The extraordinary developments surrounding the Department of Labor (DOL) “investment advice” fiduciary definition and related exemptions (Final Rule), which became generally applicable on June 9, 2017, reached a new peak during the week of March 12, 2018.

– On March 13, the Tenth Circuit Court of Appeals, 55 days after oral argument, rejected a claim that DOL violated the Administrative Procedure Act (APA) in its treatment of fixed index annuities under the Final Rule.

– On March 15, a split panel of the Fifth Circuit, 227 days after oral argument, ruled that DOL broadly overreached its authority in promulgating the Final Rule – specifically in its redefinition of “investment advice” fiduciary and in the terms of the Best Interest Contract Exemption – and vacated the Rule in its entirety as arbitrary, capricious and unlawful under the APA.

– On March 16, DOL announced that it is suspending enforcement of the Final Rule pending further review. (In general, DOL has been following a compliance assistance approach to the Rule in the field, rather than an enforcement approach.)

The immediate consequences of these developments are that:

– The vacatur of an agency rule by a circuit court has a national effect, no later than upon issuance of the court’s mandate; and

– By vacating the Final Rule in its entirety, the Fifth Circuit appears to have reversed DOL’s replacement of the existing five-part fiduciary definition and modification of existing exemptions, which were embedded in the Rule, thus reinstating prior law.

Notwithstanding the change in Administrations, DOL has zealously and vigorously defended the Final Rule in court, and it has options available should it decide to continue that defense. The DOL could:

– Petition the Fifth Circuit for a rehearing or rehearing en banc, which DOL would be required to file on or before April 30, during which time there would be a stay in the decision. Otherwise, the Fifth Circuit will issue its mandate on or about May 7; and/or

– Petition the US Supreme Court for a writ of certiorari, which would be due by June 13 (absent a request for rehearing).

The insurance organizations prosecuting the Tenth Circuit litigation could also seek rehearing or certiorari. In addition, proceedings in Minnesota district court and the DC Circuit challenging the Final Rule in various ways could resume, and those courts would not be bound by either the Fifth Circuit or Tenth Circuit decision.

– The parties in the Minnesota litigation most recently filed a status report on March 5 and requested a continuation of the November 3, 2017 stay in those proceedings.

– Pursuant to a February 22 order, the parties in the DC Circuit litigation are to file a status report within 10 days after the Fifth Circuit decision, that is, by March 25.

Alternatively, DOL could be persuaded, by the intellectual heft of the Fifth Circuit panel opinion or its own continuing review of the Rule mandated by the White House or otherwise, that the retirement system would be better served if it moved on from the Final Rule and considered a new approach to these issues.

– Any new proposal by DOL would necessarily be informed by the Fifth Circuit opinion.

– The early indications are that the Securities and Exchange Commission will continue with its “best interest” project, with the objective of issuing a proposal this summer.

– There is an emerging interest among the states in promulgating “best interest” standards under state insurance or securities laws.

It may be inevitable, in (i) a federal system with (ii) national rulemaking authority divided among multiple agencies, that plan sponsors and providers will be compelled to deal with a patchwork of federal and state “best interest” standards of differing scope and content, with its attendant burden on compliance programs, increase in costs to the retirement system, and confusion among retirement investors. It would be well, however, if the various rulemaking authorities could take a broader, less parochial view in deciding if and how to regulate these issues. At least pending clarification from DOL on how it intends to proceed following the Fifth Circuit opinion, the wise course for plan sponsors and providers is to:

– Continue with the practices and procedures adopted in response to the Final Rule, but

– Inventory the changes to those practices and procedures, as well as to agreements, manuals and other documentation, that might merit reconsideration if the vacatur of the Final Rule takes definitive effect.