Speculation continues to swirl on whether the Department of Labor will appeal the ruling by the 5th U.S. Circuit Court of Appeals vacating the fiduciary rule, but time is running short.
At the April 15 opening session of the NAPA 401(k) Summit in Nashville, the Groom Law Group’s David Levine and The Wagner Law Group’s Tom Clark joined NAPA Executive Director Brian Graff to discuss what the immediate future holds for the fiduciary rule.
The ruling at hand, of course, was the 5th Circuit’s reversal of an earlier district court ruling in a 2-1 decision in favor of the U.S. Chamber of Commerce.
So what's next? While the 5th Circuit’s decision vacating the rule has no immediate impact, there are a couple of important dates to focus on, Clark explained. The most immediate one: If the DOL does not appeal the decision by April 30, then the decision vacating the rule becomes effective May 7.
Clark noted that in his view, the DOL has four options:
1. The DOL can request an en banc rehearing by the 5th Circuit by April 30. Clark noted, however, that the full panel would have to agree to hear the case. “You would think that with a 2-1 decision, with a dissenting opinion, there’s a chance of that. In a typical litigation situation, it goes up a notch, but there are very few en banc situations where they agree to hear it,” he explained.
2. The DOL could petition the U.S. Supreme Court to rule on the decision, which the agency would have to do by June 13.
3. The agency could do nothing immediately and the rule is vacated. Clark noted that while there are questions of whether the ruling is vacated just in the 5th Circuit or on a nationwide scale, effectively it doesn’t matter because an earlier DOL memo said the agency does not plan to enforce the rule.
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Nevertheless, the DOL should do something, Clark suggested. “You couldn’t live in a situation where it’s one thing in the 5th Circuit and another thing elsewhere. Something nationwide will need to be decided, so it’s irrelevant whether the 5th Circuit can rule nationwide,” he explained. Clark noted that the DOL could choose to do nothing at the circuit court level, and go back to the district court level and settle by agreement. Or they could come up with a new regulatory agreement that would pass muster.
4. The DOL could just do nothing, in which case the decision would take effect and the fiduciary rule would be no more. “The big problem we have, of course, is that the old five-part test from 1975 is off the books and doesn’t exist anymore, so if you throw this out, there’s a void,” Clark observed. One possibility, he noted, is the agency pursuing some kind of emergency rulemaking.
Levine noted that the situation can evolve, citing relevant past history. He explained that the SEC faced a situation where one of its rules got thrown out and the agency ended up going to the courts for resolution. “Keep in mind that as we look forward, the DOL might say, ‘You know what, we need to clear things up.’ The reason I say that is they could also go to the court and ask them to delay so they can figure out what they’re going to do, because there is some disagreement about what happens now,” Levine stated.
So what happens if the DOL walks away from the fiduciary rule? “There are different views — you could read a million articles and get a million thoughts,” Levine said, as he explained that not all ERISA attorneys are in agreement on whether the old five-part rule would come back to life if the fiduciary rule is voided. His view is that if the DOL walks away from the rule, the old five-part test would come back, but he also noted that there are different perspectives on that issue.
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Going forward, we could end up in a world where there could again be the “31 flavors of fiduciary” because of all the different things going on, Levine explained. With the DOL potentially going back to its old rule and the SEC moving forward on its own rulemaking, you could end up with broker-dealers and registered investment advisors falling into “SEC land,” but not necessarily people who deal with insurance products. In addition, he noted that you may have groups like the Comptroller of the Currency and the Federal Reserve weighing in, as well as the states, several of which are already moving forward with their own fiduciary initiatives.
If the states think there’s a gap or an opportunity or if they think there’s an area the SEC has not taken control of, they’re going to try to fill it, Levine noted. “It leaves us in a bit of a morass because you could have a million definitions of fiduciary. So what we may be seeing for a while is trying to figure out who trumps whom and which rule applies,”he cautioned.
Similarly, Clark suggested that “it might be more painful moving forward on these issues in the immediate two to three years than if had we just kept [the DOL rule].”
As for what to do over the course of the next two to three months, Levine advised attendees to "keep doing what you were doing" in terms of following the policies and procedures put into place to comply with the rule.