Circuit Court Ruling to Vacate DOL Fiduciary Extends Regulatory Uncertainty

The United States Court of Appeals for the Fifth Circuit has ruled, by a two-to-one majority, to vacate the Department of Labor (DOL) Fiduciary rule, based on arguments put forward by the U.S Chamber of Commerce and the Securities Industries and Financial Markets Association.

This latest decision comes nearly a year a Texas district court judge roundly rejected the investment industry advocacy groups’ arguments that the DOL exceeded its authority in crafting the fiduciary rule. Exactly what this latest move spells for the regulation’s future under the Trump administration is yet unclear, especially given that just this week the Tenth Circuit issued an essentially opposite ruling, determining in no uncertain language that DOL’s fiduciary rulemaking process has played out properly and within the confines of the regulator’s broad existing authority. Experts are still grappling with the question of how the conflicting rulings should be interpreted, particularly on the point of whether an appeal to the Supreme Court could occur. 

Ropes & Gray tax and benefits partner Josh Lichtenstein warns that the Fifth Circuit’s decision to vacate the DOL’s fiduciary rule in its entirety creates “a new round of uncertainty in the ongoing saga of the rule.”

“The Fifth Circuit is now at odds with multiple other courts that have upheld the rule, including the 10th Circuit,” he tells PLANADVISER. “While the government decides whether to request an en banc review of the ruling, appeal the case to the Supreme Court, or take no action, financial institutions are forced to decide how to react, especially if part of their operations is located in the Fifth Circuit.”

Lichtenstein says this possibility of having the rule apply in some parts of the country but not in others “creates new risks and compliance challenges for institutions, reopening the period of uncertainty around the rule shortly after the DOL had resolved similar uncertainties by delaying the compliance date for portions of the rule.”  It also remains to be seen, he warns, whether state regulators will move forward with new enforcement actions or create new rules in response to the new uncertainty that this decision brings.

As pointed out by Brendan McGarry, attorney at Kaufman Dolowich and Voluck who advises broker/dealers and advisers, the Fifth Circuit majority uses strong language in vacating the rulemaking more or less in its entirety, “crossing over from legal arguments to fundamental arguments against the rule from a business perspective.”

In explaining why it has ruled the DOL overstepped its authority in crafting and implementing the strict new conflict of interest and prohibited transaction requirements of the new fiduciary rule, the majority opinion uses terms like “burdensome” and “onerous” to describe the requirements placed on financial industry participants, which appears to signal a position stronger than one solely about the DOL’s power to enact the rule as written, McGarry argues.

As laid out in the text of the Fifth Circuit majority opinion, the business groups’ challenge succeeded on multiple grounds, including: “(a) the Rule’s inconsistency with the governing statutes; (b) DOL’s overreaching to regulate services and providers beyond its authority; (c) DOL’s imposition of legally unauthorized contract terms to enforce the new regulations; (d) First Amendment violations; and (e) the Rule’s arbitrary and capricious treatment of variable and fixed indexed annuities.”

Finding merit in several of these objections, the Fifth Circuit takes the strong step of wholly vacating the DOL rulemaking. The full text of the decision is available here and includes detailed argumentation on all of these points. 

Both McGarry and Lichtenstein agree that it will be interesting to see if the DOL tries to appeal this decision to the Supreme Court. This is far from a certainty, despite the conflict among the circuit courts, given the change in executive branch leadership since the rule was implemented. One additional confusing aspect here is the emerging role of the U.S. Securities and Exchange Commission (SEC), and whether this ruling could strengthen or weaken that regulator’s resolve to get involved in policing conflicts of interest in the retirement plan and retail investing arenas.

Speaking to this element of the developing story, Blaine Aikin, executive chairman at Fi360, urges the DOL to continue to work with SEC and others on the fiduciary rule, calling this necessary to alleviate persistent industry and investor confusion over fiduciary status.

“Fi360 has always supported a strong fiduciary standard for financial services professionals who clients must rely upon for trustworthy advice,” Aikin says. “At the same time, given the uncertainty with regard to compliance and liability concerns, as well as investor protection under the DOL’s fiduciary rule, we urge the Securities and Exchange Commission to continue to work closely with the DOL in drafting a standard across regulatory jurisdictions that is principles-based and requires advisors to act in the best interest of the client without regard to their own financial interests.”

“At the end of the day, it is the professional closest to the client who establishes the strongest and most sustainable relationships,” Aikin adds.  “Professionalism involves utilizing a prudent process firmly grounded in fiduciary principles, and both advisors and their clients will benefit when policymakers and the courts recognize this important relationship.”