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By: George M. Sepsakos and Michael P. Kreps, Groom Law Group, Chartered
This article discusses the implications of the Fifth Circuit Court of Appeals’ vacatur of the Department of Labor’s (DOL) Fiduciary Rule1 and related amendments to other prohibited transaction exemptions (PTEs) in Chamber of Commerce of the United States v. United States Dep’t of Labor, 885 F.3d 360 (5th Cir. 2018).
BY REPLACING A LESS RESTRICTIVE five-part test regulating the scope of persons who fit the definition of an investment advice fiduciary under Section 3(21) of the Employee Retirement Income Security Act of 1974 (ERISA) and Section 4975 of the Internal Revenue Code (I.R.C.),2 the Fiduciary Rule expanded the types of activities that are considered investment advice subject to the ERISA and the prohibited transaction provisions of the I.R.C. The new PTEs and amendments published along with the Fiduciary Rule were designed to avoid conflicts of interest and ensure that retirement industry professionals who provide investment advice (including, for the first time, to owners of IRAs) do so in the best interest of their clients.
In response to the Fiduciary Rule, the retirement industry spent millions of dollars in preparation for compliance. However, after the Fifth’s Circuit’s entering of its mandate on May 7, 2018, ERISA’s definition of investment advice fiduciaries will revert to the original 1975 regulation’s five-part test.
The Fifth Circuit determined that the Fiduciary Rule conflicts with the statutory text of Section 3(21)(A)(ii) of ERISA and with the counterpart provision in Section 4975 of the I.R.C. The Fifth Circuit vacated the Fiduciary Rule on the basis that the common law meaning of the word fiduciary requires a relationship of trust and confidence and that Congress codified that common law meaning in the statutory text. By attempting to broadly expand the universe of persons to whom fiduciary status is assigned to include ordinary salespersons, such as many brokerdealers and insurance agents, the Fifth Circuit ruled that the Fiduciary Rule conflicted with the underlying statutory text.
To read the full practice note in Lexis Practice Advisor, follow this link.
George M. Sepsakos is a partner at Groom Law Group where he represents clients on a broad range of ERISA, federal tax, and securities law matters. His practice is primarily focused on issues related to Title I of ERISA, including fiduciary responsibility and prohibited transaction issues. Prior to joining the firm, George worked as an ERISA enforcement advisor within the Office of Enforcement of the Department of Labor Employee Benefits Security Administration. Michael P. Kreps is a principal at Groom Law Group, where he counsels employers, plan sponsors, financial institutions, trade associations, and coalitions on retirement, health, tax, and employment matters. Mr. Kreps specializes in issues relating to public policy, fiduciary responsibility, and plan funding and restructuring. Previously, Mr. Kreps served as the Senior Pensions and Employment Counsel for the U.S. Senate Committee on Health, Education, Labor, and Pensions from the 110th through the 114th Congress.
For more information on the duties and obligations of fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) and on prohibited transaction exemptions, see
> ERISA FIDUCIARY DUTIES
RESEARCH PATH: Employee Benefits & Executive Compensation > Retirement Plans > ERISA and Fiduciary Compliance > Practice Notes
For guidance on fiduciary duties that apply to ERISA discretionary investment managers, see
> ERISA FIDUCIARY COMPLIANCE FOR INVESTMENT MANAGERS
For a description of the principal rules under Title I of ERISA, including fiduciary standards and duties, see
> ERISA TITLE I FUNDAMENTALS
For an update on ERISA prohibited transactions, see
> ERISA LEGISLATIVE DEVELOPMENTS
For a list of steps for a practitioner to follow when applying for a prohibited transaction exemption under ERISA, see
> PROHIBITED TRANSACTION EXEMPTION APPLICATION CHECKLIST
RESEARCH PATH: Employee Benefits & Executive Compensation > Retirement Plans > ERISA and Fiduciary Compliance > Checklists
1. 81 Fed. Reg. 20,946 (Apr. 8, 2016) (the Fiduciary Rule), 81 Fed. Reg. 21,002 (Apr. 8, 2016) (Best Interest Contract and Principal Transactions Exemptions), as corrected at 81 Fed. Reg. 44,773 (July 11, 2016) and 81 Fed. Reg. 21,089 (Apr. 8, 2016). 2. 40 Fed. Reg. 50,842 (Oct. 31, 1975).