DOL 3, Fiduciary Rule Opponents 0

By Nevin Adams • February 09, 2017 • 0 Comments

The Labor Department is now 3-0 in defending the fiduciary regulation in court.

If there had been a sense that the U.S. District Court for the Northern District of Texas would prove to be a more plaintiff-friendly venue, Judge Barbara M.G. Lynn turned out to be no more sympathetic to the plaintiffs’ case than had the previous two adjudications, both of which also upheld the Labor Department’s fiduciary regulation. 

Hold ‘Off’?

Judge Lynn's decision, U.S. Chamber of Commerce v. Hugler (N.D. Tex., No. 3:16-cv-1476-M, 2/8/17) came Feb. 8, the same day that the Department of Justice had asked the court to hold off making its decision, citing President Trump’s Feb. 3 administrative memorandum directing the Labor Department to reevaluate the likely impact of the rule, noting that “it would not serve judicial economy to issue a ruling at this point.” Judge Lynn’s decision in the case had been expected sometime this week. 

Judge Lynn had previously said that she had read the 92-page opinion of Judge Randolph Moss of District Court for the District of Columbia, and said, “my goal is to write something shorter.” As it turns out, she did it in 81.

The plaintiffs in this case (actually three cases combined due to the commonality of the issues raised) asserted that a recent DOL proposed exemption designed to ease compliance for some fixed-indexed annuities providers demonstrated that the advice rule would “upend” the distribution system and proved it was an example of “regulatory overreach.”

Judge Lynn began her analysis by explaining that courts analyze an agency’s interpretation of a statute using the two-step approach set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. (467 U.S. 837 (1984)). The first step is to determine “whether the intent of Congress is clear,” and if “Congress has directly spoken to the precise question at issue.” If so, that’s the end of it, and the court “must give effect to the unambiguously expressed intent of Congress.” If not, there’s a second step, where the court “must defer to the agency’s interpretation of ambiguous statutory language if it is based on a permissible construction of the statute.”

Texas ‘Toast’?

Judge Lynn outlined – and quickly dispensed with – the following arguments made by the plaintiffs.

Argument 1: The fiduciary rule exceeds the DOL’s statutory authority under ERISA.

Judge Lynn noted that not only does the “plain language of ERISA” not foreclose the DOL’s interpretation, it does not expressly define “investment advice,” and expressly authorizes the DOL to “prescribe such regulations as [it] finds necessary or appropriate to carry out the provisions of [ERISA],” as well as to “define [the] accounting, technical and trade terms used in [ERISA].” She also noted that there is no “serious dispute that someone who provides a recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property is providing investment advice.” 

She then proceeded to dismiss six other reasons plaintiffs had put forth, noting that “the Fiduciary Rule plainly does not make one a fiduciary for selling a product without a recommendation,” that nothing in ERISA suggests the term “investment advice” was intended only to apply to advice provided on a regular basis, that the plain language of the first and third prongs do not indicate that an ongoing relationship is required, that Dodd-Frank does not foreclose the DOL’s interpretation, and that Congress had not ratified the five-part test.

Turning to the analysis under Chevron Step 2, Judge Lynn brushed aside four arguments that the plaintiffs said rendered the final rules unreasonable, including her conclusion that the DOL reasonably removed the regular basis requirement, the DOL may regulate issues of deep economic and political significance, that the DOL’s rules reflect congressional intent (“as a result of as the rulemaking process, the DOL rejected a disclosure-only regime, finding that disclosure was ineffective to mitigate the problems ERISA sought to remedy”), and that the DOL justified its new interpretation. “For the reasons stated above, the Fiduciary Rule is a reasonable interpretation under ERISA and is entitled to Chevron deference,” she wrote.

Argument 2: The Best Interest Contract Exemption (BICE) exceeds the DOL’s exemptive authority, because it requires fiduciaries who advise Title II plans, such as IRAs, to be bound by duties of loyalty and prudence, although that is not expressly provided for in the statute. 

The exemptions are not unambiguously foreclosed by ERISA or the Code (Congress, however, expressly granted the DOL broad authority to adopt “conditional or unconditional exemption[s]” from prohibited transactions under Title II…), Lynn noted, going on to hold that the DOL may require compliance with Title II duties, the BICE is not unduly burdensome, nor is it a mandate.

Judge Lynn next noted that the BICE does not exceed the DOL’s authority under Chevron Step 2, that the DOL is entitled to deference unless it is arbitrary and capricious. She said that plaintiffs argue that it was, but she ruled that Congress has delegated exemptive authority to the DOL, and that the conditions and consequences of BICE are reasonable. 

Argument 3: The written contract requirements in BICE and PTE 84-24 impermissibly create a private right of action.

Lynn ruled that the DOL’s exemptions “…neither create a new sanction under federal law nor a private right of action.” She noted that while PTE 84-24 and BICE require that certain terms be included in written contracts to qualify for the exemption, and while that be a lawsuit for non-compliance with the contract, “…the exemptions do not create a federal cause of action under Title II.”

