On March 15, 2018, the Fifth Circuit Court of Appeals struck down the U.S. Department of Labor’s fiduciary advice regulation and related prohibited transaction exemptions (the “Fiduciary Advice Rule”). The panel, with one dissent, found that the Fiduciary Advice Rule expanded the scope of investment advice beyond the ordinary usage of the term and thereby expanded the activities which create a fiduciary relationship with an ERISA plan or IRA to include customary arm’s-length interactions. The Court reasoned, in part, that the Labor Department’s new definition of “fiduciary” was inconsistent with the plain language of the statute and the common-law meaning of that term. The Court held that Department of Labor exceeded its authority in promulgating the Fiduciary Advice Rule and “vacated the Fiduciary Rule in toto”.

This is the latest development in the ongoing saga of the Fiduciary Advice Rule, which has been in a transition period until July 1, 2019 while the Department of Labor reconsiders the rule. One possible outcome of the Fifth Circuit’s decision, once final, is that the Fiduciary Advice Rule is invalid under Administrative Procedures Act (the “APA”) and that this effect is nationwide. However, there are many contingencies still at play:

• the Department of Labor has 45 days to petition for panel rehearing or for rehearing en banc by the Fifth Circuit Court of Appeals and 90 days to petition the Supreme Court for writ of certiorari;
• on March 13, 2018 the Tenth Circuit Court of Appeals addressing a more limited challenge to the Fiduciary Advice Rule, rejected that challenge and upheld that aspect of the Fiduciary Advice Rule finding it was not arbitrary or capricious. This may present a “circuit conflict” which could be resolved by the Supreme Court; and
• a separate challenge to the Fiduciary Advice Rule before the D.C. Circuit Court of Appeals is currently held in abeyance pending a joint status report to be filed by the parties within 10 days of the Fifth Circuit Court of Appeals’ decision, which could result in a circuit conflict and could provide insight as to the Department of Labor position on the Fiduciary Advice Rule going forward.

Given the significance of the Fiduciary Advice Rule and the number of possible outcomes, coupled with the current Administration’s opposition to the Fiduciary Advice Rule, it is impossible to predict if, or in what form, the Fiduciary Advice Rule will survive.

In this regard, we note that SEC Chairman Clayton has made developing a proposal for a uniform standard of conduct applicable to brokers and investment advisers a priority for the SEC, and in a speech yesterday Chairman Clayton, while not offering up a timetable for when the SEC could propose the new standard, said “I’m not sitting on this” and “the sooner, the better”.

Seward & Kissel will issue further Client Alerts reporting on significant developments as they occur.