Fifth Circuit Vacates Fiduciary RulePublications - Client Alert | March 16, 2018
The Fifth Circuit Court of Appeals held that the Department of Labor (“DOL”) exceeded its authority in issuing the Fiduciary Rule. The court vacated the Fiduciary Rule in its entirety. The ruling may make the Fiduciary Rule ineffective in the Fifth Circuit if it becomes effective and may provide a basis for reconsideration of the rule elsewhere in the country. In light of the rule being vacated, employers should expect their service providers to review their services and potentially make changes to undo some of the changes they previously made to comply with the rule.
The Fiduciary Rule, which became applicable on June 9, 2017, significantly broadened the arrangements under ERISA that caused an adviser to become a fiduciary by giving investment advice. Shortly after Donald Trump took office, he directed the DOL to reconsider the rule. During this time, the DOL announced transitional relief. While the rule was still applicable, the terms of the transitional relief made compliance significantly easier by delaying the applicability of many documentation and disclosure requirements. The rule was challenged in court several times and upheld, including in a decision issued by the Tenth Circuit Court of Appeals earlier this week.
The Fifth Circuit’s Opinion
Under applicable law, the Fifth Circuit could properly overturn the Fiduciary Rule if it determined that the rule was an unreasonable interpretation of ERISA’s provisions regarding becoming a fiduciary by providing investment advice. The Fifth Circuit’s ruling broadly criticized the Fiduciary Rule as being an unreasonable interpretation in several respects. Specifically, the court emphasized that:
- The Fiduciary Rule was a departure from prior law, including prior DOL regulations, other provisions of ERISA, and congressional intent
- The DOL impermissibly overstepped its authority with respect to regulating IRAs and conduct explicitly delegated to the SEC
- The Best Interest Contract Exemption was inconsistent with congressional intent because it created private rights to sue where Congress did not intend to allow them
- The Best Interest Contract Exemption’s restrictions on arbitration violated the Federal Arbitration Act
Although the Fifth Circuit could have preserved the application of some of the rule’s provisions if they could be separated from the unreasonable provisions, the court found that no such separation was possible and vacated the rule in its entirety.
Under Fifth Circuit rules, the ruling will not take effect until a stay period elapses. During this period, the DOL may request a rehearing or appeal the decision to the Supreme Court. Alternately, the Trump administration may not wish to pursue an appeal, in which case the ruling will likely become effective in late April or early May. Once the ruling takes effect, assuming that it is not successfully appealed or overturned on rehearing, the Fiduciary Rule will be set aside and will no longer be effective in the Fifth Circuit. The Fifth Circuit includes the States of Texas, Mississippi and Louisiana.
We do not expect that service providers will immediately roll back the changes that they have made to their service offerings, many of which are beneficial for plan sponsors. If service providers announce changes to their service offerings, retirement plan committees should discuss those changes and whether they are appropriate.
Broker-dealers and other service providers should continue to follow the compliance procedures that they have put in place. In the meantime, they can also contact their Kutak Rock attorney or a member of the Employee Benefits Practice Group to develop a long-term plan.
If you have any questions about this ruling, please contact a member of our Employee Benefits Practice Group.