On June 21, 2018, the Fifth Circuit Court of Appeals issued a mandate vacating the controversial fiduciary rule issued by the U.S. Department of Labor (DOL) in 2016. The mandate follows the court’s opinion issued on March 15, 2018, which invalidated the rule. As a result of the mandate, the fiduciary rule is no longer effective nationwide.

The fiduciary rule would have greatly expanded the circumstances under which retirement plan investment advisers are considered fiduciaries. As a result of the court’s mandate, the DOL’s prior five-part test will continue to apply in determining fiduciary status under the Employee Retirement Income Security Act (ERISA).

Existing DOL Standard

Under the DOL’s regulation issued in 1975, a person who provides investment advice for a fee is not considered a fiduciary under ERISA unless all of the following five elements are satisfied: (1) the person must render advice as to the value of securities or other property or the advisability of investing in, purchasing or selling securities or other property, (2) on a regular basis, (3) pursuant to a mutual understanding with the ERISA client, that (4) the advice will serve as a primary basis for the ERISA client’s investment decisions and that (5) the advice will be individualized based on the needs of the ERISA client. The regulation, DOL opinions, and prohibited transaction exemptions should continue to inform the basis on which advisers are treated as fiduciaries.

Effect of the Mandate

In anticipation of the fiduciary rule becoming effective, many investment management firms have already revised their agreements and marketing materials to take advantage of the best interest contract (BIC) exemption or to otherwise comply with the fiduciary rule. As a result of the mandate, these firms will probably decide to revise further their agreements and marketing materials.

It remains to be seen whether some firms will nonetheless continue the processes or standards they have already put in place in response to the fiduciary rule. For instance, firms that suspended investment by IRAs and ERISA clients because they were unable to meet the BIC exemption under the fiduciary rule may decide to keep the suspensions in place. However, it also remains to be seen whether firms adopting and retaining the standards under the fiduciary rule will have a competitive advantage in the market.

Attention will now turn to the Securities and Exchange Commission (SEC) and its issuance of impartial conduct standards and disclosure requirements for financial advisers and broker-dealers. The SEC may ultimately seek to incorporate some of the same protections and standards from the fiduciary rule.