The Labor Department won’t be enforcing the fiduciary rule—at least for now—after a federal appeals court in Louisiana vacated the rule, a department spokesman told Bloomberg Law March 16.
The U.S. Court of Appeals for the Fifth Circuit in a 2-1 decision late March 15 vacated the Obama-era rule that aims to regulate the advice given to retirement savers. Judges Edith H. Jones and Edith Brown Clement held that the Labor Department exceeded its regulatory authority by implementing the rule that includes a new definition of investment-advice fiduciary and redefining exemptions to provisions concerning fiduciaries that appear in the Employee Retirement Income Security Act.
“Pending further review, the Department will not be enforcing the 2016 Fiduciary Rule,” a spokesman told Bloomberg Law.
It’s helpful to the industry that the DOL is acknowledging that it covers the whole rule and has a nationwide impact, Kevin Walsh, an attorney with Groom Law Group who advises on fiduciary matters, told Bloomberg Law. It would also be helpful for the DOL to make clear that the rule is off the books and other parties can’t enforce it, Walsh added.
The DOL is recognizing the decision is “a pretty big loss,” but it doesn’t clarify what it will do next, Walsh said.
The fact that the DOL won’t enforce the rule “means nothing,” Peter Gulia, an independent fiduciary guidance, told Bloomberg Law March 16.
No one expected the DOL to provide the enforcement for the fiduciary rule because they don’t have the resources available, he added. However, many business have already adopted the best interest standard and that means that investors have a private right of action against those business, Gulia said.
The Fifth Circuit said in its decision that the DOL’s interpretation of an “investment advice fiduciary” relies too narrowly on a purely semantic interpretation of one isolated ERISA provision and wrongly assumes that the provision is ambiguous.
Nothing in ERISA allows the DOL to stretch its power to regulate employment-based retirement plans to include supervising individual retirement account financial service providers, the court said.
The rule extends regulation to any financial transaction involving an ERISA or IRA plan in which compensation for advice is received—an action that the DOL didn’t do in the past. That it took the DOL 40 years to “discover its novel interpretation further highlights the rule’s unreasonableness,” the judges said.