Confusion Abounds After Fifth Circuit Decision Vacates DOL Fiduciary Rule

The latest decision out of the Fifth U.S. Circuit Court of Appeals throws a dramatic new element of confusion into the epic regulatory saga that has been the rollout of the Department of Labor fiduciary rule.

The United States Court of Appeals for the Fifth Circuit has ruled, by a two-to-one majority, to vacate the Department of Labor (DOL) Fiduciary rule, based on arguments put forward by the U.S Chamber of Commerce and the Securities Industries and Financial Markets Association.

This latest decision comes nearly a year a Texas district court judge roundly rejected the investment industry advocacy groups’ arguments that the DOL exceeded its authority in crafting the fiduciary rule. Exactly what this latest move spells for the regulation’s future under the Trump administration is yet unclear, especially given that just this week the Tenth Circuit issued an essentially opposite ruling, determining in no uncertain language that DOL’s fiduciary rulemaking process has played out properly and within the confines of the regulator’s broad existing authority. Experts are still grappling with the question of how the conflicting rulings should be interpreted, particularly on the point of whether an appeal to the Supreme Court could occur. 

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Ropes & Gray tax and benefits partner Josh Lichtenstein warns that the Fifth Circuit’s decision to vacate the DOL’s fiduciary rule in its entirety creates “a new round of uncertainty in the ongoing saga of the rule.”

“The Fifth Circuit is now at odds with multiple other courts that have upheld the rule, including the 10th Circuit,” he tells PLANADVISER. “While the government decides whether to request an en banc review of the ruling, appeal the case to the Supreme Court, or take no action, financial institutions are forced to decide how to react, especially if part of their operations is located in the Fifth Circuit.”

Lichtenstein says this possibility of having the rule apply in some parts of the country but not in others “creates new risks and compliance challenges for institutions, reopening the period of uncertainty around the rule shortly after the DOL had resolved similar uncertainties by delaying the compliance date for portions of the rule.”  It also remains to be seen, he warns, whether state regulators will move forward with new enforcement actions or create new rules in response to the new uncertainty that this decision brings.

As pointed out by Brendan McGarry, attorney at Kaufman Dolowich and Voluck who advises broker/dealers and advisers, the Fifth Circuit majority uses strong language in vacating the rulemaking more or less in its entirety, “crossing over from legal arguments to fundamental arguments against the rule from a business perspective.”

In explaining why it has ruled the DOL overstepped its authority in crafting and implementing the strict new conflict of interest and prohibited transaction requirements of the new fiduciary rule, the majority opinion uses terms like “burdensome” and “onerous” to describe the requirements placed on financial industry participants, which appears to signal a position stronger than one solely about the DOL’s power to enact the rule as written, McGarry argues.

As laid out in the text of the Fifth Circuit majority opinion, the business groups’ challenge succeeded on multiple grounds, including: “(a) the Rule’s inconsistency with the governing statutes; (b) DOL’s overreaching to regulate services and providers beyond its authority; (c) DOL’s imposition of legally unauthorized contract terms to enforce the new regulations; (d) First Amendment violations; and (e) the Rule’s arbitrary and capricious treatment of variable and fixed indexed annuities.”

Finding merit in several of these objections, the Fifth Circuit takes the strong step of wholly vacating the DOL rulemaking. The full text of the decision is available here and includes detailed argumentation on all of these points. 

Both McGarry and Lichtenstein agree that it will be interesting to see if the DOL tries to appeal this decision to the Supreme Court. This is far from a certainty, despite the conflict among the circuit courts, given the change in executive branch leadership since the rule was implemented. One additional confusing aspect here is the emerging role of the U.S. Securities and Exchange Commission (SEC), and whether this ruling could strengthen or weaken that regulator’s resolve to get involved in policing conflicts of interest in the retirement plan and retail investing arenas.

Speaking to this element of the developing story, Blaine Aikin, executive chairman at Fi360, urges the DOL to continue to work with SEC and others on the fiduciary rule, calling this necessary to alleviate persistent industry and investor confusion over fiduciary status.

“Fi360 has always supported a strong fiduciary standard for financial services professionals who clients must rely upon for trustworthy advice,” Aikin says. “At the same time, given the uncertainty with regard to compliance and liability concerns, as well as investor protection under the DOL’s fiduciary rule, we urge the Securities and Exchange Commission to continue to work closely with the DOL in drafting a standard across regulatory jurisdictions that is principles-based and requires advisors to act in the best interest of the client without regard to their own financial interests.”

“At the end of the day, it is the professional closest to the client who establishes the strongest and most sustainable relationships,” Aikin adds.  “Professionalism involves utilizing a prudent process firmly grounded in fiduciary principles, and both advisors and their clients will benefit when policymakers and the courts recognize this important relationship.”

