On Thursday, March 15, 2018, in a two-to-one decision, the U.S. Court of Appeals for the Fifth Circuit vacated the Department of Labor’s (DOL) fiduciary rule and related exemptions (the Rule) in its entirety. The Rule, among other things, jettisoned DOL’s prior definition of “fiduciary,” which had been in effect for 40 years, and thereby dramatically expanded the circumstances under which financial and insurance professionals become fiduciaries for purposes of the Employee Retirement Income Security Act (ERISA) and the prohibited-transaction provisions of the Internal Revenue Code. As the Fifth Circuit explained, the prior definition “captured the essence of a fiduciary relationship known to the common law as a special relationship of trust and confidence between the fiduciary and his client.” The Rule departed from this common law understanding by eliminating the requirements that an “‘investment advice fiduciary’s’ business … be its ‘regular’ work on behalf of a client” and that “the client’s reliance on that advice [be] the ‘primary basis’ for her investment decisions.”
The Fifth Circuit, in reversing the lower court’s decision upholding the Rule, stated that the Rule “conflicts with the plain text of the ‘investment advice fiduciary’ provision [in ERISA] ... and it is inconsistent with the entirety of ERISA’s ‘fiduciary’ definition.” As a result, DOL “lacked statutory authority to promulgate the Rule with its overreaching definition of ‘investment advice fiduciary.’ ”
The court went on to explain that, even if ERISA were silent or ambiguous regarding this definition, the Rule, for a host of reasons, does not satisfy the reasonableness test for upholding an agency’s interpretation and “bears hallmarks of ... arbitrary and capricious exercises of administrative power.” Among other things, the Fifth Circuit explained that the best interest contract exemption (the BIC Exemption), one of the exemptions included in the Rule, would impermissibly create a private right of action for owners of individual retirement accounts (IRAs). The court stated that the BIC Exemption circumvents the statutory rules applicable to IRAs. The court pointed out that IRAs are not subject to ERISA but, instead, are subject to Section 4975 of the Internal Revenue Code, which does not provide a private right of action for owners of IRAs. The court also noted the significant impact the Rule has had on the financial services industry and the confusion created by the Rule, including the BIC Exemption. Sidley represented the Indexed Annuity Leadership Council and several of its members as appellants in the Fifth Circuit.