eLABORate: The Fifth Circuit Overrules the Obama-Era Fiduciary Rule

March 19, 2018

On March 15, 2018, in Chamber of Commerce of the USA, et al. v. U.S. Dep’t of Labor et al., the Fifth Circuit nullified the “Fiduciary Rule.” The Fiduciary Rule is a regulatory attempt to expand what it means to be a “fiduciary” under the Employee Retirement Income Security Act (“ERISA”) and Internal Revenue Code. As the Court explained, the Rule was of “monumental significance to the financial services and insurance sectors of the economy.” Since 2016, the Rule has reportedly caused major investment and insurance companies to exit the brokerage and retirement investor market and limited the retirement investment products sold by such companies.

In 2016, the U.S. Department of Labor (“DOL”) announced the Fiduciary Rule. The Rule’s stated purpose was to “regulate in an entirely new way hundreds of thousands of financial service providers and insurance companies in the trillion dollar markets for ERISA plans and individual retirement accounts.” The DOL sought to fulfill the Rule’s purpose by enlarging the scope of financial service providers that were subject to statutory duties and restrictions. Specifically, the DOL wanted to capture stockbrokers, financial salespeople, insurance professionals, and one-time sellers of investment products.

Effectively, the Rule eliminated the distinction between an investment advisor who is a fiduciary regulated by ERISA and a broker whose advice is incidental and whose compensation is not based on his or her advice. Financial service providers and salespeople of investment products—such as brokers and insurance agents who deal with IRAs, 401(k)s, and other tax-deferred plans—were “investment advice fiduciaries” under the Rule. And as such, they owed duties of loyalty and prudence to purchasers of investment products. Further, they were subject to statutory prohibited transaction provisions, which forbade them from engaging in transactions with clients in which they received a commission from a third party or compensation that varied based on their advice.

On Thursday, the Fifth Circuit vacated the Fiduciary Rule. According to the Court, it refused to fundamentally transform over 50 years of settled legal practices in the financial services and insurance industries. The Court held, among other things, that the DOL acted unreasonably and exceeded its authority. In so doing, the Court reinstated the original definition of a fiduciary under ERISA for Texas, Louisiana and Mississippi. Notably, the Fifth Circuit decision disagrees with a recent Tenth Circuit decision. The resulting split among the federal courts of appeal sets the stage for the U.S. Supreme Court to potentially resolve the conflicting decisions.