Split Loyalties: Circuit Courts Render Inconsistent Rulings on DOL Fiduciary Rule

By: Esmat Hanano, IAC Intern Spring 2018

The Department of Labor’s fiduciary regulation (“Fiduciary Rule”) covering the work of financial advisers faces an uncertain future in the wake of conflicting federal rulings. Not only do the rulings cast the status of the fiduciary rule into doubt, but they also create confusion within the financial industry that could have an impact on retail investors. Accordingly, these rulings and their implications must be understood so that investors can continue making informed decisions.

The fiduciary rule requires all financial advisers to act in their client’s best interest when giving advice about retirement accounts, individual retirement accounts, and 401(k)s. The rule was crafted six-years during the Obama administration. It took partial effect in June 2017, but the Trump administration has delayed full implementation by eighteen months. Previously, not all individuals providing investment advice were held to a fiduciary standard.

On March 13, the Tenth Circuit Court of Appeals upheld the Department of Labor’s fiduciary rule. The Tenth Circuit’s opinion analyzed different evidence put forth by the Department of Labor and determined that the decision to create the rule was not “arbitrary or capricious.” In fact, the Tenth Circuit concluded that the new regulation “. . . would promote innovation, and it would save investors millions of dollars by reducing or curtailing conflicted advice from fiduciaries.” The Tenth Circuit’s ruling echoes the reasoning of investor-oriented groups, such as the Public Investors Arbitration Bar Association (“PIABA”). In a press release, PIABA stated that the fiduciary rule would save investors billions of dollars every year and that the rule protects investor’s best interests.

Two days later, on March 15, the Fifth Circuit Court of Appeals reached a different result and vacated the rule. The Fifth Circuit’s opinion focused on the Department of Labor’s authority and whether it can even promulgate the regulation to begin with. The analysis of the Fifth Circuit concluded that the regulation was “arbitrary and capricious” and “in excess of statutory authority.” According to the Fifth Circuit, the Department of Labor usurped the role of Congress by trying to enact a law—a power expressly left to the legislative branch. The Fifth Circuit feared that the Department of Labor had “def[ied] Congressional limits” and would “lord it over people.”

The Fifth and Tenth Circuit’s rulings stand in direct opposition to each other. A circuit split of this nature is likely to come before the Supreme Court if there is no change in the Fifth Circuit’s ruling in an en banc hearing. Whatever happens, the repercussions will be felt by both the financial industry and retail investors.