Appeals court knocks out DOL rule 

The court called the rule unreasonable

A Texas court narrowly struck down the Department of Labor‘s fiduciary rule Thursday evening in response to a challenge brought by several business groups, including the US Chamber of Commerce and the Insured Retirement Institute.

The court’s 2-1 decision found the law “unreasonable,” and ruled that it could not stand. Furthermore, the majority opinion determined that DOL exceeded the clear distinction in the scope of its authority under [the Employee Retirement Security Income Act],” which governs US defined contribution and pensions plans.

The rule aimed to make brokers act in the best interests of their clients in retirement accounts. The court took aim at the rule’s Best Interest Contract Exemption, calling it onerous and outside the DOL’s authority under ERISA titles I and II.

BICE would have allowed an adviser or broker to receive variable compensation as long as they were contractually obligated to work in their client’s best interest (FA, 4/6/16). IRA holders could enforce these contracts with lawsuits, the court noted.

“The BICE supplants former exemptions with a web of duties and legal vulnerabilities,” the majority opinion states.

The rule previously survived legal challenges, opposition from several asset management firms and financial industry groups only to fall during President Donald Trump‘s administration. While on the campaign trail, Trump promised to roll back financial and other regulations put in place by his predecessor.

Several industry trade groups praised the court’s decision.

Retirement Institute and other groups wrote in a statement to FA. “Our organizations have long supported the development of a best interest standard of care, and the Securities and Exchange Commission should now take the lead on a clear, consistent, and workable standard that does not limit choice for investors.”

The court’s opinion was not unexpected, George Gerstein, of counsel with Stradley Ronon Stevens & Young, told FA.

“There was cautious optimism that the fifth circuit would rule in industry’s favor,” he said.

The DOL can now appeal the decision to the Supreme Court, but Gerstein declined to speculate on that likelihood.

What’s now certain is the court believes the SEC retains proper jurisdiction, rather than DOL, over ERISA retirement plan rulemaking, Gerstein explained.

“The SEC’s proposal is [now] upon us,” he added. “This is yet another curveball in the implementation of the fiduciary rule, raising the specter of further confusion,” Gerstein said.

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