• The future of the Fiduciary rule is uncertain, particularly in light of the Fifth Circuit’s decision vacating the rule.
  • Retirement plan fiduciaries should continue to stay apprised of the viability of the Fiduciary rule with an eye towards the services provided by their plans’ investment advisors.
  • Industry experts are hopeful that the DOL and SEC will coordinate their efforts to provide clear guidance to investment advisers and broker-dealers, plan fiduciaries and plan participants.

In April of 2016, the Department of Labor (DOL) promulgated the “Fiduciary” rule, which expands 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. The DOL also published guidance on expanded and amended exemptions under the prohibited transaction rules that would allow certain providers of investment advice to continue to receive fees subject to certain safeguards. Portions of the Fiduciary rule took effect on June 9, 2017. After multiple delays, the effective date of other provisions of the Fiduciary rule, including Best Interest Contract Exemption (BICE), and the “Principal Transactions Exemption,” was delayed until July 1, 2019.

Even prior to its effective date, the rule was met with extensive legal challenges. However, until mid-March 2018, the DOL had successfully defended against these challenges. This March, two circuit courts issued split decisions regarding the legality of the Fiduciary rule.

On March 13, 2018, in Market Synergy Group, Inc. v. United States Department of Labor, the Tenth Circuit Court of Appeals unanimously upheld the lower court’s decision in favor of the DOL’s authority to issue the expansive regulations. In this case, the plaintiff, Market Synergy Group, an organization that conducts research and markets specialty insurance annuity products, unsuccessfully argued that the DOL violated the Administrative Procedure Act by acting arbitrarily or capriciously when it promulgated the Fiduciary rule. The plaintiff in this case was particularly concerned with the DOL’s disparate treatment of fixed-rate annuities versus fixed-indexed annuities. The Tenth Circuit ultimately found that the DOL acted properly in promulgating the Fiduciary rule.

Two days later on March 15, 2018, in Chamber of Commerce of the United States of America, et al. v. United States Department of Labor, a divided Fifth Circuit Court of Appeals vacated the Fiduciary rule in its entirety. Numerous industry groups, including the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association, brought this lawsuit. Reversing an earlier decision by the District Court for the Northern District of Texas, the Fifth Circuit found 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 specifically notes that “[f]or the past forty years, the DOL has considered the hallmarks of an ‘investment advice’ fiduciary’s business to be his ‘regular’ work on behalf of a client and the client’s reliance on that advice as the ‘primary basis’ for her investment decisions.” The majority opined that the DOL’s Fiduciary rule was a vast expansion of this historical interpretation that was not authorized by ERISA and in violation of the Chevron doctrine—providing for judicial deference to administrative interpretations—and the Administrative Procedure Act.

The DOL could appeal the Fifth Circuit’s decision by seeking rehearing by the same three-judge panel or by the full Court or by appealing to the U.S. Supreme Court. However, in light of the Trump Administration’s prior delay of implementing the DOL’s Fiduciary rule regulations and exemptions, it is uncertain whether the DOL will appeal this decision. If the DOL does not elect to appeal the Fifth Circuit’s decision or seek a rehearing within 45 days, the Fifth Circuit is expected to enter a mandate vacating the Fiduciary rule on May 7, 2018. Pursuant to the Administrative Procedure Act, such a mandate would vacate the Fiduciary rule on a nationwide basis and the DOL’s five-part definition of “fiduciary” would stand as it was in effect prior to the enactment of the DOL’s Fiduciary rule.

Shortly following the Fifth Circuit’s decision, the DOL announced that it will not enforce the Fiduciary rule “pending further review.”

Impact on Plan Fiduciaries Although recent developments do not require action at this time, plan fiduciaries should continue to keep apprised of the necessity of complying with the Fiduciary rule and, accordingly, continue to monitor the efforts of their service providers who provide investment advice to their retirement plans and plan participants. The DOL’s non-enforcement policy does not prevent private parties, including service providers and plan participants, from bringing lawsuits challenging the Fiduciary rule or compliance with the Fiduciary rule.

Many service providers have expended substantial effort and expense in developing systems and procedures surrounding their investment advice in order to comply with the Fiduciary rule. These systems and procedures have been substantially socialized and adopted by plan fiduciaries, and may now be an expected service or cost of doing business in the retirement and IRA industries. As such, while the DOL has announced that it will not currently enforce, and will continue to review, the Fiduciary rule, service providers may elect to provide investment advice services consistent with the principles of the Fiduciary rule and, as a result, the impact of the Fiduciary rule may be longer lasting than the legislation.

Finally, the Securities and Exchange Commission (SEC) has announced that it will promulgate new standards of conduct for investment advisers and broker-dealers. This guidance is expected to cover both retirement and non-retirement related investments and services. In previous guidance, the DOL committed to reviewing its Fiduciary rule in coordination with the SEC. Although a coordinated effort between the agencies may not directly impact plan fiduciaries, it is expected that if a harmonized definition of “fiduciary” and related duties are established between the agencies, compliances costs for plan service providers may be reduced and, thus, plan fiduciaries and plan participants could similarly benefit.