Fifth Circuit Strikes Down DOL Fiduciary Rule

Author:Mr Steven Lofchie
Profession:Cadwalader, Wickersham & Taft LLP

On June 21, 2018, the Fifth Circuit issued a mandate finalizing its March 2018 decision vacating the DOL's 2016 regulation that, among other things, expanded the scope of persons subject to fiduciary obligations (the "fiduciary rule"). The final decision relates to the definition of investment advice under ERISA, and certain related new prohibited transaction exemptions and amendments to existing prohibited transaction exemptions.

The appellants challenged the fiduciary rule on multiple grounds, claiming:

inconsistencies between the fiduciary rule and governing statutes; the DOL overreached "to regulate services and providers beyond its authority"; the DOL imposed "legally unauthorized contract terms to enforce the new regulations"; First Amendment violations; and "arbitrary and capricious treatment of variable and fixed indexed annuities." The Court's majority found that (i) the fiduciary rule's interpretation of "investment advice fiduciary . . . conflicts with the statutory text and contemporary understandings" and (ii) the fiduciary rule failed the "reasonableness test" of Chevron USA, Inc. v. NRDC, Inc. and the Administrative Procedure Act.

In striking down the rule, the Court observed that the fiduciary rule had already had significant negative consequences for both customers and service providers. The Court observed that:

"The Fiduciary Rule has already spawned significant market consequences, including the withdrawal of several major companies . . . from some segments of the brokerage and retirement investor market. . . . Confusion abounds how, for instance, does a company wishing to comply with the BICE exemption document and prove that its salesman fostered the 'best interests' of the individual retirement investor client? The technological costs and difficulty of compliance compound the...

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