Here’s the latest article from Adam Bergman that first appeared on Forbes.com –
On March 15, 2018, the Fifth Circuit Court of Appeals vacated the Department of Labor’s (DOL) fiduciary rule in a split decision, overturning a Dallas district court that was unwavering in its support of the rule.
By a 2-1 vote, the appellate judge held that the DOL exceeded its statutory authority under retirement law — the Employee Retirement Income Security Act (ERISA) — in promulgating the measure.
The Fiduciary Rule is a package of seven different rules that broadly reinterpret the term “investment advice fiduciary” and redefine exemptions to provisions concerning fiduciaries that appear under ERISA. The stated purpose of the new rules is to regulate in an entirely new way hundreds of thousands of financial service providers and insurance companies in the trillion dollar markets for ERISA plans and individual retirement accounts (IRAs). The business groups’ challenge proceeded on multiple grounds, including the DOL’s overreaching to regulate services and providers beyond its authority.
Due to the increased popularity of IRAs, the DOL was concerned that the lack the sophistication and understanding of the financial marketplace by individuals may lead them to engage in transactions not in their best interests because advisers, like brokers, dealers and insurance professionals, who sell products to them, have “conflicts of interest.”
The DOL concluded that the regulation of those providing investment options and services to IRA holders is insufficient. Beginning in 2010, DOL set out to fill the perceived gap. The result, announced in April 2016, was an overhaul of the investment advice fiduciary definition, together with amendments to six existing exemptions and two new exemptions to the prohibited transaction provision in both ERISA and the Code (collectively, as previously noted, the Fiduciary Rule).
The Fiduciary rule requires that brokers act in the best interests of their clients in retirement accounts. However, the appeals court held that the DOL overstepped its regulatory authority over IRAs as it lacked direct regulatory authority over IRA and “impermissibly bootstrapped what should have been safe harbor criteria into ‘backdoor regulation.’” As the court stated, “the DOL contends that legislation pertaining to the SEC does not detract from its authority to regulate ‘fiduciaries’ to IRA investors, but we are unconvinced.”
On June 9, 2017, the Department of Labor’s final rule meaningfully expanded when a person is deemed to be treated as a fiduciary under ERISA and the Internal Revenue Code as a result of providing investment advice. Under the Fiduciary rules, the rule required all financial advisers working with retirement investments to act in their clients’ best interests—an overly broad directive that has thrown the financial industry into confusion. The DOL rule, however, contained a “best interest contract” (BIC) prohibited transaction exemption (PTE), which would allow otherwise so-called “conflicted compensation” to be paid if the terms of the BIC exemption were met. Though, satisfying the BIC exemption has proven difficult for many IRA investors.
The new Fiduciary rules were designed to offer retail IRA investors a higher level of financial advisory services. However, the Appeals Court in its opinion rules that the DOL overstepped its authority in extending the reach of Fiduciary rules to IRAs. The Appeals court was clear that in order to expand the scope of DOL regulation in vast and novel ways is valid only if it is authorized by ERISA. The Appeals court relied on conventional standards of statutory interpretation and authoritative Supreme Court decisions to decide whether the statute was sufficiently broad to include the Fiduciary Rule.
The appeals court concluded that the DOL did not have the authority to extend the application of the Fiduciary rule to IRAs. The court stated, “perceived ‘need’ does not empower DOL to craft de facto statutory amendments or to act beyond its expressly defined authority.” The court further held, “The DOL interpretation, in sum, attempts to rewrite the law that is the sole source of its authority. This it cannot do.”
The lawsuit was brought by several industry groups that oppose the rule, including the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Institute. In 2017, a Dallas district court upheld the DOL rule. On March 15, 2018, the industry conclusively won in their appeal.
The DOL rule, which was circulated during the Obama administration, has been partially applied while the remaining provisions are under a review mandated by President Donald Trump. The Appeals Court ruling has left the future of the Fiduciary Rule somewhat unclear, however, it could very well mean the end of the road for the Obama Fiduciary Rule.