Important Decision – But Not the End of Drama (Yet)
On March 15, 2018, the United States Court of Appeals for the 5th Circuit vacated in its entirety the Department of Labor's revised investment advice fiduciary rule (the "Fiduciary Rule") under the Employee Retirement Income Security Act of 1974, as amended ("ERISA").1 This decision has the potential to have national applicability and finality on the Fiduciary Rule. Assuming there are no challenges to the decision or other adverse authority from other circuits for cases currently open and under appeal, it is likely that the "old" 1975 rule (the "Original Rule") will be reinstated. While there has been some discussion that other recent decisions in other circuits addressing the Fiduciary Rule may now result in a "split," no decision appears more sweeping or broad concerning the underlying legality of the Fiduciary Rule than the decision from the 5th Circuit. Moreover, because of the Constitutional nature of the decision, future Administrations—regardless of party—may have difficulty resurrecting the Fiduciary Rule or similar sweeping changes to the Original Rule absent Congressional action.
On March 16, the day after the decision was released, the Department of Labor announced that it was not enforcing any aspect of the Fiduciary Rule pending a review of the case. Previously, as mentioned in prior Stroock Special Bulletins, the Department of Labor had adopted a "good faith" compliance approach with respect to the Fiduciary Rule and certain of the accompanying exemptions, pending full compliance scheduled for July of 2019. Of course, the Department of Labor's position does not necessarily impact private litigants so long as the Fiduciary Rule continues to remain in effect.
As discussed further below, the 5th Circuit's actions are not necessarily the end of the story—at least not yet. And there are a number of additional considerations that clients and friends will continue to need to pay attention to as described in the next sections. The Department of Labor could challenge the decision, and there are other actions that could be taken that at a minimum would prolong the process of finality. With any such delay, already taxed financial services institutions trying to change business models and compliance approaches to meet the changes occasioned by the Fiduciary Rule may feel even more under the gun.
In addition, some institutions doing business in jurisdictions where other circuit courts have weighed in on prior challenges to the Fiduciary Rule may feel compelled—rightly or wrongly—to approach the 5th Circuit decision with caution. Needless to say, the Department of Labor's next steps will help to clarify the situation.
Fiduciary Rule Still Applicable—For Now. What Happens Next?
While the 5th Circuit has vacated the Fiduciary Rule, the rule is still technically in effect as the case continues to be under the jurisdiction of the 5th Circuit until it issues a "mandate" opening a limited period during which the Department of Labor can choose to contest the decision under applicable rules of procedure. The "mandate" would generally be expected to be issued several days following the decision, which opens a window for any such challenge that is expected to close by May 7, 2018 (45 days from the 5th Circuit's decision). During that period, the decision may be appealed by the Department of Labor (either en banc, or potentially to the Supreme Court) during which time the 5th Circuit's decision may be stayed. Of course, should the Department of Labor in fact seek review by the Supreme Court, additional delays would be likely. In addition, there is a pending appeal in the District of Columbia Court of Appeals that has been "on hold" pending the outcome of this 5th Circuit case. While other circuits have upheld challenges concerning aspects of the Fiduciary Rule, most recently in the 10th Circuit, given the sweeping nature of the decision of the 5th Circuit, those cases can be distinguished and likely do not create a "split." Those earlier cases in particular likely could be regarded as having a more narrow focus than the issues addressed by the 5th Circuit case. Nevertheless, there are some competing views that may cause institutions doing business in circuits that have previously upheld challenges to aspects of the Fiduciary Rule to proceed with greater caution pending additional clarity. Rightly or wrongly (and as of this writing, we believe more wrongly) these institutions may be concerned that the Fiduciary Rule will continue to be in effect in these jurisdictions, notwithstanding the 5th Circuit's decision.
Assuming that the Fiduciary Rule is in fact extinguished on or about May 7, the Original Rule's "five part" test would be reinstated. However, returning to status quo ante may not be as simple as it first appears—at least in the short term. Many legal and commercial challenges would likely remain.
Footnotes
1 The case may be accessed at http://www.ca5.uscourts.gov/opinions/pub/17/17-10238-CV0.pdf.
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