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5th Circuit Vacates DOL Fiduciary Rule

In a decision dated March 15, the Court of Appeals for the 5th Circuit vacated the "fiduciary advice rule" (the Fiduciary Rule) that became effective on June 9, 2017.

In rendering its decision, the 5th Circuit concluded that the Department of Labor (DOL) exceeded its authority by implementing the Fiduciary Rule and re-interpreting the definition of the term "investment advice fiduciary" under the Employee Retirement Income Security Act of 1974 (ERISA). (Please see Katten's June 6, 2017 advisory for additional information.) The decision only applies to courts within the 5th Circuit, and is at odds with other federal court cases, which have largely upheld the Fiduciary Rule. Last week the Court of Appeals for the 10th Circuit upheld the Fiduciary Rule as applied to the sale of annuities in the insurance industry, and another similar case remains before the Court of Appeals for the DC Circuit.

In a 2–1 split decision, the court determined that the Fiduciary Rule was inconsistent with both the historical meaning of the term "fiduciary" and the legislative intent of Congress set forth in ERISA. The court found that the meaning of the term "fiduciary" historically involved a relationship of trust and confidence, which justified a beneficiary's expectation of honesty and loyalty, and concluded that the DOL failed to take account of this essential characteristic in fashioning a test to determine fiduciary status. The court observed in this regard that at the time of the enactment of ERISA, the DOL itself noted that a broker-dealer's receipt of fees in connection with rendering investment advice would only create a "fiduciary" relationship if the broker-dealer provided individualized investment advice on a regular basis pursuant to a mutual agreement with their client—which was the test under the DOL regulations that was modified by the Fiduciary Rule.

The court also found that while ERISA plan fiduciaries are subject to the common law duties of loyalty and prudence, fiduciaries to individual retirement accounts (IRAs) that are not subject to ERISA, but are subject to the Internal Revenue Code, are not subject to such duties. The court, therefore, found that the DOL exceeded its statutory authority by imposing a "best interest" standard on advisers to IRAs in the same manner as apply to ERISA plan fiduciaries.

Whether the decision of the 5th Circuit is the death knell of the Fiduciary Rule will be determined over the coming months. While it appears unlikely that the DOL will appeal the decision to the US Supreme Court, it is possible that the DOL will seek review by the entire bench of judges of the 5th Circuit (in what is referred to as an en banc hearing). It is also possible that an outside industry group (such as the AARP) will seek to intervene and appeal the decision.

It has been reported that in response to the decision of the 5th Circuit, the DOL issued a statement indicating that it would not enforce the Fiduciary Rule pending further review.

©2020 Katten Muchin Rosenman LLP


About this Author

 Gary W. Howell, Katten Muchin Law Firm, Financial Institutions Lawyer

Gary W. Howell focuses his practice in Employee Retirement Income Security Act (ERISA) fiduciary matters, tax-qualified retirement plans and ERISA litigation. A significant portion of Gary’s practice involves advising plans and investment managers on compliance with ERISA in managing plan assets. In this area, he provides advice on fee structures, fiduciary status, identification of plan assets, prohibited transactions and fiduciary duty. Gary has obtained prohibited transaction exemptions and advisory opinions under ERISA from the US Department of Labor. He works closely with other...

Austin S. Lilling, Katten New York, nonqualified deferred compensation attorney, welfare plans lawyer

Austin S. Lilling focuses his practice on issues relating to executive compensation arrangements and employee benefit plans, including defined benefit pensions, 401(k)s, nonqualified deferred compensation, welfare plans, executive employment agreements, severance agreements, and retention and change in control arrangements. He deals largely with private equity and hedge funds and the compensation arrangements established by them. Austin has experience in designing and negotiating compensation arrangements, both for senior executives and employers, including employment agreements, severance agreements, change in control agreements, and equity and phantom equity compensation arrangements. He also has significant experience handling compensation matters in a transactional setting, including as they relate to private and public mergers and acquisitions, financial restructurings, and investment fund acquisitions and dispositions.

Special Counsel

Gabriel Marinaro serves as special counsel in the Employee Benefits and Executive Compensation group. His practice focuses on all aspects of employee benefits and executive compensation. He regularly counsels publicly traded and privately held companies, tax-exempt organizations, and governmental entities on a variety of employee benefits and executive compensation matters.

Gabe regularly advises both employers and executives on a wide range of executive compensation matters, including drafting employment agreements, equity compensation...

Robert Stone, Katten Law Firm, Employee Benefits Attorney

Robert Stone is a partner in Katten's Employee Benefits and Executive Compensation practice. Robert advises clients on the investment and management of benefit plan assets, including the fiduciary standards and prohibited transaction rules of ERISA. He regularly advises hedge fund and private equity clients investing on behalf of benefit plan investors and compliance with the ERISA "plan asset" regulations. He also has significant experience advising asset managers and broker-dealers on a broad range of securities and financial products offered to US pensions. Robert...