Fifth Circuit Sides With Business Lobby Groups in DOL Fiduciary Rule Fight

(CN) – The Fifth Circuit vacated the Department of Labor’s fiduciary rule in a divided decision, dealing a major blow to the Obama administration’s efforts to increase protections for investors.

In a 2-1 decision issued handed down on March 15, the Dallas-based federal appeals court ruled that the Labor Department exceeded its authority under the Employee Retirement Income Security Act in adopting the new rule, which requires brokers to act in the best interests of their clients in retirement accounts.

Various business groups brought the challenge, led by the U.S. Chamber of Commerce, the American Council of Life Insurers, and the Indexed Annuity Leadership Council.

Under ERISA, a fiduciary may not receive a commission from a third-party for recommending a particular investment to a client.

The new fiduciary rule was intended to protect retirement savers, many of whom are not sophisticated investors, by ensuring that brokers cannot accept a commission for persuading a client to invest in a certain product that may not be in their best interest.

A federal judge roundly rejected the business lobbying organizations’ challenge to the rule, but the conservative Fifth Circuit gave them a victory last week.

“Not only does the rule disregard the essential common law trust and confidence standard, but it does not holistically account for the language of the ‘investment advice fiduciary’ provision or for the additional prongs of ERISA’s fiduciary definition,” U.S. Circuit Judge Edith Jones said, writing for the panel majority consisting of Republican appointees.

Her opinion was joined by U.S. Circuit Judge Edith Clement.

“Although lacking direct regulatory authority over IRA ‘fiduciaries,’ DOL impermissibly bootstrapped what should have been safe harbor criteria into ‘backdoor regulation,’” Jones said. “The Fiduciary Rule thus bears hallmarks of ‘unreasonableness’ under Chevron Step Two and arbitrary and capricious exercises of administrative power.”

U.S. Circuit Judge Carl Stewart, a Clinton appointee, dissented.

“Appellants and the panel majority skew valid agency action that demonstrates an expansive-but-permissible shift in DOL policy as falling outside the statutory bounds of regulatory authority set by Congress in ERISA and the Code,” Stewart said.

He acknowledged that the last 40 years have seen a major shift in the way people save for retirement, with IRAs and 401(k)s now outnumbering pensions as an employee’s primary retirement savings method.

“The DOL’s exercise was nonetheless lawful and consistent with the Congressional directive to ‘prescribe such regulations as [the DOL] finds necessary or appropriate to carry out [ERISA’s provisions],” Stewart said.

The U.S. Chamber of Commerce praised the majority’s decision.

“The court has ruled on the side of America's retirement savers, preserving access to affordable financial advice. Our organizations have long supported the development of a best interest standard of care and the Securities and Exchange Commission should now take the lead on a clear, consistent, and workable standard that does not limit choice for investors.”

But the Consumer Federation of America said, “This is a sad day for retirement savers.”

“The opinion is extreme by any measure. It strikes at the essence of the DOL's authority to protect retirement savers under ERISA. It's not only an attack on the rule, it's an attack on the agency,” the CFA continued.

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