect.

Despite this victory for transparency and clarity, problems persist for the new Fiduciary Rule.

Earlier this month, the Trump administration directed the DOL to further review the Fiduciary Rule and to delay its implementation. This move by the young Trump administration adds some uncertainty to the Fiduciary Rule’s future. As it stands, Judge Lynn’s ruling provides strong support for the new Fiduciary Rule.

It remains to be seen what will become of the Obama-Era Fiduciary Rule in light of the Trump administration’s desire to potentially scale back its most vital components. However, there is no question that financial professionals should be held to the highest standard in providing advice to their clients and refraining from conflicts of interest.

Please contact your Trust Fund counsel for more information concerning the Fiduciary Rule and other topics.

By Ryan Kadevari | February 21, 2017

Legal Developments