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March 22, 2018

By: Steven E. Saltzman

By now, everyone is aware that the U.S. Court of the Appeals for the 5th Circuit vacated the entirety of the Department of Labor’s Fiduciary Rule on Thursday last week.   Marking the Rule’s first loss in the courts, the split 2-1 decision against the DOL could be the last second “buzzer-beater” that the Rule’s detractors have been hoping for.  And for the Rule’s proponents, a heart-breaking loss after being ahead (in the courts) for most of the game.


For those wildly celebrating last week’s decision, unlike the popular NCAA Basketball Tournament that consumes our collective attention each March, this kind of contest is not necessarily a single-elimination competition.  Last week’s Fifth Circuit Court ruling still may not spell the absolute end of this contest for the Department of Labor.


In addition, there are a number of important happenings among other regulators that may affect how we are required to operate.  This post is intended to provide updates on what’s next for the DOL and the important developments at other regulators.



Department of Labor’s Fiduciary Rule Vacated by the Fifth Circuit


The Fifth Circuit Court’s decision on March 15, 2018 vacated Labor’s new Fiduciary Rule in toto, meaning all of it.  Enchilada totalis. Like it never even happened.  No expanded definition of who is a Fiduciary, no new BIC Exemption, no changes to PTE 84-24, etc.   As a result, assuming no other appeals or delay, we will revert back to the old fiduciary rules dating back to 1975 starting as of May 7, 2018.


That of course assumes no appeals or delays, which may or may not be the case.  In short, the Labor Department now has a few options that they can follow, which include:


  1. The DOL could end its defense of the Rule, allowing it to possibly go back to the drawing board to re-write a new one or stand back and let the SEC take over the issue.

  2. The DOL could file for an appeal of the decision by the entire Fifth Circuit through an appeal known as an en banc hearing, where all of the court’s judges would hear the case (instead of the 3-judge panel that heard the original appeal).

  3. The DOL could file a petition for a writ of certiorari, which asks the Supreme Court to review the decision

  4. The DOL could request an additional stay of the Fifth Circuit’s decision, effectively giving itself more time to determine what its next steps will be or to allow for more time for the industry to retool its policies and procedures to conform with the requirements of the earlier version of the rule.


In the scenarios 2 through 4 above, additional delays beyond the May 7th date will be inevitable.  It all depends on what the Department of Labor decides to do.  Absent an extension, motions for rehearing must generally be filed by April 30th, and petitions for writ of certiorari must be filed by June 13th (or 90 days after the Fifth Circuit denies a petition for rehearing).  In any case, the DOL does not have to make a decision on its next step(s) until April 30th.  Which means that until the DOL decides what to do next and until their choice is fully played out, the Labor Department’s new Fiduciary Rule will technically remain in force.


However, DOL officials responded to the Fifth Circuit’s decision this week by saying that the DOL will not be enforcing the Fiduciary Rule “pending further review”.  As you may recall, the DOL previously stated that it would not enforce the Rule during the transition period, as long as firms were making a good-faith effort to comply.


Despite Labor’s new position on enforcement, it does not impact any private litigants’ rights as long as the Rule is technically still in effect.  As such, it would be prudent for advisors and firms to continue to comply with the DOL Fiduciary Rule and its own policies and procedures adopted in support of the Rule until we are definitively told that the Rule is no longer in effect (at the earliest, on May 7, 2018).


At first glance it would be logical to assume that given the Trump Administration’s well-known preference for deregulation, simply ending its defense of the Rule would be the most likely and simplest path.  And while this is a distinct possibility, it has a few significant considerations.


  • It is entirely plausible that the DOL is sincere in its current effort of proposing changes to the Rule and would use the appeal to retain the ability to do so.  Don’t forget that in its Rule to Delay published in November of 2017, the DOL allowed the Fiduciary Rule itself to go into effect in April of 2018 (at the same time citing its importance in protecting retirement investors), while implementation of the related exemptions were specifically delayed in 2019 so that they could be reviewed.

  • The Labor Department has incentive to defend the Rule in order to preserve and defend its own rule-making authority.  In the Fifth Circuit’s recent decision, it struck down the Rule in a strongly worded way that focused on overreach by the Department, effectively challenging its authority over what it likely sees as its own turf.

  • Despite the Trump Administration’s misgivings about the Rule, the Labor Department has already been defending the Fiduciary Rule in court.  Under this defense, the Rule survived several court challenges and was upheld by another appeals court just days before the Fifth Circuit’s decision, albeit on narrower grounds.

  • If the Labor Department decides not to defend the Rule, a group advocating for the measure could try to step in and keep the matter going in court.  While the prospect of this is unlikely (the courts would have to accept the new party’s request to intervene- which they rarely allow), it remains a contingency for the DOL to consider.


While the list of considerations above is meaningful, we can really only speculate on how the Labor Department will proceed.  The DOL ending its defense of the Rule and punting to the SEC sure does sound like the simplest approach, but nothing about this odyssey has yet to be simple.


