The Labor Department's conflict-of-interest rule -- the rule that says advisers must put their client's interests first when it comes to retirement accounts -- is no longer the rule of the land in Texas, Louisiana, and Mississippi.
But legal experts say advisers must still comply with the Labor Department's rule -- otherwise referred to as the fiduciary rule -- in other parts of the county. Or at least they must until the Supreme Court takes up the case and decides either in favor of retirement account owners or business groups.
The Fifth Circuit Court of Appeals, in a 2-1 decision, last week found in the favor of several business groups, or what some call the "product pushers", in their challenge to the Department of Labor's fiduciary rule.
The court reversed the District Court on Administrative Procedure Act grounds, finding the Labor Department's action to be arbitrary and capricious, not in accordance with law and in excess of its authority, according to a release issued jointly by the American Council of Life Insurers (ACLI) the National Association of Life Underwriters (NALU).
Because the court concluded that the rule was not severable, it vacated the rule in its entirety.
And that has created more than a little uncertainty according to the Wagner Law Group, a Boston-based firm that specializes in employment, retirement and pension law.
"In effect, the fiduciary rule is vacated (or soon to be vacated) in three states, but remains in effect in the rest of the country," the firm wrote in its ERISA & Employee Benefits Law Alert. "This make it more likely that the Supreme Court will hear the case (either because the DOL appeals the Fifth Circuit ruling to the Supreme Court or others challenge the Tenth Circuit or other decisions in light of the Fifth Circuit decision)."
One thing, however, is certain according to the Wagner Law Group: "There will be further legal challenges as other courts have rejected challenges to the fiduciary rule. Notably, the Tenth Circuit (two days before the Fifth Circuit decision) issued an opinion upholding the Fiduciary Rule in a challenge involving fixed indexed annuities, ruling that the DOL acted well within its authority."
Despite the uncertainty caused by the Fifth Circuit's ruling, some experts are telling investors not to despair. They say the horse is already out of the barn.
For instance, financial services firms have already spent tens of millions of dollars to put in place systems to make sure their advisers comply with the letter and spirit of the fiduciary rule. And firms, including Merrill Lynch, are already telling investors they will comply with the fiduciary rule -- no matter the locale, including the Fifth Circuit.
Still, consumer advocates and legal experts expressed dismay and shock over the Fifth Circuit's ruling. "The magnitude of the decision is hard to grasp," Knut Rostad, president of the Institute for the Fiduciary Standard, wrote in an email. "We are overcome, today, by ongoing examples of bad behavior and events that defy understanding. It's mind-numbing. The Fifth Circuit's decision is sickening, a national tragedy -- and worse. It's a legal action whose resulting and inevitable harms are predictable, well documented and calculable. There's no mystery how they'll hit American savers. The decision merits its own 'March on Washington.'"
Others shared that point of view. For instance, Christine Owens, executive director of the National Employment Law Project, issued this statement: "Today the Fifth Circuit Court of Appeals issued a legally flawed decision vacating a 2016 Labor Department rule protecting retirement investors by ensuring that their financial advisers put their interests first. In addition to misapplying the law, the opinion conflicted with the decisions of every other court to consider the rule, discounted the dramatic changes in the retirement landscape over the past 40 years, and worst of all, potentially costs retirement savers as much as $17 billion annually. The court's faulty reasoning also threatens the Labor Department's very ability to protect retirement investors now and in the future. We urge the Justice Department to appeal this decision, to put retirement savers' interests first and to defend the federal government's ability to regulate in this important area."
So, what does the future hold for the fiduciary rule?
For its part, the Wagner Law Group says it's likely that the DOL will appeal the Fifth Circuit ruling (either directly to the Supreme Court or to the Fifth Circuit en banc) and proceed with its review and revision of the fiduciary rule, the Best-Interest Contract Exemption (BICE), and other exemptions.
"We do think that the Fifth Circuit's decision will encourage U.S. Secretary of Labor Alexander Acosta and others in the Trump Administration to speed up the DOL's review of the fiduciary rule," wrote the Wagner Law Group. "The DOL has suggested that the review would produce new and alternative exemptions to the BICE. The Fifth Circuit decision offers Secretary Acosta and Trump Administration policymakers the chance to comprehensively change both the fiduciary rule and the role of the DOL with respect to IRAs if they wish to do so."
There's another wrinkle yet to be ironed out in all this mess.
The Securities and Exchange Commission is moving ahead on a fiduciary rule as well and doesn't expect its work to be affected by the Fifth Circuit's decision. Read SEC Forging Ahead.
Still, it's possible retirement accounts owners could face someday two different fiduciary rules, one that governs taxable and retirement accounts under the SEC and one that governs retirement accounts under the Labor Department.
What does this mean for owners of retirement accounts, including traditional IRAs and Roth IRAs?
Well, if you want to work with an adviser who is a fiduciary, who puts your interests first, consider learning if they abide by the practices outlined by Institute for the Fiduciary Standard as well as those outlined by the Financial Planning Coalition.
Also consider reviewing the information on Pam Kruger's website, The Right Advisor At The Right Time.
Ultimately, making sure your adviser acts in your best interest -- regardless of what happens in the Fifth Circuit or Supreme Court or the SEC or the Labor Department -- is what's in your best interest.
Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com