Investment Products and Services Launches

oekom Research Joins ISS, Renames Brand; T. Rowe Price Releases Multi-Strategy Fund; BNY Mellon Launches Core Plus Fund; and more.

Hartford Funds Lowers Fees for Six ETFs

Hartford Funds has reduced fees for six of its seven MultiFactor exchange-traded funds (ETFs), originally designed to lower costs for investors.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

“Our risk-first investment approach is designed to allow advisers the ability to build more robust portfolios that are intentional about emphasizing rewarded risks, while seeking to control undesirable risks,” says Ted Lucas, head of Investment Strategies and Solutions for Hartford Funds. “We foresee a progressively challenging investment environment and believe advisers should be positioning their clients accordingly–enhancing their potential for capital growth, while aggressively managing cost and tax drag.”

Hartford Funds’ Multifactor ETFs seek to outperform traditional passive benchmarks while delivering the potential benefits of lower cost, transparency, and tax efficiency offered within an ETF wrapper.

oekom Research Joins ISS, Renames Brand

oekom research, a leader in the provision of environmental, social, and governance (ESG) ratings and data, as well as sustainable investment research, announced it will join Institutional Shareholder Services Inc. (ISS). Reflecting the strength of both brands, oekom research will be renamed ISS-oekom.

The oekom research business will continue to be led by its co-founder, Robert Habler, and will maintain and enhance its operations in Munich, Paris, London, New York and Zurich with its staff of more than 110 remaining in place.

“As institutions across the globe continue to seek out holistic responsible investment solutions and services, ISS is pleased to respond to those demands through this transaction,” says ISS Chief Operating Officer Stephen Harvey. “We welcome Robert and the entire oekom team to the ISS family and look forward to continue providing our clients with the industry’s leading environmental, social, and governance solutions.”


T. Rowe Price Releases Multi-Strategy Fund 

T. Rowe Price announced the launch of the T. Rowe Price Multi-Strategy Total Return Fund. The fund seeks to diversify investment risk for clients by combining six internally managed liquid alternative strategies to provide different sources of alpha in one multi-strategy approach, whose returns are expected to have low correlation to the equity and fixed income markets. In addition to offering risk diversification, the fund also aims to provide capital preservation and consistent returns over time.

The Multi-Strategy Total Return Fund is considered an absolute return fund designed to complement a traditional portfolio of stocks and bonds by virtue of low correlation to the capital markets. The goal of an absolute return fund is to achieve generally positive returns over time, regardless of market conditions, by employing long and short positions across multiple asset classes.

The six underlying strategies used by the fund take advantage of T. Rowe Price’s investment capabilities, including its fundamental and quantitative analysis and its global research platform.

The fund is co-managed by Stefan Hubrich, Ph.D., CFA, portfolio manager and director of multi-asset research, and Rick de los Reyes, portfolio manager. Both are in the firm’s Multi-Asset division.

The underlying component portfolios are macro and absolute return; fixed income absolute return; equity research long/short; quantitative equity long/short; volatility relative value; and style premia. The overall portfolio assembly emphasizes risk considerations and risk budgeting, owing to the varying volatility levels and risk profiles of the individual component strategies. The net expense ratios of the fund’s Investor Class shares and I Class shares are 1.37% and 1.07%, respectively.  Fee waivers of 0.13% and 0.61%, respectively, are in place through February 29, 2020.

BNY Mellon Launches Core Plus Fund

BNY Mellon Investment Management has added the BNY Mellon Insight Core Plus Fund, an actively-managed multi-sector bond strategy which seeks to deliver attractive risk-adjusted performance over an investment cycle and in various market conditions. The fund is sub-advised by Insight Investment, a global asset manager and part of BNY Mellon’s multi boutique structure.

The fund seeks high total return consistent with preservation of capital, and normally invests primarily in a diversified portfolio of investment grade fixed income securities of U.S. and foreign issuers. The fund is added with a seven-year performance track record based on the strategy it shares with the Insight Investment Grade Bond Fund, an earlier fund launched in 2010 and managed by the same portfolio management team.

The fund is co-managed by three members of Insight’s fixed income group—Gerard Berrigan, head of U.S. fixed income and Senior Portfolio Managers Gautam Khanna and Jason Celente. They apply the fund’s active bond strategy, which seeks to add value from multiple sources including sector allocation, security selection, and interest rate management.

“Our focus for this fund is to deliver attractive returns throughout the cycle without sacrificing the critical roles of capital preservation and diversification that clients expect of their core bond allocations,” says Khanna. “While the long-term decline in rates and cyclical compression in credit spreads have been a tail wind for fixed income investors in recent memory, our specialist approach and expertise in global fixed income will allow us the potential to capitalize on what we believe are the best risk and reward opportunities across the fixed income universe regardless of the Fund’s benchmark or where we are in the credit cycle.”

«