By Jane Meacham, Contributing Editor

The future of the Department of Labor’s (DOL) fiduciary rule could land on the docket of the U.S. Supreme Court now that a federal appeals court has vacated the rule, including the expanded definition of “investment advice fiduciary” and associated exemptions. 

The 2-1 decision, announced March 15 by the 5th U.S. Circuit Court of Appeals, nullified the DOL’s 2016 regulation—at least in the 5th Circuit states of Louisiana, Mississippi, and Texas—but won’t be the final decision on the matter. The case is U.S. Chamber of Commerce v. DOL, No. 17-10238, 2018 WL 1325019 (5th Cir. Mar. 15, 2018).

The decision upheld a sweeping challenge to the DOL’s authority to enforce its fiduciary rule brought by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association (SIFMA), the American Council of Life Insurers, and other trade groups. 

Effect of the Ruling

The effect of the ruling, if it becomes final, will be to revert to the regulatory definition of fiduciary advice adopted in 1975 and to the pre-2016 prohibited transaction exemptions.

It won’t become effective nationwide until May 7, at the earliest, as the DOL has 45 days from entry of the judgment to request that all the 5th Circuit judges re-hear the case en banc. Of note: The dissenting judge was the chief judge of the court; he found that the DOL acted within its authority in finalizing the fiduciary rule.

The day after the decision, the DOL announced that it will not enforce the fiduciary rule until further review.

“If the DOL doesn’t take additional steps, we revert to the old ‘five-part’ fiduciary advice definition,” said Drinker Biddle & Reath LLP attorneys in a March 20 client bulletin on the decision. “In addition, [t]he Best Interest and other Impartial Conduct Standards [BICE] will go away. If a request for re-hearing is granted, it seems likely the court will grant a ‘stay,’ i.e., the decision will not apply until a decision by the full Fifth Circuit,” the law firm advised.

Another possibility would be a stay of the case for a Supreme Court appeal. The current fiduciary rule would remain in effect if a stay is granted. If the process is fully stretched out, the stays could be in effect for a year or more, said Drinker Biddle.

“In that case, we think the DOL will propose a new regulation and exemptions during that time, which will start an entirely new process. The [Securities and Exchange Commission] might also propose its own fiduciary rule during that period. The Fifth Circuit decision could also motivate more states to adopt their own fiduciary rules,” the firm said.

Dissecting the Decision

In its decision, the appellate court concluded that the DOL’s expansion of the definition of a fiduciary reflected a policy decision that was beyond the agency’s authority. The court said in the ruling that expansion of service providers’ obligations under the law and individuals’ ability to enforce the law in court requires an act of Congress rather than an unelected agency of the Executive Branch.

Although the court allowed for the DOL to make changes to the definition, it rejected the DOL’s justification for a complete rewrite.

The appellate court first determined that the statute’s definition of fiduciary was not ambiguous and must be interpreted consistently with the wording of the Employee Retirement Income Security Act (ERISA) and the common law. The court noted a distinction in the law between an “investment adviser,” who regularly gives advice that is the main basis for investment decisions, and a broker-dealer, whose principal role is sales. 

The court concluded that the DOL’s 1975 definition of “investment advice fiduciary”—the five-part test that the DOL claimed was outdated and too narrow—properly reflected that distinction. 

Furthermore, even assuming that the statute’s definition of fiduciary was ambiguous, the majority judges concluded that the DOL’s expanded definition was not a “reasonable” interpretation of the law for a number of reasons that they detailed.

Might Affect Rule’s Review

“[T]he decision articulates principles that could embolden the Trump administration’s general deregulatory agenda and might affect the Department’s review of the fiduciary rule,” law firm Proskauer Rose LLP said in a March 16 client bulletin.

“Even if other courts continue to disagree with the Fifth Circuit’s conclusion (as the Tenth Circuit did most recently), the decision further clears a path for withdrawing the fiduciary rule or a regulatory compromise that softens its impact—for example, by expanding the ‘seller’s’ exception and eliminating the most onerous requirements for the Best Interest Contract Exemption,” Proskauer’s alert continued.

For now, the DOL is continuing its review of the rule. Even if the agency puts it aside, a future administration could reopen the project.

“Under the circumstances, we think that the prudent and best course of action for the moment is to maintain existent efforts to satisfy the Impartial Conduct Standards when relying on the BICE or other exemptions and to characterize advisers as a fiduciary (or not) pursuant to the terms of the Fiduciary Rule and its exceptions and exclusions,” advised the Wagner Law Group in a March 16 client bulletin for retirement plan sponsors and service providers.