On May 22, 2017, Department of Labor (DOL) Secretary Alexander Acosta announced in an op-ed in the Wall Street Journal that the DOL would not issue another delay of the “fiduciary rule,” and that it was set to generally become effective on June 9, 2017. As we now know, certain provisions of the fiduciary rule went into effect on that date, with others being delayed until July 1, 2019. However, the fiduciary rule remains under attack in the courts. Two notable appellate court decisions were issued within days of one another, and both were decided by three judge panels. One case upheld narrow provisions of the fiduciary rule, and the other effectively completely invalidated the rule. Shortly after the second decision, the Department of Labor announced that it would not enforce the fiduciary rule “pending further review.”

On March 13, 2018, in Market Synergy Group, Inc. v. U.S. Department of Labor, the Tenth Circuit issued a narrow ruling, upholding the DOL’s position that fixed indexed annuities were to be excluded from Prohibited Transaction Exemption 84-24 and instead fell under the Best Interest Contract Exemption (“BICE”). Before the rule, insurance agents selling fixed indexed annuities received a commission for selling the annuity. The classification of these insurance agents as ERISA fiduciaries would have essentially barred them from being able to receive a commission; however, they were exempt from that prohibition under Prohibited Transaction Exempt 84-24. The Plaintiff’s argued that the BICE was unworkable due to the commission-based distribution arrangements traditionally used for fixed indexed annuities, nonetheless, the court was not convinced. The Tenth Circuit found that the DOL provided sufficient notice regarding the treatment of fixed indexed annuities, and the DOL’s decision on how to treat those annuities was not “arbitrary and capricious.”

Two days later, on March 15, 2018, in Chamber of Commerce of the United States of America v. U.S. Department of Labor, the Fifth Circuit vacated the fiduciary rule in its entirety, with the three judge panel ruling 2-1. Notably, the Fifth Circuit found that the expansion of the definition of fiduciary was beyond the scope of the DOL’s authority, because the meaning of the term in ERISA was unambiguous, and did not include the type of sales-related activities that are fiduciary acts under the new rule. Imposing fiduciary obligations on people engaged in those activities would thus require a Congressional amendment to the statute.

The Fifth Circuit further found that the fiduciary rule violated the Administrative Procedure Act because it was premised on an unreasonable interpretation of ERISA.  The Court based this holding on a number of findings, including the following:

  • The rule ignores the fact that ERISA specifically distinguishes the DOL’s authority over employer-sponsored plans and individual retirement accounts.
  • ERISA generally prohibits fiduciaries from selling financial products to plans.
  • The BICE extends ERISA statutory duties to brokers and insurance representatives who sell to individual retirement account plans.
  • The BICE provisions regarding lawsuits violate the separation of powers under the United States Constitution.
  • The DOL “outflanked” two Congressional initiatives under Dodd-Frank relating to oversight of broker-dealers handling individual retirement account investments and fixed indexed annuities.
  • The fiduciary rule is a creature of a long-outstanding statute and has great power over the nation’s economy.

While the Fifth Circuit ruling is binding only on federal courts in Texas, Mississippi and Louisiana,  the DOL has avoided potential disputes over the validity of the rule elsewhere by stating that it would not be enforcing the rule pending further review.

The DOL must seek review of the Fifth Circuit’s decision by April 30. The DOL may also request, by June 13th, that the United States Supreme Court hear its appeal of the Fifth Circuit’s decision.  While many practitioners have spent significant resources in an attempt to come into compliance with the fiduciary rule, it is still too early to determine whether these efforts were futile. Practitioners should remain aware of the status of the rule in the courts, and be ready to adapt their efforts as needed.