On March 15, 2018, in a two-to-one decision, the United States Court of Appeals for the 5th Circuit overturned a district court decision and vacated the Department of Labor’s ERISA advice fiduciary rule, which had gone into effect in June 2017. For our prior newsletter on the DOL’s advice fiduciary rule, please click here.
The 5th Circuit Court of Appeals found that the definition of “investment advice fiduciary” under the regulations did not follow the common law definition of investment advice fiduciary. The common law definition required that an investment advice fiduciary provide advice to a customer on a “regular basis” and that the advice is the “primary basis” for the investment decision. The majority argued that the regulations changed this definition, which had been used for over 40 years. The majority found that the DOL’s interpretation of the phrase “investment advice for a fee” was not a reasonable interpretation of that phrase. The dissenting judge argued that the common law definition of investment advice fiduciary should not be controlling and that the regulations were reasonable.
It is not known whether the DOL will appeal the ruling. If there is an appeal, the DOL may ask that the full Court of Appeals hear the case or appeal the case to the Supreme Court. If the DOL does not appeal the case, the Trump Administration may choose to have the SEC, rather than the DOL, draft regulations regarding investment advice fiduciaries.
The U.S. Court of Appeals in D.C. has a similar case pending before it. Additionally, on March 13th, the 10th Circuit Court of Appeals upheld the rule, but only with respect to a narrow issue.
The advice fiduciary rule was somewhat controversial from the start, and many thought that it would never go into effect, and once it did, that it would be repealed.
Private investment fund managers, however, generally revised their offering memorandums and subscription agreements in 2017 to address the advice fiduciary rule. Many managers ceased to take investments after June 7, 2017, from benefit plan investors that could not make certain representations so that the managers would not be considered to be advice fiduciaries with respect to such investors.
Until there are more developments in this area which clarify how to proceed, private investment fund managers should continue to follow the advice fiduciary rule.