A panel of the U.S. Court of Appeals for the Fifth Circuit has vacated the Department of Labor’s Fiduciary Rule. In a 2-1 split, the Fifth Circuit’s decision overrules a Dallas District Court’s decision, which had previously upheld the rule.
Unfortunately, the decision does little to settle the fate of the beleaguered rule. Although it is binding on the Fifth Circuit, which is comprised of Texas, Louisiana and Mississippi, it is merely persuasive on the other circuits or until the Supreme Court weighs in. There’s also a chance that the Fifth Circuit will be asked to rehear the case en banc.
The lawsuit was originally brought by industry groups opposed to the rule, such as the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association. After failing to win at the district court level, the plaintiffs appealed to the Circuit court. The Fifth Circuit panel held, among other things, that the Department of Labor’s expansion of the applicability of the term “fiduciary” went beyond the Department’s authority.
We recall last decade when the SEC attempted to change the application of the word “client” to include private fund investors. In the Goldstein v. SEC decision, the U.S. Court of Appeals for the D.C. Circuit ruled that the SEC had exceed its authority in an attempt to require hedge fund managers to register. In the end, it took an act of Congress, also known as Dodd-Frank, to require private fund advisers to register, and expanded registration to private equity and other fund managers.
Between the Goldstein decision and Dodd-Frank, many registered managers did not de-register because the industry had come to expect money to be managed by the standards expressed by the SEC. Once the genie is out of the bottle, things change. Certainly, some of the concepts of the DOL Fiduciary Rule will remain with us in our compliance efforts to protect investors. Fortunately, we work with managers who value running strong businesses and we help them appropriately navigate these changing conditions without undue burden.
So what does all of this mean for you? At the moment – not much. You should continue preparing for the Fiduciary Rule’s full implementation while continuing to monitor the Rule’s status.