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Fifth Circuit Vacates Fiduciary Rule

A three-judge panel of the Fifth Circuit Court of Appeals issued a ruling vacating the Department of Labor ("DOL") fiduciary rule, as well as two new related exemptions and related changes to certain relevant DOL prohibited transaction class exemptions.

In a split decision, the Court's majority found that the fiduciary rule is "unreasonable," and that the DOL acted beyond its authority in promulgating the fiduciary rule. The fiduciary rule was originally issued in April of 2016 and sets standards for determining who is a fiduciary of an employee benefit plan under ERISA by virtue of giving investment advice. The DOL also had issued with the fiduciary rule two new prohibited transaction exemptions – the Best Interest Contract Exemption ("BICE") and Principal Transaction Exemption – and made certain related changes to other existing exemptions. The fiduciary rule generally became applicable on June 9, 2017, but the DOL postponed the application of many conditions of the two new exemptions until July 2019 in order to re-examine the rule and exemptions as directed by the President.

Writing for the majority, Judge Edith Jones found that the DOL's expanded interpretation of an "investment advice fiduciary" was not authorized by ERISA. The Court also focused on the BICE, stating that it is "integral to retaining the rule," yet characterized it as "independently indefensible," which "dooms the entire rule."

Judge Carl E. Stewart, Chief Judge of the Fifth Circuit, dissented, asserting that the DOL "acted well within its regulatory authority" in expanding the definition of investment advice fiduciary.

The Court’s decision is not yet final and will not go into effect until the Court issues a mandate. The DOL has not yet indicated how it will proceed following the decision. Unless a rehearing is requested or a petition for a writ of certiorari filed, the earliest the decision would go into effect is early May.

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