Law360 (March 16, 2018) -- A Fifth Circuit ruling vacating the U.S. Department of Labor’s fiduciary rule for retirement account advisers has created confusion across a broad swath of the U.S. investment landscape that will only be resolved once the DOL decides whether to drop the case or pursue it on appeal, legal experts said Friday.
A split Fifth Circuit panel on Thursday jettisoned the Obama-era rulein its entirety, with the majority finding in favor of the U.S. Chamber of Commerce and other business groups that the agency overstepped its authority and that its redefinition of "fiduciary" was unreasonable.
Thursday’s ruling conflicts with a narrower Tenth Circuit opinionhanded down earlier this week, which affirmed a decision upholding the rule related specifically to fixed indexed annuity sales, and both legal analysts and investor advocates say swift action by the DOL will help quell uncertainty raised by the rift.
“The Fifth Circuit’s decision to vacate the DOL’s fiduciary rule in its entirety creates a new round of uncertainty in the ongoing saga of the rule,” said Joshua Lichtenstein, a tax and benefits partner at Ropes & Gray LLP. “While the government decides whether to request an en banc review of the ruling, appeal the case to the Supreme Court or take no action, financial institutions are forced to decide how to react, especially if part of their operations is located in the Fifth Circuit.”
A DOL spokesman referred questions to the Department of Justice, which represented the DOL in court. A DOJ spokeswoman said in an email to Law360, “We are considering our next steps.”
Legal experts said it’s difficult to predict which direction the government will go.
Kevin L. Walsh, an attorney with the Groom Law Group, said there are essentially two “viable paths” for the DOL. The first, according to Walsh, is that the DOL chooses not to appeal.
“That path is the easy path,” Walsh said. “DOL essentially just gives up. They let the fiduciary rule die. They walk away, but they’ve also been told to walk away. They have a circuit court telling them to walk away.”
The other path, which “makes the most sense if DOL chooses to go forward,” according to Walsh, is that the DOL asks the Fifth Circuit to review the panel decision en banc. The DOL’s odds of winning before the en banc court, however, “aren’t great,” said Walsh.
Meanwhile, the DOL could also try to keep the Tenth Circuit case alive, seeking a broader ruling from that court that would create a wider split with the Fifth Circuit’s opinion that might help draw the attention of the Supreme Court if the DOL loses a potential en banc appeal.
“If the DOL wants to go scorched-earth here, their path forward is an en banc court in the Fifth Circuit, getting a decision out of the D.C. Circuit and then ultimately fighting it out in front of the Supreme Court,” Walsh said.
The fiduciary rule, which was approved in April 2016, requires financial professionals to act in their clients’ best interests when recommending investment products.
The Fifth Circuit’s majority decision, penned by U.S. Circuit Judge Edith Jones, said the DOL’s interpretation of an “investment advice fiduciary” relied too heavily on the “purely semantic construction” of one single provision in the Employee Retirement Income Security Act and Internal Revenue Code. The DOL had wrongly presumed that the provision was ambiguous, the majority said.
Advocacy group The Consumer Federation of America urged the DOL to seek an en banc appeal of the Fifth Circuit panel's opinion, calling it “wrongly decided” and “extreme by any measure.”
“Given how poorly reasoned this decision is, as well as the far-reaching implications it could have, we think it’s entirely appropriate for the Fifth Circuit to rehear the case en banc,” said CFA attorney Micah Hauptman. “The industry opponents went forum-shopping and finally found a court that was willing to buy in to their bogus arguments. This is a sad day for retirement savers.”
Christine Lazaro, executive vice president of the Public Investors Arbitration Bar Association, a non-profit group that represents investors in securities litigation and arbitration, also urged the DOL to appeal Thursday’s ruling, saying the fiduciary rule provides “much-needed protection to retirement investors, who lose billions to conflicted advice."
“We are hopeful that the DOL will do the right thing and fight the Fifth Circuit's latest ruling. It is an injustice to the investing public that the interests of the industry may trump the interests of investors who have tried to do the right thing and prepare for retirement,” Lazaro said.
Lichtenstein said the clashing Fifth and Tenth circuit rulings raise the possibility that the fiduciary rule might apply in some areas of the U.S. but not in others, creating “new risks and compliance challenges for institutions.”
“It also remains to be seen whether state regulators will move forward with new enforcement actions or create new rules in response to the new uncertainty that this decision brings,” Lichtenstein added.
The rule was originally set to take effect in April 2017 after surviving a series of court challenges from business and broker advocates. The DOL, however, delayed its implementation until June after President Donald Trump directed the agency to analyze whether it would reduce investor access to retirement advice, cause investors to pay higher prices for advice or lead to increased litigation.
Walsh said it’s unlikely the financial advisory industry will respond quickly to the Fifth Circuit’s ruling with major changes given new fiduciary rules expected soon from the U.S. Securities and Exchange Commission and recent activity on the issue by state securities regulators.
“I think any time you have a really big decision like this, you’re going to have a lot of short-term confusion,” Walsh said. “There is confusion now, but I think it will clear pretty quickly as it becomes clearer what path the DOL is going to pursue.”
The Chamber of Commerce groups are represented by Gibson Dunn & Crutcher LLP.
The DOL is represented in federal court by Galen N. Thorp of the U.S. Department of Justice.
The case is U.S. Chamber of Commerce et al. v. U.S. Department of Labor et al., case number 17-10238, in the U.S. Court of Appeals for the Fifth Circuit.
--Additional reporting by Dave Simpson. Editing by Philip Shea and Joe Phalon.
Correction: An earlier version of this story misidentified an appeals court. The error has been corrected.