The Fifth Circuit Court of Appeals vacated the Labor Department's fiduciary rule in a split decision announced late Thursday afternoon, overturning a Dallas district court that was just as adamant in upholding the measure.
By a 2-1 vote, the appellate judges held that the agency exceeded its statutory authority under retirement law — the Employee Retirement Income Security Act — in promulgating the measure. The rule requires that brokers act in the best interests of their clients in retirement accounts.
The regulation replaced a five-part test that determined whether a broker was a fiduciary. The judges criticized a key provision of the rule, the best-interest-contract exemption. The BICE allows brokers to receive variable compensation for investment products they recommend, creating a potential conflict, as long as they sign a legally binding agreement to act in a client's best interests.
"The BICE supplants former exemptions with a web of duties and legal vulnerabilities," the majority opinion states. "Expanding the scope of DOL regulation in vast and novel ways is valid only if it is authorized by ERISA Titles I and II."
The lawsuit was brought by several industry groups that oppose the rule, including the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Institute.
A Dallas district court upheld the DOL rule in a decision last year that eviscerated the industry arguments against the rule. The industry decisively won in its appeal Thursday.
The DOL rule, which was promulgated during the Obama administration, has been partially implemented, while the remaining provisions are under a review mandated by President Donald J. Trump that could lead to major changes.