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Latest DOL Fiduciary Fight Zeros In on Advice vs. Sales

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Lawyers representing the Department of Labor and the nine plaintiffs suing Labor over its fiduciary rule recently filed briefs arguing their stance on whether Labor has the authority to regulate advice versus sales.

A three-judge panel heard oral arguments on Aug. 1 at the U.S. Court of Appeals for the Fifth Circuit in the U.S. Chamber of Commerce’s appeal, which resulted from an adverse lower decision issued by the U.S. District Court for the Northern District of Texas. 

(Related: Dalbar Puts a Sellers’ Exemption to Fiduciary Rule on DOL’s Desk)

At the oral arguments, the court asked the parties to file letter briefs addressing whether the participant/IRA exemption in the Pension Protection Act — for level fee and computer model advice — proves that Labor has authority to regulate sales, or brokers.

As Eugene Scalia, partner with Gibson Dunn who represents the nine plaintiffs, wrote in his Aug. 11 letter to the court, a specific question arose during the arguments as to whether those provisions “reflect Congress’ recognition of a distinction between sales and advice, contrary to the position of the Department of Labor (DOL) that ‘sales and advice go hand in hand in the retail market,’ and that in interpreting the term ‘fiduciary,’ it may “reject … the purported dichotomy between a mere ‘sales’ recommendation, on the one hand, and advice, on the other.”

Scalia argued that those provisions of the PPA “do indeed further illustrate that Congress recognized the distinction between sales and advice in ERISA and the Tax Code — just as it did in the Investment Advisers Act, and just as DOL itself did in one portion of the fiduciary rule.”

Labor, Scalia added, “may not base its rule on rejection of a distinction recognized by Congress, and accordingly, this error — among others — requires that the Fiduciary Rule be vacated.”

Labor, however, argued in its Aug. 10 letter that the PPA provision (and the department’s follow-up regulation) show that sales can be fiduciary advice, when the sales are accompanied by advice. 

“The exemption’s text makes clear that it applies both to fees for investment advice and to fees for the sale of an investment product pursuant to investment advice,” Labor wrote.

“This distinction does not in any way suggest, let alone dictate, that ERISA’s fiduciary definition does not reach salespeople who give retirement investment advice for a fee. To the contrary, the fact that Congress provided an exemption that specifically included fees for ‘sale[s]’ in connection with investment advice confirms that whether individuals are labeled ‘salespeople’ or ‘advisers’ is irrelevant. Congress understood that salespeople are otherwise subject to the prohibited transaction provisions of ERISA if they render investment advice as part of a sales transaction for which they receive a fee or other compensation — as DOL has explained.”

Groom Law Group noted in an Aug. 10 brief on the oral arguments that according to the Fifth Circuit’s website, it aims to publish decisions within 60 days from oral argument.

For Chamber of Commerce — which is among the nine groups suing Labor — this would mean “the court would aim to have its decision out by the end of September,” Groom said.

“We would not be surprised, however, if the decision were published as early as the first week of September, as that is typically when circuit court clerks are replaced. Given the complexity of this case, the judges might prefer not to hand it off to a new set of clerks.”

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