Tough Process Questions Raised by Fifth Circuit Fiduciary Rule Decision

Steven Rabitz is a compensation and benefits partner with Stroock in New York; his firm provides transactional and litigation guidance to investment advisory corporations, banks and venture capital firms.

Like many other attorneys whose work regularly touches on the Employee Retirement Income Security Act (ERISA), Rabitz has been hard at work this week fielding questions about the fate of the Department of Labor (DOL) fiduciary rule expansion. As readers likely already know, the decision that emerged this week out of the Fifth U.S. Circuit Court of Appeals threw a dramatic new element of confusion into the epic regulatory saga that has been the rollout of the Department of Labor fiduciary rule. The Fifth Circuit’s two-to-one majority ruling wholly rebukes the long-running fiduciary rule expansion as an abusive overreach of the DOL’s authority—this after numerous district courts have strongly upheld the DOL’s rulemaking process.

To help ease the immediate concerns and confusion of clients, Rabitz and his firm have published a helpful guide that dissects the latest fiduciary rule developments. On his assessment, it actually is not that likely that the U.S. Supreme Court will get involved.

“While there has been some discussion that other recent decisions in other circuits addressing the fiduciary rule may now result in a ‘split,’ no decision appears more sweeping or broad concerning the underlying legality of the fiduciary rule than the decision from the Fifth Circuit,” Rabitz explains. “Moreover, because of the Constitutional nature of the decision, future administrations—regardless of party—may have difficulty resurrecting the fiduciary rule or similar sweeping changes to the original fiduciary rule, absent Congressional action.”

But don’t get the wrong idea. As Rabitz sees it, this week’s Fifth Circuit action is “not necessarily the end of the story—at least not yet.”

“There are a number of additional considerations that clients and friends will continue to need to pay attention to. The Department of Labor could challenge the decision, and there are other actions that could be taken that at a minimum would prolong the process of finality,” Rabitz observes. “With any such delay, already taxed financial services institutions trying to change business models and compliance approaches to meet the changes occasioned by the fiduciary rule may feel even more under the gun.”

Based on his interactions with clients, Rabitz points out that some institutions doing business in jurisdictions where other circuit courts have weighed in on prior challenges to the fiduciary rule—for example in the Tenth Circuit—may feel compelled to approach the Fifth Circuit decision with caution. He notes that caution is a reasonable response here, but he also says firms can and should take the Fifth Circuit decision seriously. The court has strongly rebuked the DOL and cast the whole future of the rulemaking process in serious doubt.

“What Happens Next? While the Fifth Circuit has vacated the fiduciary rule, the rule is still technically in effect as the case continues to be under the jurisdiction of the Fifth Circuit until it issues a ‘mandate’ opening a limited period during which the Department of Labor can choose to contest the decision under applicable rules of procedure,” Rabitz says. “The mandate would generally be expected to be issued several days following the decision, which opens a window for any such challenge that is expected to close by May 7, 2018, or 45 days from the Fifth Circuit’s decision.”

As Rabitz lays out, during that period, the decision may be appealed by the Department of Labor—either en banc, meaning the Fifth Circuit would be called on to rehear the case, or potentially to the Supreme Court—during which time the Fifth Circuit’s decision may be stayed.

“Of course, should the Department of Labor in fact seek review by the Supreme Court, additional delays would be likely,” Rabitz says. “In addition, there is a pending appeal in the District of Columbia Court of Appeals that has been on hold pending the outcome of this Fifth Circuit case. While other circuits have upheld challenges concerning aspects of the Fiduciary Rule, most recently in the Tenth Circuit, given the sweeping nature of the decision of the Fifth Circuit, those cases can be distinguished and likely do not create a split.”

According to Rabtiz, the earlier cases should be regarded as having a more narrow focus than the issues addressed by the Fifth Circuit case—weighing against the likelihood of a Supreme Court decision here.

“Nevertheless, there are some competing views that may cause institutions doing business in circuits that have previously upheld challenges to aspects of the fiduciary rule to proceed with greater caution pending additional clarity,” Rabitz continues. “Rightly or wrongly—and at this stage, we believe more wrongly—these institutions may be concerned that the fiduciary rule will continue to be in effect in these jurisdictions, notwithstanding the Fifth Circuit’s decision. Assuming that the fiduciary rule is in fact extinguished on or about May 7, the original rule’s ‘five part’ test would be reinstated.”

Of course, Rabitz warns, returning to status quo ante may not be as simple as it first appears—at least in the short term.

“While many may point to President Trump’s pre-election rhetoric criticizing the fiduciary rule, and his February 3, 2017, directive to the Department of Labor to reconsider the fiduciary rule as an indication of what is to happen next, it is not preordained that the Department of Labor will not seek a rehearing, or perhaps even a challenge to the United States Supreme Court in light of the several other circuits that have upheld challenges related to the fiduciary rule,” Rabitz notes.

Still far from a certain outcome, Rabitz hedges that the Department of Labor’s acquiescence to the Fifth Circuit decision, should it occur, would clear the way for the Securities and Exchange Commission (SEC) to “adopt a more fulsome rule that would likely have the advantage of applying more broadly across retail accounts.”

“Such acquiescence would likely be more in line with the President’s previously stated objectives about regulatory overreach generally, and the fiduciary rule specifically,” he explains. “Nevertheless, were the Department of Labor to challenge the decision in defending a regulation of the predecessor Democratic administration, it would likely need to consider that a majority of the judges on the Fifth Circuit were Republican appointees. Another case pending before the District of Columbia U.S. Court of Appeals brought by the National Association of Fixed Annuities [NAFA] has been on temporary pause pending the outcome of this case in the Fifth Circuit. It would be interesting to see what happens if NAFA simply dropped its appeal given the Fifth Circuit’s broad ruling.”

Until these questions are addressed, the picture for the short term is likely to remain unclear, Rabitz concludes.