On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit vacated certain U.S. Department of Labor “fiduciary investment advice” regulations (“the Regulations”) in their entirety, ruling that the DOL exceeded its authority in promulgating them. The Regulations provide that, in general, when a plan or entity subject to ERISA (an “ERISA Plan”) receives “investment advice” from a person or entity in return for a fee or other compensation, that person or entity is treated as a fiduciary under ERISA and subject to ERISA’s considerable constraints. Certain lenders have taken the position that a loan arrangement may constitute “fiduciary investment advice” within the meaning of the Regulations and as a result, since June 2017 (the effective date of the Regulations) it has become market practice to include new ERISA representations reflecting the provisions of the Regulations in credit facilities. In particular, these representations have required portfolio company borrowers to represent that they are not an ERISA Plan and do not hold ERISA Plan assets.
Since the Fifth Circuit decision, the DOL has advised that it will not be enforcing the Regulations pending further review. Notwithstanding this non-enforcement policy, ERISA Plans arguably continue to have a cause of action for breach of fiduciary duty under the Regulations’ expanded definition of fiduciary. Therefore, we expect to continue to see ERISA representations related to the Regulations in credit agreements, though their import may be debated in the coming months by parties who would prefer to strike them.
We are continuing to monitor the activities of the DOL, the courts, the LSTA and the SEC. We note that the latter has indicated that it is in the process of developing a new fiduciary standard that may apply more broadly but may be more precise and less subjective regarding the scope of “fiduciary investment advice” than the Regulations.