Chevron U-turn undermines fiduciary rule. That’s what it’s about

In a landmark decision that sent shockwaves through the regulatory landscape, the U.S. Supreme Court recently overturned the long-standing Chevron doctrine within the case of Loper Bright Enterprises v. RaimondoThis ruling, which arose from a dispute between fishing corporations, has broad implications for all regulators, including the Department of Labor and its enforcement of the brand new fiduciary rule.

For nearly 4 a long time, the Chevron doctrine was a cornerstone of administrative law within the United States. Established in 1984, this principle granted federal regulators considerable latitude in interpreting ambiguous statutory language inside their jurisdiction. Under this framework, courts would typically defer to an agency’s reasonable interpretation of a statute fairly than substituting their very own judgment. This allowed agencies just like the DOL and Securities and Exchange Commission to play a central role in shaping how laws are implemented through their regulations and guidance.

However, on June 28, 2024, the Supreme Court issued its ruling in Loper Bright Enterprises v. Raimondo, effectively overturning the Chevron doctrine. In a 6-3 decision, the court held that “an ambiguity simply does not constitute a delegation of authority to interpret the law” and that it must be the job of the courts, not the agencies, to resolve statutory silence and ambiguity.

This decision represents a radical shift within the balance of power between regulators and the judiciary. Agencies can not depend on the Chevron Rules to implement their interpretation of the laws they administer. Instead, courts must now exercise independent judgment in interpreting laws and reviewing agency actions.

Impact on the enforcement and feasibility of fiduciary rules

The ruling in Loper Bright is already having significant implications for the enforcement and viability of the DOL’s latest fiduciary rule, issued earlier this yr, which seeks to impose a heightened standard of care on investment advisers who make recommendations to retirement plan participants and IRA owners. In fact, last week, U.S. District Judge Jeremy D. Kernodle make a stop on the time the fiduciary rule got here into force, citing Loper Bright within the order. Judge Kernodle used this latest precedent to claim that the 2024 Fiduciary Rule and its amendments to the Prohibited Transactions Exemption 84-24 were “unlawful and arbitrary and capricious” and due to this fact required a stay.

Citing the Supreme Court’s recent rejection of the Chevron doctrine, he emphasized that courts must now play a more lively role in interpreting the law. This shift played a key role in his ruling, as he found that the DOL’s try and redefine the term “fiduciary investment advice” under ERISA exceeded its regulatory authority.

Under the previous Chevron Act, the DOL would have had considerable latitude in interpreting ERISA’s ambiguous language and defining the scope of fiduciary duties. However, with Chevron not in effect, the courts will now play a more central role in interpreting the provisions of the fiduciary rule.

This change could make sure elements of the rule more legally vulnerable and potentially tougher for the DOL to implement. For example:

1. Definition of trustee: The courts may now have greater scope for interpretation Who is qualified to be a trustee? Within the framework of the rule, the circle of individuals and firms subject to its requirements could also be restricted or expanded.
2. Best-Interest Standard: The interpretation of what constitutes acting within the “best interests” of a client could also be subject to different judicial interpretations, potentially resulting in inconsistent application in numerous jurisdictions.
3. Disclosure obligations: Courts may examine the rule’s disclosure requirements more closely and should conclude that some requirements exceed the DOL’s statutory authority.
4. Enforcement measures: The DOL may face greater challenges in enforcement actions because defendants could more easily challenge the agency’s interpretation of the rule in court.

It is very important to notice that while the Loper-Bright decision doesn’t mechanically invalidate existing regulations, it opens the door to latest legal challenges to agency interpretations previously upheld within the Chevron decision.

Plan sponsors beware

Given this evolution, plan sponsors should be more vigilant than ever to make sure they’re working with true fiduciaries who will act in one of the best interests of the corporate and its participants. Key signs of a real fiduciary include transparent fee structures, the absence of commission-based compensation, and a concentrate on long-term investment strategies that align with the plan’s objectives.

Independent accreditation can provide plan sponsors with additional assurance that the adviser adheres to the very best industry standards. CEFEX certification, for instance, demonstrates that the fiduciary puts the plan’s interests first and follows best practices in areas resembling investment management, fee transparency and governance.

The lack of the Chevron rule doesn’t eliminate the fiduciary rule or its underlying principles, nevertheless it does introduce a component of uncertainty into its enforcement and interpretation. While the complete impact of this ruling on the enforcement of the DOL’s fiduciary rule stays to be seen, it is evident that the interpretation of this and other rules is now more incumbent upon the courts.

For plan sponsors, this underscores the importance of researching and choosing plan advisors, staying informed about legal developments, and the continued commitment to act in one of the best interests of plan participants. As the regulatory environment evolves within the wake of this landmark decision, vigilance and adaptableness can be key to navigating the changing landscape of fiduciary responsibility.

Brian Menickella is founder and managing partner of Beacon Financial Servicesa diversified financial advisory firm based in Wayne, PA.

Investment and advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.

This material has been prepared for educational and informational purposes only and is just not intended to constitute ERISA, tax, legal or investment advice.