On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit (the Court) vacated the fiduciary rule (the Rule) in a 2-1 decision in U.S. Chamber of Commerce v. DOL, 5th Circ., No. 17-10238. As background, the Rule amended ERISA's definition of fiduciary by considering a larger subset of communications to be investment advice that renders the person providing that advice a fiduciary.
The plaintiffs in U.S. Chamber of Commerce v. DOL, which were all financial service industry groups, were the first to file suit against the DOL. They challenged the Rule on multiple grounds, including allegations that the Rule is inconsistent with ERISA, that the DOL is overreaching by using the Rule to regulate services and providers that aren't covered under ERISA, and that the DOL imposed legally unauthorized contract terms to enforce the Rule. Although the district court disagreed with the allegations and held in favor of the DOL, the Fifth Circuit agreed with many of the plaintiff's allegations and vacated the Rule in its entirety.
In launching into a background of the Rule, the Court pointed out that the Rule was fundamentally transforming over fifty years of settled and hitherto legal practices in a large swath of the financial services and insurance industries. The Court went on to discuss the congressional history of ERISA and highlight the definition of fiduciary that was in place before the Rule.
Ultimately, the Court found that the DOL was expanding the scope of the regulations in vast and novel ways and, in doing so, the DOL was overstepping its authority by seeking to rewrite the law that is the sole source of its authority. They essentially held that it wasn't Congress's intent to render any person who renders any investment advice for a fee a fiduciary; instead, the DOL's 1975 regulations reflect the idea that investment advice for a fee reflects an intimate relationship of trust between advisor and client.
Additionally, the Court argued that the DOL's imposition of the Rule failed the Chevron doctrine. As background, the Chevron doctrine draws upon the U.S. Supreme Court precedence in the Chevron U.S.A. v. Natural Resources Defense Council, Inc., which essentially provided a two-part test in determining if the courts must defer to federal agencies in their application of the law. The first part of the test determines whether Congress was clear on the issue in question. If Congress was clear, then the agency must defer to Congress's intent. If the Congressional statute was unclear or ambiguous, then the second part of the test is to determine if the agency's interpretation is based on a permissible construction of the statute.
Considering the Chevron doctrine, the Court found the DOL's imposition of the Rule to be unreasonable, even if there was an assumption that Congress was unclear. Further, the Court held that the DOL's creation of the Best Interest Contract Exemption (BICE) was an abuse of power that was only necessary to blunt the overinclusiveness of the new definition of fiduciary. Not only did they find the BICE to be proof of the unreasonableness of the Rule, but they also held that in promulgating the BICE, the DOL was creating a private right of action against advisors where Congress had not allowed one.
Since the Court found it impossible to separate the Rule from the BICE, they deemed the whole rule unreasonable and vacated it in toto.
Although this ruling seems to represent the demise of the Rule, it's important to note that there's now a split in the circuit courts. As we've reported on in this edition of Compliance Corner, the U.S. Court of Appeals for the Tenth Circuit ruled in favor of the Rule a few days before this ruling was published (in Mkt. Synergy Grp., Inc. v. U.S. Dep't of Labor).
Furthermore, although the court vacated the Rule in its entirety, there are still procedural limitations that give time for additional action by the DOL. The DOL has the following choices. They could:
- Appeal the case to the Fifth Circuit for an en banc hearing (which would be in front of the full Fifth Circuit) and even appeal the case all the way to the U.S. Supreme Court.
- Do nothing and let the rule become vacated after the appropriate procedural stays have been exhausted.
- Attempt to amend the rule in a way that addresses the Fifth Circuit's concerns and salvages a portion of the Rule.
It's hard to know how they'll proceed. On one hand, the Trump administration seems opposed to the Rule as written (as evidenced by their attempts to review it and delay it). On the other hand, many in the industry have already begun to comply with the rule and accept its standards. Only time will tell how the DOL chooses to proceed.
U.S. Chamber of Commerce v. DOL »