On June 21, the Fifth Circuit Court of Appeals entered a final order vacating the Fiduciary Rule. The rule significantly expanded the standard under ERISA that caused an adviser to become a fiduciary by giving investment advice. It also introduced several new prohibited transaction exemptions, including the Best Interest Contract Exemption (“BICE”), which was intended to allow service providers who were fiduciaries under the Fiduciary Rule to receive other than level compensation for investment advice if they satisfied conduct and disclosure requirements.

In light of the Fifth Circuit’s initial ruling on the Fiduciary Rule, which was substantially similar to this ruling, the Department of Labor announced that it would not enforce prohibited transactions claims against investment advisors who are working diligently in good faith to comply with the BICE’s impartial conduct standards. This policy applies retroactively for the period starting June 9, 2017 until guidance is issued. Intriguingly, this suggests that investment advisers still may be able to temporarily rely on the BICE’s impartial conduct standards.

While the Fiduciary Rule is effectively set aside as a result of this ruling, the SEC’s proposed Regulation Best Interest remains unaffected by the rule and the SEC’s regulatory course of action remains unchanged. As proposed, Regulation Best Interest applies to retail investors (i.e., rollovers out of a retirement plan and advice to an IRA). While the regulation currently does not apply to advice given to retirement plan fiduciaries, it still may be amended to do so before being finalized. It requires brokers to act in the “best interest” of investors. Although the term “best interest” is undefined, the regulation generally requires brokers to establish conflict mitigation policies and consider certain factors in making investment recommendations.

Furthermore, as a result of the Fiduciary Rule, many state regulators and plaintiffs’ attorneys are taking steps of their own to combat perceived breaches of fiduciary duty.

Additionally, since the Fifth Circuit issued the final order, some service providers already have begun to reach out to plan sponsors regarding the ruling. We expect that service providers will retain some of the changes they made to their service offerings (i.e., investment and distribution advice), but it is likely that they will attempt to roll back some changes.

Next Steps 

Plan sponsors should carefully review communications from their service providers and make sure that they understand whether any changes to their service offerings are being proposed as a result of the Fifth Circuit’s ruling. To the extent changes are being proposed, plan sponsors need to review those changes and determine whether they are appropriate. As always, plan sponsors should ensure that they identify who is providing them with investment advice and whether they acknowledge fiduciary status.

Broker-dealers and other service providers should evaluate their compliance procedures in the wake of the SEC’s proposed Regulation Best Interest, as well as applicable state law. Service providers still may want to look to the standards set forth in the Fiduciary Rule (including the Best Interest Contract Exemption and Impartial Conduct Standards) as guidelines for their processes and recommendations until nationwide clarity is achieved.

Additional Information 

If you have any questions about this ruling, please contact a member of our Employee Benefits Practice Group.