On March 15, 2018, in a group of consolidated cases known as Chamber of Commerce of the United States of America, et al v. United States Department of Labor, the United States Court of Appeals for the Fifth Circuit held that the Department of Labor (DOL) exceeded its authority when it issued the Fiduciary Rule and vacated the Fiduciary Rule in its entirety. On May 7, 2018, DOL issued Field Assistance Bulletin No. 2018-02, which many commentators are interpreting as an indication that DOL will not appeal the Court’s ruling. So, what does this mean for the employee benefits profession?
In technical terms, it means that life goes back to the way it was before April, 2017. The definition of the term “fiduciary” under ERISA reverts to the definition that had existed since 1975, when DOL promulgated a five-part test to determine whether a person is a fiduciary. As described by the Court, under that test, a person is a fiduciary if he:
1. renders advice . . . or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
2. on a regular basis;
3. pursuant to a mutual agreement . . . between such person and the plan;
4. the advice serves as a primary basis for investment decisions with respect to plan assets; and
5. the advice is individualized . . . based on the particular needs of the plan.
The Fiduciary Rule revised the definition of “fiduciary” by removing two important elements. First, it eliminated the requirement that advice be provided on a “regular basis”. Second, it eliminated the requirement that the advice be the “primary basis” for investment decisions. This turned the role of fiduciary from a relationship to a transaction. In other words, prior to the Fiduciary Rule, a fiduciary was a person who had a long-standing relationship of trust with a client and upon whose advice the client regularly and primarily relied. Under the Fiduciary Rule, a person who worked with a client in a single transaction and did not have a relationship of trust or was not the person upon whom the client regularly relied for investment advice could be a fiduciary. This is no longer the case.
The Court’s ruling also eliminates the Best Interest Contract Exemption and reverses the amendment to Prohibited Transaction Exemption No. 84-24 (PTE 84-24). Under the Best Interest Contract Exemption, persons who might not otherwise meet the definition of “fiduciary” had to sign a written contract in which they agreed to be treated as a fiduciary and agreed to be subject to suit in state court. The amendment to PTE 84-24, removed indexed annuity contracts from the exemption. In addition, both required that an advisor adhere to the “Impartial Conduct Standards”. Vacating the Best Interest Contract Exemption, as well as the amendment to PTE 84-24, means that an insurance agent or financial planner does not have to sign a written contract with a client pursuant to which he or she agrees to assume the role of fiduciary and submit to suit in state court. It also means that indexed annuity contracts will be treated the same as fixed annuity and life insurance contracts for purposes of the prohibited transaction exemption. Most importantly, it may mean that an advisor is no longer subject to the Impartial Conduct Standards. 1
As a practical matter, however, the Court’s decision may have much less impact. The Impartial Conduct Standards requires an insurance agent or financial planner to:
1. act in the best interest of the client;
2. receive no more than reasonable compensation; and
3. make no materially misleading statements.
Most insurance professionals and financial planners have followed the foregoing standards of conduct for many years, even before they were announced by DOL. While the Court’s decision may have vacated the mandate of the Impartial Conduct Standards, it will not change the way most insurance agents and financial planners conduct their business.
The most important effect of the Court’s opinion, and DOL’s apparent decision to not appeal, may be to remove a psychological impediment to proposing a qualified retirement plan to your client. The Court recognized the importance of retirement planning and the vital role that an experienced and knowledgeable insurance agent can play. The Court also recognized that insurance and annuity products are an important component of a well-designed plan and that Americans should not be deprived of the support of insurance professionals.