Argument 4: The rulemaking process violates the Administrative Procedures Act (APA) for several reasons, including that the notice and comment period was inadequate, the DOL was arbitrary and capricious when it moved exemptive relief provisions for FIAs from PTE 84-24 to BICE, the DOL failed to account for existing annuity regulations, BICE is unworkable, and the DOL’s cost-benefit analysis was arbitrary and capricious. 

Judge Lynn held that the notice and comment period was adequate (when the DOL requested comment on its proposed approach, it used language that satisfies the APA because it notified the public and the industry about the possibility the DOL would remove FIAs from PTE 84-24 and make them instead subject to BICE. In the NPRM, the DOL expressly asked whether FIA transactions should continue under PTE 84-24. Requiring sellers of FIAs to rely on BICE, as opposed to PTE 84-24, was thus a logical outgrowth of the DOL’s proposal), that the DOL reasonably moved FIAs from PTE 84-24 to BICE (in particular, the DOL justified its decision in three steps: (1) by explaining the complexity and risk of FIAs; (2) distinguishing between fixed rate annuities and FIAs; and (3) demonstrating how FIAs and variable annuities are similar), that the DOL accounted for existing annuity regulation (“the DOL comprehensively assessed existing securities regulation for variable annuities, state insurance regulation of all annuities, academic research, government and industry statistics on the IRA marketplace, and consulted with numerous government and industry officials… The DOL found the protections prior to the current rulemaking insufficient to protect investors”), and that the BICE is not unworkable. Here Lynn basically took apart the arguments put forward by the plaintiffs by concluding:

  • the DOL anticipated the most common distribution model would remain workable, predicting firms “will gravitate toward structures and practices that efficiently avoid or manage conflicts to deliver impartial advice consistent with fiduciary conduct standards”; 
  • the DOL provided guidance on reasonable compensation; 
  • the DOL considered litigation liability; 
  • the DOL’s guidance on proprietary products is clear; 
  • the plaintiffs misconstrue the supervisory responsibilities imposed by the rules; and
  • the DOL’s cost/benefit analysis was reasonable (“…analyzed under the same standard of deference to the agency as their ‘workability’ argument”).
Argument 5: The BICE does not meet statutory requirements for granting exemptions from the prohibited transaction rules. 

Judge Lynn said that the DOL “argues that this requirement refers to whether or not the exemption is feasible for the agency to apply, not for the regulated industry to satisfy. No party cites a case supporting its position, but the Court finds the DOL to be correct for three reasons,” which are: (1) assessing whether BICE is feasible for the industry would always require a cost benefit or economic impact analysis; (2) canons of statutory construction support the DOL’s position; and (3) ERISA’s legislative history supports the DOL’s position.

Argument 6: ACLI argues the new rules violate the First Amendment, as applied to the truthful commercial speech of their members.

One of the more novel arguments of the plaintiffs had to do with their assertion that in constraining the communications with customers regarding their sales communications, the First Amendment itself was violated. Judge Lynn didn’t waste much time on this argument, concluding that waiver applies and the rules do not violate the First Amendment. “Plaintiffs advance three arguments against waiver,” Judge Lynn noted: that typical waiver principles do not apply (because they assert a pre-enforcement First Amendment claim under the Declaratory Judgment Act); that it is impossible to waive a constitutional objection to an agency rule; and that the substance of the First Amendment was in fact raised in several comments. However, Judge Lynn found these arguments “unpersuasive.” Moreover, Judge Lynn noted that, “Even if Plaintiffs’ First Amendment challenge were not waived, the DOL’s rules do not violate the First Amendment,” explaining that “the rules regulate professional conduct, not commercial speech, and therefore any incidental effect on speech does not violate the First Amendment.” 

Argument 7: The contractual provisions required by BICE violate the Federal Arbitration Act.

“Plaintiffs’ argument is without merit,” Judge Lynn wrote, noting that “the exemptions’ contract requirements do not render arbitration agreements between a financial institution and investor invalid, revocable, or unenforceable.” Rather, she noted, “Institutions and advisers may invoke and enforce arbitration agreements, including terms that waive or qualify the right to bring a class action or any representative action; such contracts remain enforceable, but do not meet the conditions for relief from the prohibited transaction provisions of ERISA and the Code.” Consequently, she concluded that the exemptions, “…do not violate the FAA’s primary purpose, which is to “ensure that private arbitration agreements are enforced according to their terms.” 

With that, Judge Lynn noted that “for the reasons stated above, Plaintiffs’ Motions for Summary Judgment are DENIED, and Defendants’ Motion for Summary Judgment is GRANTED.”

What’s Next?

It remains to be seen whether plaintiffs in this, or the other two cases, will pursue an appeal, particularly since the Trump administration has sent a clear signal that it has designs on at least making some adjustments to the rule as it stands, and may well pursue a delay in the application date as the Labor Department undertakes a new review of the impact of the regulation. This result, coupled with President Trump’s Feb. 3 administrative memorandum to the DOL, will doubtless add some additional intrigue to the Senate Health, Education, Labor and Pensions Committee’s confirmation hearing for Labor Secretary nominee Andrew Puzder — now (re)scheduled for Feb. 16.

Buckle up. 





Comments (0)