Fifth Circuit Vacates DOL Fiduciary Rule

It was the Ides of March for the Obama Administration's "fiduciary duty rule" that sought to remake much of nation's financial markets by back-door regulation of anyone dealing with IRA investors. The US Fifth Circuit vacated the regulation entirely in a stinging rebuke by Judges Edith Jones and Joy Clement; Chief Judge Carl Stewart dissented.

The Court held that the "novel assertion of DOL's power," Op. at 7, "fundamentally transforms over fifty years of settled and hitherto legal practices in a large swath of the financial services and insurance industries…." Op. at 3.

"The fiduciary rule conflicts with the text of 29 U.S.C. Sec. 1002(21)(A)(ii); 26 U.S.C. Sec. 4975(e)(3)(B)" because it embraces all compensated investment advice and not the traditional fee-based investment advisory relationship understood at the time of its enactment and subsequent law and regulation until this one. Op. § III.A at 12-31. "The DOL interpretation, in sum, attempts to rewrite the law that is the sole source of its authority. This it cannot do." Op. at 20.

The Court refused any Chevron deference, discussing at least seven ways in which DOL's interpretation is not "reasonable." "To begin with, DOL knew, and continues to concede, its new definition encompassed actors and transactions that the Department 'does not believe Congress intended to cover as fiduciary.' DOL had to create exemptions … to blunt the overinclusiveness of the new definition. Were it not for DOL's ahistorical and strained interpretation of 'fiduciary,' there would be no rationale for the BICE exemptions." Op. at 35. Others included inconsistency in the large-institution "seller's carve out": "Only DOL's fiat supports treating smaller-scale sales pitches, those not carved out as if the counterparty is acting as an impartial or trusted adviser. Illogic and internal inconsistency are characteristic of arbitrary and unreasonable agency action." Op. at 36. And the BICE violates the separation of powers, because "only Congress may create privately enforceable rights, ands agencies are empowered only to enforce the rights Congress creates." Op. at 39.

The Court's Opinion even took a swipe at Obamacare: "Finally, with unintentional irony, DOL pledged to alleviate the regulated parties' concerns about 'compliance and interpretive issues' following this 'issuance of highly technical or significant guidance' by drawing attention to its 'broad assistance for regulated parties on the Affordable Care Act regulations.'" Op. at 7

The opinion in Chamber of Commerce of the United States of America v. United States Dept. of Labor, No. 17-10238 (5th Cir. March 15, 2018) is here.

Thomas K. Potter, III ( is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 32 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2018 by Thomas K. Potter, III (all rights reserved).

Posted in: Fiduciary Rule
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