U.S. Fifth Circuit Strikes Down the Obama Administration’s “Fiduciary Rule”

In What's New in ERISA Litigation?, What's New in the Courts by gravierhouseLeave a Comment

The U.S. Chamber and two other business groups filed suit in the Northern District of Texas, challenging the “Fiduciary Rule” – a package of seven different DOL Regulations that broadly re-interpret the term “investment advice fiduciary” and re-define exemptions that relate to fiduciaries from ERISA and the Internal Revenue Code.  On appeal, the U.S. Fifth Circuit struck down the Rule.

“The Fiduciary Rule contradicts the text of the ‘investment advice fiduciary’ provision and contemporary understandings of its language. To restate, a person is a fiduciary with respect to a plan to the extent ‘he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.’  Focusing on the words ‘investment’ and ‘advice,’ DOL cites dictionary definitions to explain the breadth of the terms, the reasonableness of the Fiduciary Rule’s construction of those terms, and the permissibility of its departure from the common law trust and confidence standard….

“Properly considered, the statutory text equating the ‘rendering’ of ‘investment advice for a fee’ with fiduciary status comports with common law and the structure of the financial services industry. When enacting ERISA, Congress was well aware of the distinction, explained further below, between investment advisers, who were considered fiduciaries, and stockbrokers and insurance agents, who generally assumed no such status in selling products to their clients. The Fiduciary Rule improperly dispenses with this distinction. Had Congress intended to include as a fiduciary any financial services provider to investment plans, it could have written ERISA to cover any person who renders ‘any investment advice for a fee….’ The word ‘any’ would have embodied DOL’s expansive interpretation, and it is a word used five times in ERISA’s tripartite fiduciary definition, e.g. ‘any authority or responsibility.’ That Congress did not say ‘any investment advice’ signals the intentional omission of this adjective. Further, DOL’s interpretation conjoins ‘advice’ with a ‘fee or other compensation, direct or indirect,’ but it ignores the preposition ‘for,’ which indicates that the purpose of the fee is not ‘sales’ but ‘advice.’ Therefore, taken at face value, the provision rejects ‘any advice’ in favor of the activity of ‘rendering investment advice for a fee.’ Stockbrokers and insurance agents are compensated only for completed sales (‘directly or indirectly’), not on the basis of their pitch to the client. Investment advisers, on the other hand, are paid fees because they ‘render advice.’ The statutory language preserves this important distinction.

“Put otherwise, DOL’s defense of the Fiduciary Rule contemplates a hypothetical law that states, ‘a person is a fiduciary with respect to a plan to the extent…he receives a fee, in whole or in part, in connection with any investment advice….’ This language could have embraced individual sales transactions as well as the stand-alone furnishing of investment advice. But this iteration does not square with the last clause of the actual law, which includes a person who ‘has any authority or responsibility to render investment advice.’ Only in DOL’s semantically created world do salespeople and insurance brokers have ‘authority’ or ‘responsibility’ to ‘render investment advice.’ The DOL interpretation, in sum, attempts to rewrite the law that is the sole source of its authority. This it cannot do.

“Further, in law and the financial services industry, rendering ‘investment advice for a fee’ customarily distinguished salespeople from investment advisers during the period leading up to ERISA’s 1974 passage…. And the phrase ‘investment advice for a fee’ and similar phrases generally referenced a fiduciary relationship of trust and confidence between the adviser and client.

“The SEC has also repeatedly held that ‘the very function of furnishing investment advice for compensation — learning the personal and intimate details of the financial affairs of clients and making recommendations as to purchases and sales of securities — cultivates a confidential and intimate relationship’ — rendering a broker-dealer who does so a fiduciary. The SEC cautioned that fiduciary status does not follow ‘merely from the fact that the broker-dealer renders investment advice.’ Indeed, broker-dealers ‘who render investment advice merely as an incident to their broker-dealer activities’ are not fiduciaries ‘unless they have by a course of conduct placed themselves in a position of trust and confidence as to their customers’….

“Significant federal and state legislation also used the term ‘investment adviser’ to exclude broker-dealers when their investment advice was ‘solely incidental’ to traditional broker-dealer activities and for which they received no ‘special compensation.’”

Chamber of Commerce v. U.S. Departner of Labor, No.17-10238, 2018 WL 1325019 (5th Cir. March 15, 2018).

 

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