The fate of the so-called fiduciary rule is likely to take years to wind its way through appeals courts and potentially even the U.S. Supreme Court, Ali Khawar, former principal deputy assistant secretary of labor of the Employee Benefits Security Administration, told attendees at the recent CFP Board “Connections Conference” in Washington, D.C.

Khawar said the DOL is appealing the two District Court decisions that have paused the rule’s implementation, previously slated for Sept. 23. The courts’ rulings cast doubt on whether the rule will ultimately survive. One of the courts vacated the Obama-era facsimile of the rule in 2018, although proponents hope that when the entire court is required to consider the new rule, the DOL may prevail.

“We are seriously in a holding pattern,” noted Khawar, who defended the rule, which for the first time would subject insurance agents, one-time advice and IRA and fixed-annuity sales subject to fiduciary requirements when investors are rolling over retirement plan assets. The rule would require financial professionals to put client interests before their own when making such recommendations.

The rule will decide who is and isn’t a fiduciary, which “has tremendous implications under the law for your obligations to that customer,” said Khawar, who added that the delay creates instability for investors over the long-term.
Should the rule be struck down again, it will put full responsibility for knowing who is and isn’t a fiduciary squarely on investors’ shoulders, he said. The “onus is on those customers to know the regulatory regime and its consequences. That doesn’t seem like a stable resting point from a regulatory perspective,” the former DOL official argued.

Kamila Elliott, CEO and founder of Collective Wealth Partners, agreed with Khawar and said that without the rule, investors bear the brunt for regulatory gaps that allow investment professionals to routinely deliver conflicted advice. “[T]he main regulatory gap we have right now is one-time advice,” said Elliott, former chair of the CFP Board. The regulatory hole makes investors prone to the sale of investment products that cost consumers more and are not in their best interest, she added. 

ERISA expert Fred Reish, a partner at the law firm Faegre Drinker, said at the conference that it is possible that the legal battle over the fiduciary rule may be appealed to the U.S. Supreme Court, in which case it could take two to four years for an ultimate decision on the rule’s fate.

“If the Fifth Circuit lifts the stay, then it’s 2016 all over again when the Obama fiduciary rule went into partial effect,” policy consultant Duane Thompson, president of Potomac Strategies LLC, said in an interview. “The real challenge will be potential liability as the sales culture within the insurance industry transitions to a fiduciary mindset. Recall that the current advice rules in place for the insurance and brokerage industries are essentially upgraded suitability standards that disclaim fiduciary status, notwithstanding their ‘best interest’ monikers.”

If the Fifth Circuit upholds the stay, “then that sends an unmistakable signal” to the DOL that the odds of prevailing at the higher court are also low, Thompson said.

“For now, the real decision-makers in this dispute are not the courts, the industry, or the DOL, but the voters who turn out November 5th,” Thompson added. “If Harris wins, it’s likely she will direct the DOL to continue to vigorously defend the rule in court. The litigation could go on for another couple of years. However, if Trump wins, after January 20, it’s likely you will see the department drop its defense shortly after new leadership is installed at the agency.”