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.

So what should firms and advisors do now while awaiting the DOL’s next legal move? For the short term, until May 7 at least, the rule remains in effect. “Therefore, firms must still comply to avoid possible regulatory action or private litigation,” Drinker Biddle said. “If the DOL seeks to overturn the Fifth Circuit ruling, we think a stay of the ruling is likely, which means that firms would need to continue complying with the fiduciary rule until a final judgment is issued.”

To the extent that firms have adopted internal policies or opened communications with clients that implement the rule, they will need to continue complying with their policies and procedures and communications made to clients until the fate of the law is certain and they formally begin to make changes.

“Otherwise, they could face regulatory problems with the SEC, Finra or state regulators (similar to the Massachusetts complaint against Scottrade),” Drinker Biddle said.

Even if the Fifth Circuit decision becomes effective on May 7 and the DOL rule is vacated, there is another possible trap for the unwary, said the law firm:

The general rule seems to be that when a rule is “vacated,” it means the rule was never valid to begin with. This may be good news to firms that became fiduciaries as of June 9, 2017.

But it’s not such good news for firms and advisors that were fiduciaries before that (and continue to be). If they have received “conflicted compensation” (for example, revenue sharing or other variable compensation) in reliance on the best-interest contract exemption (BICE) since June 9, they’ll have a problem, Drinker Biddle said.

That is because BICE would also be “vacated” effective on that date, so they would no longer have an exemption for the conflicted compensation they received.

Broker-dealers may need to find a way to unwind some of their conflicted compensation deals and practices.

The Fifth Circuit ruled that the DOL’s fiduciary advice definition is inconsistent with ERISA’s definition and that the DOL acted “arbitrarily and capriciously” by failing to follow the Administrative Procedure Act.

As a result, the court decided to get rid of the entire rule in toto.

The Fifth Circuit decision, however, could prompt states to adopt their own fiduciary rules, Drinker Biddle said. Connecticut, Nevada, New Jersey and New York have already proposed or passed their own regulations to require financial advisors to disclose conflicts of interest to clients or meet standards that require them to put clients’ best interests first.