Fifth Circuit Vacates DOL Fiduciary Rule
Employee Benefits & Investment Management Update
Date: March 20, 2018
In a landmark 2–1 ruling on March 15, 2018, the Fifth Circuit Court of Appeals in Chamber of Commerce of the United States of America, et al. v. U.S. Department of Labor, No. 17-10238 (5th Cir. Mar. 15, 2018) vacated the Department of Labor’s final fiduciary rule and related prohibited transaction exemptions (collectively, the “Fiduciary Rule”). The decision follows the Tenth Circuit Court of Appeals’ March 13, 2018 ruling affirming a district court decision upholding the Fiduciary Rule. Given the importance of the ruling and the conflict among circuit courts, the stage is set for a possible showdown in the U.S. Supreme Court.
The Fiduciary Rule’s revised standards, which became effective on June 9, 2017, changed several significant provisions of the former rule and greatly expanded the types of interactions considered fiduciary in nature under ERISA and the Internal Revenue Code, resulting in fiduciary status for many service providers (which could include brokers, investment advisers, record-keepers and other service providers based on one-time investment or distribution recommendations) not previously considered fiduciaries. The DOL contemporaneously issued new and revised prohibited transaction exemptions that would allow fiduciaries to continue receiving certain types of compensation, including commissions, if the fiduciaries satisfied the requirements of an available prohibited transaction exemption including requirements to act in their clients’ best interests. To allow affected parties sufficient time to comply with the new, robust requirements of the exemptions, the DOL provided transition relief allowing fiduciaries to rely on the new and revised exemptions by satisfying streamlined requirements through June 30, 2019. These streamlined requirements include meeting the impartial conduct standards, meeting the best interest standard, receiving only reasonable compensation for their services, and refraining from making misleading statements regarding the transactions. The DOL continues to review and analyze the Fiduciary Rule to determine whether changes should be proposed.
Fifth Circuit Decision
The Fifth Circuit case involved challenges to the Fiduciary Rule by various trade and industry groups, which had been rejected by the district court. On appeal, the majority of the Fifth Circuit found merit in some of the challenges and “vacated” the Fiduciary Rule. In particular, the majority opinion relied on two primary grounds. First, the majority held that the Fiduciary Rule conflicts with the plain text of ERISA’s definition of “fiduciary.” Second, the majority held that even if there were ambiguity in the relevant language of the statute, the Fiduciary Rule fails the “reasonableness test” applied by the courts to analyze agency regulatory interpretations under the Administrative Procedures Act.
Notably, Chief Judge Stewart disagreed with the majority decision, writing that he does not share the majority’s concerns with the DOL’s amended regulatory framework, and that the DOL acted well within its regulatory authority.
Future of the Fiduciary Rule
While the Fifth Circuit decision introduces some uncertainty regarding the Fiduciary Rule’s future, it is unlikely to have dramatic immediate impact for several reasons. First, the decision may be reconsidered by the entirety of the Fifth Circuit (as opposed to the three-judge panel that issued the decision) and reversed. Second, the Fifth Circuit’s jurisdiction is limited to Texas, Louisiana and Mississippi and, accordingly, the Fiduciary Rule remains the law in the vast majority of the country. Third, the Fifth Circuit decision conflicts with the Tenth Circuit’s recently issued decision upholding the Fiduciary Rule, which increases the likelihood of review by the Supreme Court to resolve the conflict.
At present, potentially impacted service providers should continue to conduct their operations based on the Fiduciary Rule and the requirements for relief from any prohibited transactions resulting from their status as fiduciaries and the structure of their client relationships.
Plan sponsors and responsible plan fiduciaries should continue to diligently monitor their plan service providers including, but not limited to, confirming their compliance with the Fiduciary Rule.
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