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.
Dissenting opinion
Chief Judge Carl E. Stewart issued a dissenting opinion asserting that the Rule was well within the DOL’s rulemaking authority. Chief Judge Stewart found “[t]hat the DOL has extended its regulatory reach to cover more investment advice-fiduciaries and to impose additional conditions on conflicted transactions neither requires nor lends to the panel majority’s conclusion that it has acted contrary to Congress’ directive.”
Impact and potential outcome
This decision is without a doubt a significant victory for opponents of the Rule and a blow to the Obama-era regulation, but it is by no means the end of the story. The decision now creates a direct split among the Circuits regarding the validity of the DOL Fiduciary Rule, with this decision coming in the same week that the Tenth Circuit upheld the Rule in its entirety. Additional challenges to the Rule remain pending in other jurisdictions. Shortly after the decision was announced, DOL spokespersons informally indicated that they would not seek to enforce the Rule pending its assessment of this decision, but as of publication, DOL made no formal statement or provided details about its response.
The future of the Rule has been in doubt since President Trump directed the DOL to reconsider it on February 3, 2017. That analysis is still pending, although portions of the Rule went into effect on June 9, 2017. Accordingly, some question exists as to whether the DOL will appeal this ruling at all. However, given the Circuit split and that the DOL continued to defend the Rule in this and other cases during the pendency of its reassessment of the Rule, we anticipate that the DOL will defend the Rule in some manner on appeal, unless its decision on reassessment is imminent and moots the issue. As a next step, the DOL may pursue an en banc review of the decision by the entire Fifth Circuit or seek to have the Circuit split resolved by the Supreme Court of the United States. Also, notwithstanding this victory for opponents of the Rule and uncertainty of its future, we continue to anticipate an increase in litigation focused on excessive fees and conflicted advice in the financial services and insurance industries due to the scrutiny of these issues have gained over the past several years.
Client Alert 2018-069
