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5th Circuit Buries Fiduciary Rule

John Nownes,

July 03, 2018

Retiring Your Way


What Was the Decision?

The 5th Circuit Court of Appeals, on March 15, 2018, ruled against the Department of Labor (“DOL”), striking down the recently-enacted fiduciary rule and related prohibited transaction exemptions (“PTE”), including the “best interest contract exemption.”

The fiduciary rule and related PTEs became effective June 9, 2017. The rule expanded the definition of “fiduciary” under ERISA in connection with providing investment advice to retirement plan participants and IRA owners. The best interest contract exemption was intended to protect participants from receiving conflicted investment advice.

After the court loss, the DOL could have taken the following action. First, it could have appealed the case to the United States Supreme Court. Second, the DOL could have requested the case to be reheard by all of the 5th Circuit judges. Instead, the DOL did nothing, choosing not to appeal the case or seek a rehearing.

Aware the DOL was unlikely to take action, the States of California, New York, and Oregon, as well as AARP, sought to intervene in the case, requesting a rehearing before all of the 5th Circuit judges. The 5th Circuit denied the rehearing requests.

Finally, on June 21, 2018, the 5th Circuit issued its mandate, formally vacating the fiduciary rule, best interest contract exemption, and other related PTEs.

What Happens Now?

The 5th Circuit’s decision raises this very question. The immediate result is that the fiduciary rule and PTEs are no longer effective. This means the investment advice regulation – issued in 1975 – has been given new life and is the controlling regulation. Long-term, the DOL could propose a new regulation, work with the Securities and Exchange Commission to develop a unified investment advice standard, or do nothing and allow the 1975 rule to remain in effect. At this point, it’s unclear what, if any, action the DOL will take.

From Union Bank’s perspective, however, the 5th Circuit decision will not impact the services it provides to plans or participants. At the plan level, Union Bank will continue to acknowledge its fiduciary status when acting as a trustee or as an ERISA 3(38) investment manager (when applicable) responsible for selecting the plan’s investment menu. Union Bank, acting in a fiduciary capacity, therefore, has always acted with the highest duty of care and loyalty known to the law. At the participant level, Union Bank will continue to educate participants to help them make informed investment decisions. Providing education, rather than advice, ensures Union Bank will provide “conflict-free” information to your participants.

For more information about how the 5th Circuit’s actions impact on Union Bank’s services to your plan, please contact your Union Bank Relationship Manager.

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This blog article is for informational purposes only, and is not an advertisement for a product or service. The accuracy and completeness is not guaranteed and does not constitute legal or tax advice. Please consult with your own tax, legal, and financial advisors.