Tom Perez’s Fiduciary Flop An appeals court rules that another Obama regulation is illegal.
The Obama Administration sold its fiduciary rule to the public as protecting retirees. This was never true, but now we learn it also was illegal, as the Fifth Circuit Court of Appeals explained last week in a tart decision striking down the rule.
The Dodd-Frank Act directs the Securities and Exchange Commission to promulgate standards of conduct for broker-dealers and investment advisers who render “personalized investment advice about securities to a retail customer.” The law also prohibits the SEC from banning commissions.
https://www.wsj.com/articles/tom-perezs-fiduciary-flop-1521412228
The Labor Department under Tom Perez usurped the SEC and wrote a rule that ignored that prohibition. Mr. Perez essentially rewrote the 1974 Employee Retirement Income Security Act (Erisa), which regulates employer- and union-sponsored plans differently from individual retirement accounts. For instance, individuals are allowed to sue fiduciaries of employer and union plans for charging a commission. Labor applied the more rigorous protections for employer and union plans to IRAs.
Mr. Perez also extended Erisa’s definition of “investment advice fiduciaries,” who provide advice “on a regular basis,” to broker-dealers and financial-insurance agents who merely sell a product. “Transforming sales pitches into the recommendations of a trusted adviser mixes apples and oranges,” Judge Edith Jones wrote for the 2-1 majority.
This created a Catch-22. “Thousands of brokers and insurance agents who deal with IRA investors must either forgo commission based transactions and move to fees for account management or accept the burdensome regulations and heightened lawsuit exposure required by the [best interest contract exemption] contract provisions,” Judge Jones explained.
The effect is to raise costs for small savers, many of whom will have to turn to robo-advice. Several firms including MetLife , AIG and Merrill Lynch have already withdrawn from segments of the brokerage and retirement market.
The Trump Labor Department has said it won’t enforce the rule and is working with the SEC on a new one that applies to all brokerage firms and investment advisers. The Fifth Circuit ruling will make this task easier. This is good news for retirement investors and the rule of law.
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