Fifth Circuit Vacates the Fiduciary Rule
On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit (the Court) nixed the Department of Labor’s (DOLS's) fiduciary rule (the Rule) in a 2-1 decision in U.S. Chamber of Commerce v. DOL, 5th Circ., No. 17-10238.
As background, the Rule amended ERISA’s definition of “fiduciary” by considering a larger subset of communications to be investment advice that renders the person providing that advice a fiduciary. Since the Rule was finalized in April 2016, several industry leaders have come out in opposition to it. Additionally, one of Pres. Trump’s first actions in office was to issue a presidential memorandum directing the DOL to review the Rule and its impact on American investors. The president’s directive led to a delay of the effective date of the Rule (to June 9, 2017) and a delay of the majority of the Best Interest Contract Exemption (BICE) provisions (to July 1, 2019).
U.S. Chamber of Commerce v. DOL
There have been various challenges to the Rule in federal courts across the country; however, the plaintiffs in U.S. Chamber of Commerce v. DOL were the first to file suit. Among other claims, their suit alleged that the Rule’s amended definition of “fiduciary” was inconsistent with the definition that was intended under ERISA and that the DOL went beyond their authority in promulgating the rule.
The court essentially agreed with the plaintiffs (overturning the Federal District Court decision), holding that the DOL exceeded its regulatory authority by implementing the Rule. The majority specifically claimed that Congress would have written ERISA’s definition of “fiduciary” differently had they intended to make a more expansive scope of financial practitioners fiduciaries (especially those advising with regard to IRAs).
As such, they found the DOL’s new definition of “fiduciary” to be unreasonable and found the BICE to be the DOL’s attempt at creating additional private rights of action where ERISA and Congress hadn’t already done so. The court reversed the prior judgment of the district court and vacated the fiduciary rule “in toto” — meaning the entire rule, not just a portion, is vacated.
What does the ruling mean?
The court’s ruling would vacate the rule for the whole nation. However, the ruling also represents a split in the circuits, as the U.S. Court of Appeals for the Tenth Circuit ruled in favor of the Rule earlier this week (in Mkt. Synergy Grp., Inc. v. U.S. Dep’t of Labor).
Furthermore, although the court vacated the Rule in its entirety, there are still procedural limitations that give time for additional action by the DOL. The DOL has the following choices. They could:
- Appeal the case to the Fifth Circuit for an en banc hearing (which would be in front of the full Fifth Circuit) and even appeal the case all the way to the U.S. Supreme Court.
- Do nothing and let the rule become vacated after the appropriate procedural stays have been exhausted.
- Attempt to amend the rule in a way that addresses the Fifth Circuit’s concerns and salvages a portion of the Rule.
It’s hard to know how they’ll proceed. On one hand, the Trump administration seems opposed to the Rule as written (as evidenced by their attempts to review it and delay it). On the other hand, many in the industry have already begun to comply with the rule and accepts its standards. Only time will tell how the DOL chooses to proceed.
As always, we’ll continue to update you on any developments across Washington Update and Compliance Digital Newsletter.