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On March 15, 2018, the 5th U.S. Circuit Court of
Appeals in New Orleans voided the U.S. Department of Labor’s “fiduciary rule”
adopted by the Obama administration in 2016 as a means to limit and reduce
conflicts of interest among financial advisors providing retirement planning
advice. The majority found in the case, Chamber of Commerce of the United
States of America v. U.S. Department of Labor, 17-10238, that the Department
of Labor overstepped its authority and that the Obama-era rule’s redefinition
of “fiduciary” was unreasonable.
This lawsuit stems from a challenge the U.S. Chamber of
Commerce and eight other business and financial groups, including the Financial
Services Institute, the Financial Services Roundtable, the Insured Retirement
Institute and the Securities Industry and Financial Markets Association, brought
against the rule. This decision is a major victory for the business and
financial services industry groups that have fought to overturn the rule.
In the rule, the Labor Department revised the meaning of an
“investment-advice fiduciary” under the 1974 Employee Retirement Income
Security Act to include brokers and insurance agents. The change made them
subject to new limits on the types of services they could provide when advising
on individual retirement accounts and required brokers to put their clients’
best interests first when advising them about individual retirement accounts or
401(k) retirement plans.
The new regulation replaced a five-part test implemented in
1975 that determined whether a broker was a fiduciary. The judges criticized
the best-interest-contract exemption, a main component of the rule. The
best-interest-contract exemption allows brokers to receive compensation for
investment products they recommend, creating a potential conflict, as long as
they sign a legally binding agreement to act in a client's best interests.
The U.S. Chamber of Commerce and business groups argued that
“[n]ever before has the mere act of being a salesperson — of recommending the
purchase of your company’s product — been deemed an act that marks you as a
fiduciary”. While the Labor Department argued its rule was needed to protect retirees
and ensure they receive sound advice, the Court found that the rule’s new
definition of “investment advice fiduciary” did not conform with ERISA Titles I
and II.
Writing for the majority, Circuit Judge Edith Jones said the
Labor Department acted unreasonably, arbitrarily and capriciously in expanding
a 40-year-old definition of “investment advice fiduciary,” and did not deserve
the deference that courts often accord federal agencies." The majority
opinion criticized the best-interest-contract exemption because it "supplants
former exemptions with a web of duties and legal vulnerabilities."
Circuit Judge Jones wrote in the opinion for the majority
that the department “has made no secret of its intent to transform the
trillion-dollar market” for retirement investments and that it was “not hard to
spot regulatory abuse of power when an agency claims to discover in a
long-extant statute an unheralded power to regulate a significant portion of
the American economy.”
Chief Judge Carl Stewart was the sole dissenting judge. He
stated in his dissent that the Labor Department acted “well within the confines
set by Congress in implementing the challenged regulatory package.”
The appeal overturned a decision by the United States
District Court for the Northern District of Texas. The Department of Labor could
now ask the entire New Orleans-based appeals court to rehear the case, or
appeal to the U.S. Supreme Court. As it stands, this decision against the
Department of Labor is a major victory for the securities industry.