There are many additional considerations and nuances associated with the various paths that the DOL can now take regarding the Fiduciary Rule.  So many that to cover them all in this type of post would be difficult to do.  There is a fantastic summary document that is publically available from the law firm Stroock & Stroock & Lavan LLP.  This summary document covers the details associated with each consideration that is available to the DOL.  This paper is about as well-written and balanced of any others I have read to date.    I highly recommend that you take the time to read it.



All eyes turn to the SEC


Since the announcement of the Fifth Circuit’s decision on March 15th, some observers have suggested that it will prompt the Securities and Exchange Commission to re-evaluate its fiduciary rulemaking efforts.  However, during a Q&A session at the Securities Industry and Financial Markets Association’s annual compliance conference shortly after the decision was released, SEC Chairman Jay Clayton stated that the decision has not affected the way he is approaching the development of his agency’s fiduciary rule making and that they are continuing to move forward.    He also characterized the timing of the SEC’s proposal as “soon”.


In light of the Fifth Circuit’s decision against the DOL, the urgency associated with SEC’s promised fiduciary proposal has risen significantly.  The continued delay of the DOL’s Fiduciary Rule has already prompted states like Nevada, Maryland and others to start implementing their own fiduciary standards.  A scenario where the DOL’s Rule is fully eradicated and the SEC is dragging its feet on its own proposal would likely cause more states to begin working own their own fiduciary standards.


The SEC Commissioners have indicated that a new rule will be a “a comprehensive proposal”, including plans to require that only brokers who act in the clients’ best interest be allowed to use titles such as “financial advisor”.


Many industry observers have suggested that the SEC will propose its own Fiduciary Rule, covering all securities related accounts, by the second quarter of 2018.  Based on Chairman Clayton’s recent comments, that still appears to be the case.



The National Association of Insurance Commissioners (NAIC) & Annuities


With respect to annuities, suddenly the next meeting of the National Association of Insurance Commissioners' on March 24-27th looms very large.  At the NAIC’s recent meeting in December of 2017, a working group offered several proposed revisions to the current Suitability in Annuity Transactions Model Regulation #275 which introduced a new “best interest” standard to the regulation.  The revisions to the regulation are meant to move states from suitability rules to a consumer-focused best-interest standard.


The draft document discussed at the Dec 3rd NAIC meeting introduces many new requirements in support of its proposed best interest standards, including requiring additional suitability information from buyers, compensation limitations and disclosures, as well as some other new responsibilities on agents and insurance companies.  The original draft document discussed at the Dec 3rd NAIC meeting is available to download here.  Please note that you will need to jump to page 8 of the document to see the specific changes proposed to the existing regulation.


While some work on finalizing the revisions to the current Suitability in Annuity Transactions Model Regulation #275 has been completed by conference call, the working group has a lot left to finalize during the upcoming meeting.  As you might expect, there is much left to hammer out with respect to the proposed revisions, not the least of which is to come to an agreement on exactly what the definition of “best interests” means within the Regulation.


The group meets on March 24-27th in Milwaukee for the NAIC Spring Meeting.  Commissioner Dean Cameron recently expressed hope that a final model law would be finished and voted on at the March meeting, however a quick scan of the pre-meeting agenda packet illustrates that there is a lot of ground the working group has yet to cover.


You can access the agenda packet for the next meeting here.  If you jump to page 23 of the packet, you will see a table titled, “Suggested Comments to Revise Draft Dated Nov. 24, 2017” that is 61 pages long.  The meeting minutes from the working group’s most recent conference call indicate that they have only progressed through 5 of the 61 pages so far.


In a bit of good news for securities-based advisors, the new draft proposal retains the existing provision that “sales made in compliance with FINRA requirements pertaining to best interest standards and supervision of annuity transactions shall satisfy the requirements under this regulation”.  And while no formal agreement has been made, there are suggested revisions to this provision to include compliance with similar rules from the SEC and others.



In Conclusion


The Department of Labor has five weeks to decide its next steps with respect to the Fifth Circuit Court’s decision.   It is entirely possible that they could act before the end of this month or even by next week.  Stay tuned.


A potential proposal from the SEC is still expected, however their Q2 timeline does not appear to have changed.  As previously stated, the spotlight on their proposal is even brighter now than it was before.


For those that have annuity businesses, pay attention to outcome of the NAIC’s March meeting beginning this weekend.  We should have a better idea of what is ahead for their Suitability/Best Interest Regulation as early as next week.


Much like the NCAA Basketball Tournament this month, we cannot know with certainty how it will turn out—until it does.  The best you can do is make educated decisions based on the facts available to you and to watch the contest closely as it progresses, so that you can quickly make necessary adjustments along the way.  Ultimately, it’s up to the players on the court to determine how it turns out.


We hope that these postings are helpful.  We will continue to provide updates when relevant as important information related to this topic becomes available.


Contact Steve Saltzman with questions or comments at







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