On May 7, 2018, the U.S. Department of Labor (“DOL”)’s controversial “Fiduciary Rule” – long the bane of the ERISA financial services industry – was taken off life support, following a lengthy series of blows. The latest, and most lethal, setback came when, on March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit, in a 2 – 1 decision, invalidated most of the Fiduciary Rule. The court held that the DOL exceeded its Constitutional authority when it attempted to expand the ERISA definition of “investment advice fiduciary.”
The DOL could have asked the full appellate court to hear the case, but let the April 30th deadline pass – and the court had denied motions by three states and the AARP to intervene in the case. These actions allowed the three-judge panel decision to go into effect on May 7th. And although the U.S. Supreme Court could theoretically decide to take up the case, experts consider this to be unlikely.
From a Historical Perspective. In 2017, the DOL issued long-anticipated final regulations that, among other things, expanded the definition of “investment advice fiduciary” under ERISA. This was done to help ensure that investment advisors act in the best interests of their clients – generally, ERISA retirement plan participants and their beneficiaries – by putting their clients’ interests above their own. This new Fiduciary Rule was controversial from the start, being strongly opposed by the financial services community generally, and ERISA plan investment advisors in particular – although championed by retiree advocates, such as the AARP.
Trump Administration Slams on the Brakes. The Fiduciary Rule was originally scheduled to be phased in between April 2017 and January of 2018. When, in 2017, the Trump administration issued an administrative order mandating that the DOL “review” the rule, the DOL responded, in a series of moves, by extending the phase-in period to July 2019.
Temporary Phase-In Period Rules. During the extended phase-in period, fiduciary advisers were permitted to give investment advice that adheres to “impartial conduct standards.” These fiduciary standards require ERISA investment advisers to:
- Adhere to a best interest standard when making investment recommendations;
- Charge no more than reasonable compensation for their services; and
- Refrain from making misleading statements.
Temporary Phase-In Rules Now the Standard? On May 7, 2018, the Employee Benefits Security Administration (“EBSA”) issued a new temporary enforcement policy, stating that, following the Fifth Circuit’s decision, financial institutions may continue to rely on the temporary standards enumerated above. EBSA guidance can be found here.
With the invalidation of the regulations establishing the Fiduciary Rule, some might argue that the “five-part” standard in effect prior to the 2017 issuance of those regulations should be revived. Although a murky issue, it would appear as if the DOL is not taking this position.