The US Court of Appeals for the Fifth Circuit [official website] on Thursday vacated [opinion, PDF] the Department of Labor [official website] Fiduciary Rule by a vote of 2-1.
The Fiduciary Rule reinterprets the term “investment advice fiduciary” and redefines exemptions to provisions concerning fiduciaries that appear in the Employee Retirement Income Security Act of 1974 (ERISA). The rule was challenged by business groups based on
(a) the Rule’s inconsistency with the governing statutes, (b) DOL’s overreaching to regulate services and providers beyond its authority, (c) DOL’s imposition of legally unauthorized contract terms to enforce the new regulations, (d) First Amendment violations, and (e) the Rule’s arbitrary and capricious treatment of variable and fixed indexed annuities
The court determined that the Fiduciary Rule “conflicts with the plain text of the ‘investment advice fiduciary’ provision … and is inconsistent with the entirety of ERISA’s ‘fiduciary definition.” Therefore, the court found that the DOL lacked statutory authority. Even if it is assumed that the term is ambiguous, the court still found that the Fiduciary Rule provided an unreasonable interpretation under the Chevron test and was an “arbitrary and capricious exercise of administrative power.
On Tuesday, the Fiduciary Rule was upheld [JURIST report] by the US Court of Appeals for the Tenth Circuit based on a separate challenge. The Tenth Circuit challenge was based on the Best Interest Contract Exemption (BICE). The BICE, while allowing fiduciaries to receive compensation from annuities sold, places a standard on brokers and advisers, requiring them to select products that are in the customers’ best interests and sign a legal contract. However, the Fifth Circuit found that the current challenge could not be severed from the BICE provisions. Therefore, the entire rule was vacated.