Reed Smith Client Alerts

On March 15, 2018, the United States Court of Appeals for the Fifth Circuit vacated, in its entirety, the Department of Labor’s rule redefining fiduciary status (the DOL Fiduciary Rule or the Rule) under the Employee Retirement Income Security Act of 1974 (ERISA), along with its related new and revised prohibited transaction exemptions, including the Best Interest Contract Exemption (BIC Exemption) and revised PTE 84-24. In a 2-1 decision captioned U.S. Chamber of Commerce v. Department of Labor, the court held that the Department of Labor (DOL) overstepped its regulatory authority in promulgating the Rule.

Fifth Circuit Decision

The underlying case was initiated in the Northern District of Texas and stemmed from the consolidation of several challenges to the DOL Fiduciary Rule by organizations including the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association. The lower court upheld the DOL Fiduciary Rule, as had most other courts addressing the question. The Fifth Circuit, in an opinion authored by Circuit Judge Edith H. Jones and joined by Circuit Judge Edith Brown Clement, vacated the Rule in its entirety, stating that the DOL Fiduciary Rule represented a “novel assertion of DOL’s power” that was inconsistent with the ERISA statutory framework (which treats IRAs differently than ERISA plans), the common law of trust’s well-known meaning of the term “fiduciary” as requiring a relationship of trust and confidence (which treats advisors who “render advice” differently than stockbrokers and insurance agents who primarily “complete sales”), and 40 years of regulatory and court interpretations based on such principles. As evidence that the Rule was overbroad, the majority also relied on statements of the DOL suggesting that the BIC Exemption was necessary in order to avoid sweeping within the “fiduciary” standard certain relationships that Congress did not intend to regulate as fiduciary. The ruling also concluded that the DOL Fiduciary Rule was not a reasonable exercise of the DOL’s rulemaking authority under the Chevron doctrine. “It is not hard to spot regulatory abuse of power when ‘an agency claims to discover in a long extant statute an unheralded power to regulate a significant portion of the American economy,’” the court concluded before vacating the Rule in its entirety.