June 21, 2018 - After a successful legal challenge, today the Fifth Circuit Court of Appeals issued a mandate vacating the Department of Labor’s Fiduciary Rule. Click here for the order. After receiving much attention since Trump took office and being subject to a number of court challenges, the Fiduciary Rule as adopted in April 2018 will no longer apply.
While controversy over the Fiduciary Rule has existed even before the final regulations were published, it was over the past several months that the continued existence of the rule seemed doubtful. In March, in a split decision, the Fifth Circuit’s majority ruled in favor of the appellants in their suit against the DOL and found that the Fiduciary Rule is “unreasonable,” and that the DOL acted beyond its authority in promulgating the Fiduciary Rule as explained in this Cadwalader Cabinet article. Once effective, the Fifth Circuit’s order of vacatur means the Fiduciary Rule is removed from the books nationwide.
As a reminder, the Fiduciary Rule was promulgated by the Department of Labor (DOL) under the Obama administration. The DOL published final regulations on April 8, 2016, that expanded the circumstances under which a person is a “fiduciary” in the context of investment advice concerning investments in ERISA-covered plans, IRAs and other plans covered by Section 4975 of the Internal Revenue Code of 1986, as amended, broadly capturing most common sales practices for investment and insurance products, including recommendations relating to investments, distributions, and certain withdrawals. The Fiduciary Rule also created two new related exemptions – the Best Interest Contract Exemption and Principal Transaction Exemption – and made certain changes to relevant DOL prohibited transaction class exemptions. As a result of the Fiduciary Rule, certain sales and marketing activities involving plans, fiduciaries or plan participants or beneficiaries are more likely to be considered fiduciary advice and be subject to ERISA’s fiduciary standards. Generally, the Fiduciary Rule became applicable on June 9, 2017, but the DOL postponed the application of certain portions of important related exemptions until July 2019 pending a reexamination of the Rule and exemptions as directed by the Trump administration.
For the loan market, the Fifth Circuit decision will have drafting implications for both credit agreements and related trading documents, but it is still early days. When published last June, the LSTA trading documents were updated, in part, to take into account the changes pursuant to the applicable portions of the Fiduciary Rule, including with respect to purchases and sales of loans and any investment advice that may accompany such purchases and sales. The new language covers an exception to the expanded fiduciary definition in the Fiduciary Rule (known as the “transactions with independent fiduciaries with financial expertise exception” or “independent fiduciary exception”) in connection with the provisions of advice by a person to a fiduciary of a plan or pooled fund subject to ERISA or Section 4975 of the Code which fiduciary is independent of the advice provider with respect to arm’s length transactions or services relating to the plan’s or fund’s investment in securities or other property. We expect that the language added for the Fiduciary Rule will need to be modified, but the LSTA is not making any drafting recommendations or modifying its standard documents at this time. We will continue to monitor market practice and communicate with our membership how the loan market is approaching related changes.