Fifth Circuit vacates Labor Department’s “Fiduciary Rule”

 UPDATE: The SEC Responds with Proposed Rules (4-24-18)

On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the U.S. Department of Labor’s (DOL) controversial “Fiduciary Rule.”

The ruling was issued in Chamber of Commerce of the U.S.A., et al. v. U.S. Dep’t of Labor, et al. , No. 17-10238, slip op. 46 (5th Cir. Mar. 15, 2018). In expanding the definition of “fiduciary” under ERISA and the Internal Revenue Code, the Fiduciary Rule imposed, among other things, significant new obligations and liabilities on broker-dealers and other financial professionals.

In its 2-1 opinion, the Fifth Circuit explained that:

• the DOL’s expanded definition of “fiduciary” was inconsistent with active legislation, as well as with the common-law meaning of “fiduciary,” which depends upon a special relationship of trust and confidence;
  
• the DOL abused its authority to grant exemptions from regulations (e.g., the Best Interest Contract Exemption, or “BICE”) as a method to impose expansive new duties that went beyond its power; and
  
• the Rule improperly created private rights of action against brokers and financial agents when Congress had not authorized such claims.
  

As a result, the Fifth Circuit held that the Fiduciary Rule and its exemptions were arbitrary, capricious, and unlawful under the Administrative Procedure Act (APA) and vacated them in toto .

Potential Impact

While the ruling nullifies the Fiduciary Rule in the Fifth Circuit, which encompasses Texas, Mississippi and Louisiana, its impact may be much broader. Under the APA, vacatur is a remedy by which courts “set aside agency action” that is arbitrary and capricious or otherwise beyond the agency’s statutory authority. Its effect is to “nullify or cancel; make void; invalidate.”

Because the effect of vacatur is, in essence, to remove a regulation from the books, its impact could be nationwide. As one federal appellate court explained, “When a reviewing court determines that agency regulations are unlawful, the ordinary result is that the rules are vacated — not that their application to the individual petitioners is proscribed.” The Fifth Circuit’s judgment, which is currently scheduled to take effect in May 2018, could therefore vacate the Fiduciary Rule across the country.

Notably, the decision was issued two days after the U.S. Court of Appeals for the Tenth Circuit upheld a portion of the Fiduciary Rule regulating certain financial advice, in Mkt. Synergy Grp., Inc. v. U.S. Dep’t of Labor, No. 17-3038 (10th Cir. Mar. 13, 2018). In that decision, the Tenth Circuit held that the DOL gave sufficient notice of the proposed rule change and acted reasonably in treating fixed indexed annuities differently from other fixed annuities.