March 20, 2018Client Alert

Fifth Circuit Vacates DOL Fiduciary Rule Creating a Circuit Court Split

Last week, the Fifth Circuit Court of Appeals vacated the Employee Retirement Income Security Act (ERISA) fiduciary rule. The court held that the Department of Labor (DOL), in promulgating the rule, was arbitrary and capricious and exceeded its statutory authority.

We have previously kept you apprised concerning the evolving saga of the ERISA fiduciary rule, the Best Interest Contract Exemption (BICE), and other related exemptions in a series of prior alerts (see prior alerts: here, here, here, here, and here). 

The final rule defining who is a “fiduciary” of an employee benefit plan under ERISA and updating the conflict of interest rules applicable to such a fiduciary also applies to a plan fiduciary under the Internal Revenue Code (including the fiduciary of an Individual Retirement Account (IRA)). While the fiduciary rule was set to be phased in, much of it is not yet applicable as President Trump has directed the DOL to review and consider revisions to the rule. Nonetheless, the fiduciary rule has been the subject of various lawsuits because, as the Firth Circuit recognized, the rule has significantly impacted the market, including several major companies withdrawing from the brokerage and retirement investor market segments.

The U.S. Chamber of Commerce and eight other business and financial groups challenged the fiduciary rule in the Fifth Circuit. The Fifth Circuit court found merit in several of the objections raised by these groups. Specifically, the court found that the redefined and expanded definition of “fiduciary” conflicts with the plain text and contemporary understanding of “investment advice fiduciary” and is inconsistent with ERISA’s “fiduciary” definition. As such, the court stated that the DOL lacked statutory authority to promulgate its overreaching definition of “fiduciary.”  Additionally, the court found that the fiduciary rule was unreasonable and an arbitrary and capricious exercise of administrative power because it impermissibly conflates established distinctions between salespeople and fiduciary advisers.

The Fifth Circuit decision is the first court loss for the fiduciary rule. Recently, the Tenth Circuit Court of Appeals denied an insurance agency’s attempt to overturn certain provisions of the rule related to the sale of fixed-index annuities. Other federal courts have also upheld the rule.

The Fifth Circuit and Tenth Circuit decisions create a circuit court split making it more likely that the U.S. Supreme Court will review the fiduciary rule. If the Supreme Court accepts a petition to review these rulings, a decision is not likely until June of 2019.

Employers should continue to monitor the situation. In the absence of DOL enforcement, some states, including Massachusetts, have brought suit against companies to hold them liable under state law for alleged fiduciary rule violations. Similarly, states including Connecticut, Nevada, New Jersey, Massachusetts, and New York have passed or proposed laws mirroring the federal fiduciary rule’s requirements.

Even without the new fiduciary rule in effect, certain sponsors may choose to renegotiate various provisions of their service agreements to contractually put into place some of the rule’s intended protections (especially since many investment systems have already built in these changes, but they have not yet been implemented by the investment market).

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