On June 21, 2018, in a 2-1 decision, the U.S. Court of Appeals for the Fifth Circuit issued its mandate formally vacating the U.S. Department of Labor's ("DOL") conflict of interest rule and its related exemptions (the "Fiduciary Rule"). The Fiduciary Rule, which became effective in June 2017, broadened the definition of "investment advice fiduciary," which, in turn, expanded the universe of broker-dealers and other financial advisers subject to the fiduciary standards under the Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code, as applicable to retirement plans, IRAs and other tax-qualified savings vehicles.

In its original judgment vacating the Fiduciary Rule (U.S. Chamber of Commerce v. U.S. Department of Labor, No. 17-10238, 2018WL 1325019 (5th Cir. Mar. 15, 2018)), the Court examined (1) whether the new definition of "investment advice fiduciary" comported with the ERISA Titles I and II and (2) whether the new definition was "reasonable" under Chevron U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984) and not violative of the Administrative Procedures Act ("APA"), 5 U.S.C. § 706(2)(A) (2016).

The Court held that the DOL lacked statutory authority to promulgate the Fiduciary Rule with its overreaching definition of "investment advice fiduciary," and that the definition was unreasonable, as well as an arbitrary and capricious exercise of administrative power. A copy of the Court's opinion is available here.

Moving Forward

Financial advisers should revisit changes made to their policies and procedures in order to comply with the Fiduciary Rule. Some commentators believe that the ERISA rules for determining whether a person is an "investment advice fiduciary" that were in effect prior to the Fiduciary Rule (the "five-part test") will once again apply.1 Other commentators have noted that the DOL's Field Assistance Bulletin No. 2018-02 is still in effect.2 That bulletin set out a temporary enforcement policy by the DOL, under which the DOL would not pursue prohibited transaction claims against investment advice fiduciaries who work diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted under the Fiduciary Rule's best interest contract and principal transactions exemptions. The bulletin also said that investment advice fiduciaries could rely on other applicable exemptions after the Court's decision. That would seem to encompass the five-part test.

Additionally, financial advisers and institutions should continue to monitor Regulation Best Interest, which was proposed by the SEC on April 18, 2018. Information on the components of Regulation Best Interest is available here.

1 Under the DOL's five-part test, a person is a fiduciary if he or she (i) renders advice to the plan as to the value of securities or other property or the advisability of investing in, buying or selling securities or other property, (2) on a regular basis, (3) pursuant to a mutual agreement or understanding, written or otherwise, with the plan, (4) that the advice will serve as a primary basis for investment decisions and that (5) the advice will be individualized to the plan based on the particular needs of the plan regarding such matters as investment policies or strategy, overall portfolio composition and diversification.

2 Field Assistance Bulletin No. 2018-02 is available at: https://goo.gl/DhNDnL.

Originally published in REVERSEinquiries: Volume 1, Issue 4.
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