Fifth Circuit Vacates Fiduciary Rule, But Case Not Yet Closed

Fifth Circuit Vacates Fiduciary Rule, But Case Not Yet Closed

The Fifth Circuit Court of Appeals issued a ruling on Thursday vacating the controversial “fiduciary rule” enacted by the Labor Department during the Obama administration, which would have required financial advisors to act in their clients’ best interests when advising them about retirement. The ruling overturned a February 2017 district court decision upholding the regulation, with a three-judge panel ruling 2–1 that its implementation had violated the Administrative Procedure Act. Politico’s Morning Shift newsletter called Thursday’s decision “a victory for the financial services industry,” whereas labor activists were dismayed:

A range of business associations — including the U.S. Chamber of Commerce, a plaintiff in the case — said in a joint statement that the court “ruled on the side of America’s retirement savers.” The groups have thrown their weight behind an effort by the Securities and Exchange Commission to draft a separate standard for advisers, which they say should “not limit choice for investors.” On the other hand, Christine Owens, executive director of the National Employment Law Project, said the ruling “threatens the Labor Department’s very ability to protect retirement investors now and in the future” — and encouraged an appeal.

Thursday’s decision was handed down just two days after another federal court, the Tenth Circuit, issued a ruling in a separate case concerning the treatment of fixed indexed annuities under the rule. That court found that the Labor Department had satisfied its obligations under the Administrative Procedure Act in amending the rule to make sales of such annuities ineligible for Prohibited Transaction Exemption 84-24 (Proskauer attorneys outline the particulars of the ruling in more detail at JD Supra).

In agreeing with the department’s decision to amend one facet of the fiduciary rule, the Tenth Circuit’s ruling could be interpreted to implicitly uphold the regulation as a whole, although that was not at issue in the case. Yet another fiduciary rule case is still pending in federal court as well, so industry experts are advising retirement plan sponsors to remain compliant with the rule for the time being, Paula Aven Gladych notes at Employee Benefit News:

Not only could the appeal have a minimal effect on plan sponsors, they say, but even if the rule is overturned eventually, it’s still good to ensure that their retirement-plan service providers are working in the best interest of their employees. “It is good risk management to keep complying,” says fiduciary lawyer Fred Reish, a partner in the Los Angeles office of Drinker Biddle & Reath LLP.

The ruling could affect relationships among plan sponsors and various service providers, such as their plan adviser, record keeper or third party administrators, as some of those providers will no longer be considered fiduciaries under the decision, Reish says. He points out that the fiduciary case still wending its way through the U.S. Court of Appeals for the D.C. District also could have an impact on the discussion. Since two appeals courts have weighed in on the rule in the last month — with different outcomes — it may end up in front of the Supreme Court, Reish adds.

While the Trump administration was expected to rewrite or discard the fiduciary rule, Secretary of Labor Alexander Acosta announced last May that he had “found no principled legal basis” under the Administrative Procedure Act to delay the rule any further than he already had, although the department would continue to seek public comment on how it might be revised. The regulation came into effect on June 9 of last year and its enforcement mechanisms became active at the start of this year. Now that the Fifth Circuit has ruled to vacate, the rule is no longer in effect, but the Supreme Court could bring it back to life.