The Department of Labor announced Friday it would not enforce the fiduciary rule "pending further review," after a 5th U.S. Circuit Court of Appeals decision Thursday that threw out the regulation.
A DOL spokesman provided no additional details.
The New Orleans-based appeals court ruling and the DOL response has caused uncertainty within the retirement and financial services industries, leading to speculation that the U.S. Supreme Court may have to resolve the debate over whether the DOL exceeded its authority in promulgating the regulation in 2016.
The ruling could set up a Supreme Court showdown because another appeals court in Denver issued an opinion supporting the fiduciary rule on Tuesday. "Most troubling is that businesses affected by the rule have little guidance on how to proceed, other than with extreme caution," said Nancy Ross, a partner at law firm Mayer Brown.
"With respect to the DOL's indication that it will not enforce the rule, I would view that as yet another indication of the DOL's hostility to the amended rule under this administration," said Andrew Oringer, a partner at law firm Dechert.
The ERISA Industry Committee said the decision vacating the fiduciary rule could lead to greater action by states. "We remain concerned that this will cause states to rally behind their own laws — leading to a patchwork of 50 different fiduciary standards/rules," said Will Hansen, senior vice president for retirement policy. "From a plan sponsor point of view, this (court) decision only adds to the uncertainty on the relationship between a participant and those providing the participant advice on retirement assets."
In a sharply divided 2-1 decision issued Thursday, a three-judge panel in New Orleans reversed a pro-regulation ruling issued by a U.S. District Court judge in Dallas in February 2017 that dismissed legal challenges to the rule by several organizations including the U.S. Chamber of Commerce."When agencies within the executive branch defy congressional limits, they lord it over the people without proper authority," wrote Circuit Court Judge Edith Jones for the majority opinion. The fiduciary rule is unreasonable based on legal precedent, and it represents "arbitrary and capricious exercises of power," she added.
The chamber and several other organizations that sued to overturn the fiduciary rule praised the decision. "The court has ruled on the side of America's retirement savers, preserving access to affordable financial advice," according to a statement. "The Securities and Exchange Commission should now take the lead on a clear, consistent and workable standard that does not limit choice for investors."However, Chief Judge Carl Stewart dissented, saying the fiduciary rule represented "an expansive but permissible shift in the DOL policy." He added that the regulation, enacted during the Obama administration, was "lawful and consistent" with the congressional directive to develop regulations to carry out the goals of the Employee Retirement Income Security Act.
"The 1975 regulation that the Labor Department's fiduciary rule amended in 2016 was of another era and had failed to withstand the test of time," said Mark Iwry, non-resident senior fellow at the Brookings Institution and the former senior adviser to the secretary of the Treasury in the Obama administration. "The same can be said of Thursday's 5th Circuit majority opinion."
Some ERISA attorneys said more litigation appears to be inevitable.
"It's a blockbuster decision," said James P. McElligott Jr., a partner at law firm McGuireWoods. "Although the DOL will not be enforcing the rule 'pending further review,' given the challenge to DOL authority, we should not be surprised if DOL seeks some review of the 5th Circuit decision."
ERISA attorney Bradford Campbell predicted the DOL will appeal as the Trump administration continues to work on revising the Obama administration regulation.
If the DOL drops the case, the DOL regulations would revert to those from 1975, said Mr. Campbell, partner for Drinker Biddle & Reath and a former head of the Employee Benefits Security Administration.
Some sort of appeal would enable DOL to propose revising the existing rule. "Otherwise, they would have to re-propose the rule from scratch," he said.
Although he believes the fiduciary rule "exceeds regulatory authority," the 5th circuit decision "doesn't mean change is coming soon," Mr. Campbell said. "The process isn't over."
The DOL could seek a hearing by all judges of the 5th Circuit Court of Appeals or it could appeal to the U.S. Supreme Court. The Supreme Court could get involved because the 5th Circuit decision came two days after the 10th Circuit Court of Appeals in Denver issued a pro-fiduciary rule decision.
The 10th Circuit opinion affirmed a decision by a Kansas U.S. District Court that the regulation was "not arbitrary or capricious," an argument made by an insurance agency, Market Synergy Group, that offers annuities.
"Relying on the record before it, the DOL could reasonably conclude that the benefits to investors outweighed the cost of compliance," said the unanimous opinion by the three-judge panel.
Different conclusions by different appeals courts — known as circuit splits — are often appealed to the U.S. Supreme Court.
"I would say that the department really had no choice because they can't have a rule which does not apply uniformly," said Ms. Ross of Mayer Brown. "As is, entities in the 5th Circuit would not need to comply while entities in the 10th Circuit would. That would create an impossible situation for firms operating nationwide."
David Levine, a partner in the Groom Law Group, said his firm is still studying the legal landscape. "I think we still have to see the DOL final position on the appeal," he said. "Also, people are considering whether another pro-rule party could try to intervene to appeal even if DOL doesn't."
