U.S. Court Of Appeals For The Fifth Circuit Vacates Fiduciary Rule

Recently, the United States Court of Appeals for the Fifth Circuit vacated the Department of Labor's ("DOL") fiduciary investment advice rule (the "Fiduciary Rule"). The groundbreaking decision was issued just days after the United States Court of Appeals for the Tenth Circuit issued a conflicting decision upholding a DOL regulatory action in a similar but not identical issue.

The Court of Appeals decisions create national uncertainty about the Fiduciary Rule's future. For now, however, the Rule continues to be applicable throughout most of the country and further developments are necessary before its fate is determined.

Background on the Rule

The Fiduciary Rule went into effect on June 9, 2017 (although certain exemptions published with the Rule were delayed to July 1, 2019). The complex rule defines who is a "fiduciary" with respect to an employee benefit plan or IRA (a "plan") and is, therefore, subject to the stringent fiduciary duties set out in the Employee Retirement Income Security Act ("ERISA") by reason of providing investment advice with respect to the plan. In very general terms, a person is a fiduciary under the Rule if the person provides, for a fee or other direct or indirect compensation, certain recommendations regarding the securities or investment property of a plan or related to the rollover of such securities or investment property and the recommendation is directed to a specific recipient, given pursuant to an agreement with the recipient, or the person providing the advice acknowledges that he or she is acting as a fiduciary.

The Fiduciary Rule revises a prior regulation that the DOL issued in 1975. Under that rule, a person would be considered a fiduciary under ERISA by reason of providing investment advice for a fee or other compensation only if the person satisfied a five-part test, which required, among other things, that the advice was provided on a "regular basis" and that it served as the "primary basis" for the investment decisions of a plan.

The revised Fiduciary Rule eliminated the five-part test and greatly expanded the scope of the 1975 rule by focusing only on the receipt of compensation. Under the revised rule, a person could be deemed a fiduciary by providing a recommendation related to a single transaction with respect to a plan. The revised rule thus expands fiduciary status to potentially cover securities brokers, insurance agents, and other financial services professionals who provide investment...