On March 15, 2018, the United States Court of Appeals for the Fifth Circuit struck down the Department of Labor’s (DOL) fiduciary duty rule in a 2-1 decision. While the court has denied motions filed by, among others, the attorneys general of California, New York and Oregon to intervene in the case, as of May 7, 2018, the Mandate had not issued. The deadline for filing a petition for writ of certiorari to the United States Supreme Court is June 13, 2018.

In rejecting the DOL’s rule, the Fifth Circuit’s holding is consistent with the positions of the United States Chamber of Commerce, the National Association for Fixed Annuities (NAFA) and the Securities Industry and Financial Markets Association (SIFMA), as well as others. In sum, the Fifth Circuit concluded that the DOL exceeded its authority in adopting a rule that the Court deemed to be overly broad and in conflict with aspects of the Employee Retirement Income Security Act (ERISA). The practical impact of the decision is that upon entry of the Mandate, absent further judicial intervention, the DOL fiduciary duty rule’s broadened definition of fiduciary is not the standard and the Best Interest Contract Exemption and the Principal Transaction Exemption, among other exemptions, are not the law.

In light of the potential confusion created by the Fifth Circuit decision and the anticipated Mandate, the DOL issued a Field Assistance Bulletin that, in essence, continues the temporary enforcement first implemented June 9, 2017, in the face of a Presidential directive to the DOL to further review the Rule prior to implementation. The DOL issued yesterday’s Bulletin likely in anticipation of questions from industry and retirement investors regarding the applicable definition of a “fiduciary” and the availability of any exemptions.

The prior and now current DOL policy with respect to enforcement of the proposed DOL fiduciary duty rule is that the DOL “will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted in the Best Interest Contact and Principal Transactions Exemptions, or treat such fiduciaries as violating the applicable prohibited transaction rules.”

The current state of affairs is a win for those who believe that the DOL rule was overbroad and potentially detrimental to the interests of investors. Given the Fifth Circuit ruling, the legacy definition of “fiduciary” will again be the governing standard and the old factors will apply: (1) “individualized” advice, (2) provided on a “regular basis,” (3) under a “mutual understanding,” and (4) intended as the “primary basis” for an investment decision.

In the face of the rejection of the DOL fiduciary duty rule, the Securities and Exchange Commission (“SEC”) stepped in with a proposal of its own – “Regulation Best Interest.” The SEC’s proposal does not specifically impose a fiduciary standard on brokers and does not define “best interest.” Consequently, the North American Securities Administrators Association (NASAA) and others who advocated for the DOL proposed rule view the SEC proposal with skepticism.

Going forward, we anticipate efforts to reconcile some aspects of the DOL rule with the standard of conduct proposed by the SEC. We also expect that various states will continue to pursue their own “fiduciary” standards. Finally, NASAA has also hinted that it may be coming forward with its own model act that would characterize a broker as a fiduciary if providing advice with respect to the rollover of any retirement assets. Such uncertainty in the regulatory landscape militates in favor of a slow or measured approach in contemplating any changes to a firm’s business model, policies and procedures.

Finally, firms should recognize that in the face of the Fifth Circuit decision, the BIC and Principal Transaction Exemptions are not available exemptions. Consequently, any firm relying on those exemptions in connection with the performance of any fiduciary duty is no longer protected by those exemptions and consideration of valid exemption may be appropriate (i.e., PTE 86-128 (prior versions applicable to discretionary and non-discretionary advice); PTE 84-24 (applicable to annuities); PTE 77-4 (applicable to affiliated mutual fund transactions)).