How bad will the fallout be from the Fifth Circuit Court of Appeals decision to vacate the U.S. Department of Labor’s fiduciary rule?
That will depend greatly on what the DOL does next. The agency can ask the Fifth Circuit to rehear the case or it can seek permission to appeal the decision to the Supreme Court. While there is a growing contingent that believes or hopes the DOL will let the rule die, attorneys at Drinker Biddle said in a legal brief today that the fate of the rule isn’t certain and it is premature to count the DOL out just yet.
“We believe there is a fair chance that the DOL will seek to have the decision overruled even as [it] continues its regulatory process to review and likely amend the rule,” Drinker Biddle wrote.
Such legal processes could stretch out for a year or more with legal stays.
If that happens, said Drinker Biddle, “we think the DOL will propose a new regulation and exemptions during that time, which will start an entirely new process.”
The court’s ruling to vacate the entirety of the DOL rule applies nationwide, though the rule will not formally be vacated until May 7, 2018, at the earliest. The DOL has 45 days from the entry of the judgment to request that all the Fifth Circuit judges rehear the case.
It’s worth noting that the dissenting judge was the chief judge of the court.
If the DOL decides to let the fiduciary rule die—at least in its present form—that means the fiduciary landscape for firms that provide advice to qualified retirement accounts and IRAs reverts to pre-2016 prohibited transaction exemptions and the definition of fiduciary advice that the DOL adopted in 1975.
“If the DOL doesn’t take additional steps, we revert to the old ‘five-part’ fiduciary advice definition and the pre-2016 prohibited transaction exemptions,” Drinker Biddle said. “The best interest and other impartial conduct standards will go away.”
Under the 1975 definition, fiduciary advice must be 1) individualized, 2) regularly provided, 3) related to securities or other property, and 4) subject to mutual understanding that the advice will be 5) a primary basis for the client’s decision-making.