On June 21, 2018, the United States Court of Appeals for the Fifth Circuit officially vacated the Department of Labor’s (the “DOL’s”) Fiduciary Rule.  This decision was somewhat expected after the DOL indicated that it would not challenge the court’s March 15 decision in which it found the rule “unreasonable.”

The 2016 Fiduciary Rule expanded the category of advisers who were considered fiduciaries with respect to plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and individual retirement accounts (“IRAs”).  The Fiduciary Rule generally required that financial services advisers act in the best interests of their clients by applying a higher standard than the rule that previously applied to investment advisers.  It also established prohibited transaction exemptions (“PTEs”), including the “best interest contract” or “BIC” exemption, in order to allow service providers who became investment advice fiduciaries under the new rule to continue receiving compensation.  Since President Trump took office, the Fiduciary Rule has been the focus of significant attention, and several court cases challenging its validity were filed.  

The Fifth Circuit’s decision to vacate the Fiduciary Rule has created legal ambiguity as to who qualifies as a fiduciary with respect to ERISA plans and IRAs.  Until further guidance is provided, the pre-Fiduciary Rule “five-part test” devised by the DOL in 1975 must now be followed for purposes of determining who is a fiduciary.  [Providers] that previously relied on the BIC exemption are now faced with the options of either withdrawing from fiduciary status or to rely on the Field Assistance Bulletin 2018-02 (the “FAB”).  In the FAB issued on May 7, 2018, the DOL took the position that investment advisers can continue to follow its prior advice in the rule entitled “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule -- Retirement Investment Advice,” where the DOL stated that it “would not pursue claims against fiduciaries who were working in good faith to comply with the fiduciary rule and applicable provisions of the PTEs, or treat those fiduciaries as being in violation of the fiduciary rule and PTEs.”   

REITs should be aware that, as a result of the Fifth Circuit vacating the Fiduciary Rule, exemptions such as the BIC exemption as well as certain other protections may no longer be available. We will continue to monitor developments and are happy to assist you with any questions you have about the Fiduciary Rule and the new state of affairs following the Fifth Circuit’s decision.