The United States Court of Appeals for the Fifth Circuit has vacated the U.S. Department of Labor's Conflict of Interest Rule in its entirety, reversing a lower district court ruling that upheld the measure.
By a 2-1 vote, the appeals court overturned the lower district court's decision to reject certain business groups' legal challenge to the fiduciary rule. The grounds of the legal challenge include the fiduciary rule's inconsistency with governing statutes, the department's overreach of its statutory authority, the imposition of legally unauthorized contract terms to implement the rule and the rule's "arbitrary and capricious" treatment of variable and fixed indexed annuities.
The appeals court found merit in several of the business groups' objections and criticized the fiduciary rule's best interest contract exemption, which allegedly allows advisers and brokers to avoid prohibited transactions penalties.
"The [best interest contract exemption] supplants former exemptions with a web of duties and legal vulnerabilities," according to the appeals court. "Expanding the scope of [the Labor Department's] regulation in vast and novel ways is valid only if it is authorized by [Employee Retirement Income Security Act] Titles I and II."
The lawsuit was brought by several industry and business groups, including the U.S. Chamber of Commerce, the American Council of Life Insurers, the National Association of Insurance and Financial Advisors and the Indexed Annuity Leadership Council.
The appeals court ruling comes a few months after the Labor Department officially delayed the implementation of the fiduciary rule.
