- After years of political and legal challenges, the DOL’s Fiduciary rule is dead and the ERISA five-factor fiduciary test is revived.
- The SEC has proposed its own best interest standards for investment advisers and broker-dealers (open for public comment through August 7, 2018).
- Experts are hopeful the DOL and SEC will coordinate efforts to provide clear standards for fiduciaries, including investment advisers and broker-dealers, as well as guidance on the related impact to plan fiduciaries and participants.
On June 21, 2018, the Fifth Circuit Court of Appeals issued a highly anticipated mandate vacating the Department of Labor’s (DOL) Fiduciary rule in toto. The mandate follows numerous challenges to the DOL’s Fiduciary rule and the Court’s earlier decision holding that the Fiduciary rule was invalidly promulgated.
In April 2016, the DOL promulgated the “Fiduciary” rule, which expanded the definition of “fiduciary” under Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to include individuals and entities that provide investment advice for a fee to ERISA-covered plans and their participants and beneficiaries, individual retirement account (IRA) owners, and health savings account (HSA) holders. Portions of the Fiduciary rule took effect on June 9, 2017, and other provisions are scheduled to become applicable on July 1, 2019. During this extended transition period, the Best Interest Contract Exemption (BICE), and the Principal Transactions Exemption, provided broad relief from certain prohibited transactions provisions of ERISA and the Internal Revenue Code.
This March, the Tenth and Fifth Circuit Courts of Appeals each heard challenges to the Fiduciary rule and split—the Tenth Circuit unanimously upheld the Fiduciary rule, and the Fifth Circuit struck it down in toto. The divided Fifth Circuit held that the DOL exceeded its statutory authority under ERISA in promulgating the Fiduciary rule. The majority decision focuses on the DOL’s long-established five-factor test for determining whether a service provider is an ERISA fiduciary, and opined that the DOL’s 2016 Fiduciary rule violated the Chevron doctrine and the Administrative Procedure Act.
The Fifth Circuit denied requests from the states of California, New York and Oregon, as well as the AARP to intervene after the DOL declined to request the re-hearing; on May 22, 2018, the Fifth Circuit further denied the states’ motion both to reconsider the previous denial of the motion for leave to intervene and to file petition to rehear en banc. The DOL did not request a re-hearing of the case en banc.
Finally, on June 21, the Fifth Circuit Court of Appeals issued a mandate putting into effect its March decision vacating the Fiduciary rule in its entirety, including the BICE, Principal Transactions Exemption, and related amendments to prohibited transaction exemptions.
Where does this leave us? Do we revert to the DOL’s pre-Fiduciary rule guidance? Prior to the DOL’s promulgation of the Fiduciary rule, a five-factor test was used to determine ERISA fiduciary status. Under this five-factor test, an individual or entity was considered an ERISA fiduciary if: (1) it rendered advice or made recommendations as to the value of securities or other property (2) on a regular basis, (3) pursuant to a mutual agreement between the person or entity and the plan, (4) the advice served as the primary basis for investment decisions with respect to plan assets and (5) the advice was individualized. The DOL’s Fiduciary rule did away with this test and embraced a new, more expansive definition of “fiduciary” while also introducing new prohibited transaction exemptions and bringing IRAs under the rule.
It is uncertain whether the DOL will revert back to its pre-Fiduciary rule five-factor test, or whether the DOL will regroup and narrow the Fiduciary rule as it stands. On April 7, 2018, the Securities and Exchange Commission (SEC) proposed its own best interest standards that would apply heightened standards of care to broker-dealers and investment advisors that are similar to the DOL’s Fiduciary rule, but most notably does not include BICE, a significant departure from the DOL’s Fiduciary rule. Public comments may be submitted to the SEC through August 7, 2018. Industry experts are hopeful that the DOL and SEC will coordinate their efforts to provide clear guidance to investment advisers and broker-dealers, as well as on the related impact to plan fiduciaries and participants.