The Fifth Circuit Court of Appeals Vacates the DOL’s Fiduciary Advice Rule

June 21, 2018

Today the Fifth Circuit Court of Appeals issued its mandate vacating the U.S. Department of Labor’s fiduciary advice regulation and related prohibited transaction exemptions (the “Fiduciary Advice Rule”). The court’s ruling erases six years of rulemaking efforts by the U.S. Department of Labor (the “DOL”). The ruling restores the old “5 part test”; removes the amendments to class exemptions PTE 75-1, PTE 77-4, PTE 80-83, PTE 83-1, PTE 84-24 and PTE 86-128; and eliminates the “best interest contract” (“BIC”) and “principal transaction” class exemptions.

Starting today, private investment funds can again accept investments from IRAs and small plans that are not advised by professional advisers. If your fund’s subscription booklet incorporated a separate exhibit for “Additional Benefit Plan Representations with Respect to the U.S. Department of Labor Fiduciary Rules”, you can remove that exhibit from the package you provide to prospective investors. If your fund’s subscription booklet incorporated representations regarding the Fiduciary Advice Rule into the text, consult your primary Seward & Kissel attorney contact because certain of these representations are no longer necessary to accept an investment by an IRA or small plan in your fund. We suggest making changes to the offering documents to reflect the vacature of the Fiduciary Advice Rule in the normal course of your document updates.

We note that the Securities and Exchange Commission (the “SEC”) has proposed rules and interpretations that are designed to enhance the quality and transparency of investors’ relationships with investment adviser and broker-dealers. We believe that this SEC rulemaking will likely impact the course of further developments in the DOL’s consideration of, and actions in, the area of fiduciary advice rules and exemptions. Seward & Kissel will continue to monitor these developments and issue further Client Alerts reporting on significant developments as they occur.

If you are an investment manager that implemented procedures to comply with the BIC, principal transaction class exemption and/or the amendments to existing class exemptions, the Fifth Circuit’s vacature of the Fiduciary Advice Rule requires your immediate consideration. In order to comply with the BIC or other applicable prohibited transaction exemptions, investment managers were required to make specific representations to their plan and IRA clients. The disclosures and contractual obligations that were made to clients, absent further action on your part, remain outstanding, regardless of the change in law effected by the Fifth Circuit. If, in connection with the now revoked Fiduciary Advice Rule, you acknowledged that you were acting as a fiduciary or would comply with the “impartial conduct standard”, these representations could result in your continuing to serve as a fiduciary under the reinstated 5 part test or continuing to be contractually bound by the impartial conduct standard. Accordingly, we would recommend that investment managers in these situations contact your primary Seward & Kissel attorney contact to review the disclosures and commitments made and how these might differ from what is required under the current state of the law. In this regard, on May 7, 2018, the DOL issued Field Assistance Bulletin No. 2018-02, which continues its non-enforcement policy for investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted under the BIC or principal transaction exemption, despite the fact that those exemptions are now no longer in force. This non-enforcement policy will continue until “regulations or exemptions or other administrative guidance has been issued” by the DOL.


If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.