An Obama-era rule that could reshape the massive retirement savings industry may be heading to the Supreme Court

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  • In 2016, the Obama administration and the Department of Labour rolled out the fiduciary rule which made investment advice standards for retirement savings tougher.
  • The Fifth Circuit Court of Appeals determined the rule was outside of the scope of the Department of Labour’s purview and was illegal.
  • In contrast, the 10th Circuit Court of Appeal determined upheld the rule on Tuesday.
  • The conflict could send the rule to the Supreme Court.

The Obama-era rule that raises the standards for retirement investment advice may be headed for the Supreme Court after a ruling on Thursday.

The Department of Labour’s fiduciary rule, which requires investment advisers to recommend the best product for their clients, was struck down in the Fifth Circuit Court of Appeals by a 2 to 1 ruling. At the same time, the rule was upheld in the 10th Circuit, meaning the decision will likely get pushed to the Supreme Court.

Prior to the rule, investment advisers were required to recommend investment products like mutual funds that were “suitable” for a client. Under the rule, these advisers must recommend the “best” product, raising the standard for advice.

The Obama administration argued that investment advisers were recommending investments that were less than perfect to clients because they received higher commissions on those products. According to a study by Obama’s Council of Economic Advisers, conflicted financial advisers’ advice costs American families roughly $US17 billion a year.

In the Fifth Circuit, the judges determined that the Department of Labour (DOL) overstepped their bounds.

“The majority opinion was a stinging criticism of the rule,” Ed Mills, a Washington Policy analyst at Raymond James said in a note to clients Friday. “The court found that the DOL exceeded their authority to enact regulation implementing the Employee Retirement Income Security Act (ERISA) and questioned why the DOL chose to undergo a complete overhaul of the regulations more than 40-years after its passage without specific direction from Congress.”

The court also determined the post-financial crisis Dodd-Frank Act established that the Securities and Exchange Commission (SEC) rather than the DOL should technically maintain purview over issues such as the fiduciary rule according to Mills.

On Tuesday, however, the 10th Circuit Court upheld the rule and determined the DOL was within its regulatory jurisdiction in imposing the rule.

“The conflict between circuits increases the likelihood that this will be appealed to the Supreme Court,” Mills wrote.

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