Fifth Circuit Vacates DOL Fiduciary Rule ‘In Toto’

March 20, 2018

What does this mean, and what should financial institutions do now?

In a 2-1 decision,[1] the US Court of Appeals for the Fifth Circuit struck down the US Department of Labor’s (DOL) fiduciary rule, deciding in favor of a number of leading financial services industry trade associations, including the US Chamber of Commerce, the Financial Services Institute, the Financial Services Roundtable, the Insured Retirement Institute, and the Securities Industry and Financial Markets Association (SIFMA). In reaching its opinion, the court found that the DOL exceeded its statutory authority in crafting a rule that was overly broad and inconsistent with the Employee Retirement Income Security Act’s (ERISA’s) statutory text and issuing exemptions as a means of imposing expansive duties on service providers to individual retirement accounts (IRAs) and other non-ERISA plans that Congress did not contemplate.

We examine below the impact of this decision and provide suggestions on what financial institutions should be thinking about.

  • What happened? The Fifth Circuit vacated the fiduciary rule “in toto.”

    • This means that, absent an appeal, the entire rule package will be invalidated, including the broadened definition of fiduciary investment advice, the Best Interest Contract Exemption, the Principal Transaction Exemption, and the amendments to PTE 84-24 (for annuities) and PTE 86-128 (for affiliated brokerage transactions), among other exemptions.

    • This opinion would nullify the rule for everyone nationwide, not just the parties who challenged it in the litigation.

  • Can the DOL and US Department of Justice (DOJ) appeal this decision? The DOL and DOJ could file a motion for rehearing or rehearing en banc with the Fifth Circuit, or a petition for writ of certiorari to the US Supreme Court. Motions for rehearing must generally be filed by April 30 (absent an extension), and petitions for writ of certiorari must be filed by June 13 (or 90 days after the Fifth Circuit denies a petition for rehearing).

  • When will the court’s order to vacate the rule be official? Assuming there are no challenges to the decision, the court’s order to vacate the rule will likely be effective on May 7.

    • The court’s order to vacate the rule is effective on the date the court issues its “mandate.”

    • The court has broad authority as to when a mandate is issued, but typically this is within seven days after the time to file a request for post-judgment relief elapses.

    • According to the court’s docket, the mandate issuance date is currently scheduled for May 7, 2018. Accordingly, May 7 is likely the date the fiduciary rule will be vacated if there is no challenge or request for extension.

  • If there is a challenge to the decision, then the order to vacate the rule could be stayed until the appeal is resolved.

    • What should financial institutions do now? The court’s decision is a win for those who have long advocated that the fiduciary rule is overly broad and challenging to implement, limits access to investment advice and services, and hampers the ability to provide comprehensive, holistic investment advice and financial services to retail investors. Nonetheless, for the reasons indicated above, the repeal of the fiduciary rule package is not yet effective.

      We also anticipate potential regulatory action on a harmonized standard of conduct by the US Securities and Exchange Commission (SEC) in the near future, as well as continued efforts to issue “fiduciary” standards of care in the states. As such, we suggest that financial institutions to take a measured approach as they consider potential changes to their businesses in light of the possible repeal of the rule and its exemptions.

      Near-term action items include:

    • Take a fresh look at your service offerings and consider where you may or may not be a “fiduciary” under the old/new again “five-part” test. When the fiduciary rule is finally and officially vacated, we will revert to the prior definition that determined whether investment advice was “fiduciary” based on whether the advice is “individualized,” provided on a “regular basis,” pursuant to a “mutual understanding,” and was intended to serve as a “primary basis” for an investment decision. This definition is substantially narrower than the definition the Fifth Circuit struck down. As such, firms will want to consider where they will be acting as a fiduciary under this test, and where they will not—taking into consideration, as the Fifth Circuit repeatedly noted in its opinion, that the hallmark of fiduciary status is a relationship of “trust and confidence” with the investor. We note that as the concepts of “fiduciary” and “best interest” standards of care have been discussed and considered throughout the entire fiduciary rule-making and implementation processes and industry practices have developed, a reconsideration of the how to apply the five-part test may be warranted. Areas to consider include
      • rollover advice and education;
      • brokerage vs. non-discretionary investment advisory services;
      • principal trades/IPOs;
      • investment education and asset allocation models; and
      • private fund sales to IRAs.

    • Review policies and procedures adopted for the fiduciary rule. Identify and review policies and procedures adopted in connection with the rule, including policies regarding
      • compliance with “fiduciary,” “best interest,” and “impartial conduct” standards, specifically and the references to the DOL fiduciary rule;
      • financial professional compensation, including recruiting bonuses and incentives;
      • investment product and service recommendations; and
      • rollovers.

    Consider whether any changes would be appropriate, noting that other regulators, such as the SEC, the Financial Industry Regulatory Authority (FINRA), federal bank regulators, and state agencies may have or may assert jurisdiction to enforce these policies even if no longer required under ERISA.

    • Review customer agreements and disclosures. Consider whether it would be appropriate to
      • clarify (or limit) the services you offer, and your relationship with your customers and clients, particularly with respect to fiduciary status; and
      • consider representations provided in connection with the exception for advice to sophisticated independent fiduciaries. These may continue to provide helpful clarity as to your relationships with these clients and, where appropriate, to others who may not previously have qualified for the exception.

    • Reliance on the Best Interest Contract (BIC) and Principal Transaction Exemptions. Note that when the rule package is repealed, the BIC and Principal Transaction Exemptions will be repealed as well. Thus, to the extent a financial institution or professional is acting as a fiduciary after the effective date of the repeal, these exemptions will no longer be available for relief. As such, we recommend reviewing your offerings to determine whether you are currently relying on the BIC Exemption or Principal Transaction Exemption, whether you may be acting as a fiduciary after the repeal date, and whether reliance on a different exemption or approach may be required.

    • Consider potentially expanded availability of prior exemptions. The court’s decision also affects the exemptions that the DOL amended to restrict the availability of relief and to add the impartial conduct standards. Among other changes, once the decision is effective:
      • PTE 86-128 will generally revert to its prior iteration, meaning that it will again be available for both discretionary and non-discretionary advice to IRAs, without the new requirements to provide initial, annual, and other disclosures to IRA clients
      • PTE 84-24 will again be available to cover a broad range of annuity sales and transactions
      • The impartial conduct standards will be stricken from other exemptions like PTE 77-4 for affiliated mutual fund transactions


    If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

    Lisa H. Barton
    Michael D. Blanchard
    T. Peter R. Pound

    Marla J. Kreindler
    Michael M. Philipp
    Julie K. Stapel

    New York
    Craig A. Bitman 
    Christine M. Lombardo

    Robert L. Abramowitz
    David B. Zelikoff

    John G. Ferreira
    R. Randall Tracht

    Washington, DC
    Rosina Barker
    Lindsay B. Jackson
    Michael Kenneally
    Daniel R. Kleinman
    Christina Payne-Tsoupros
    Michael B. Richman
    Steven W. Stone

    [1] Chamber of Commerce of the USA, et al. v. US Dep’t of Labor, et al., No. 17-10238, slip op. 46 (5th Cir. Mar. 15, 2018).