Another Day in Court for Fiduciary Rule

By Nevin Adams • November 21, 2016 • 0 Comments
The Department of Labor’s (DOL) Fiduciary Rule got another day in court — and with at least a sense that it might not fare as well this time around.

An edited assessment of the event by Erin Sweeney, an attorney at Miller & Chevalier who attended the Nov. 17 hearing in Dallas, characterized Judge Barbara Lynn’s approach as “sympathetic” to the plaintiffs’ arguments, while being “very focused” on how these cases differed from the November 4 decision in the District Court for the District of Columbia which upheld the Labor Department regulation.

In addition to the difference in arguments, Judge Lynn is dealing with three separate suits that were brought together, involving a large number of plaintiffs, including the American Council of Life Insurers, the National Association of Insurance and Financial Advisors (NAIFA) and six NAIFA chapters in Texas, the Indexed Annuity Leadership Council (IALC) and several providers of these insurance products, the Chamber of Commerce of the United States of America, the Financial Services Institute, the Financial Services Roundtable, the Greater Irving-Las Colinas Chamber of Commerce, the Humble Area Chamber of Commerce DBA Lake Houston Area Chamber of Commerce, the Insured Retirement Institute, the Lubbock Chamber of Commerce, the Securities Industry and Financial Markets Association, and the Texas Association of Business.


In requesting that the three cases be heard together, the parties had acknowledged the following similarities:

  • all were pending in the same judicial district against the DOL;

  • all were challenging the same final rulemaking; that “the issues of law and fact are almost entirely common”

  • all three complaints allege substantially the same violations of the APA and First Amendment, including that the fiduciary regulation “impermissibly broadens the definition of fiduciary investment advice under ERISA and the Internal Revenue Code”; and

  • all three allege that the new Best Interest Contract (BIC) Exemption is arbitrary and capricious, that the DOL failed to provide sufficient notice and comment for certain items, and that the fiduciary regulation and exemptions “unconstitutionally burden commercial speech in violation of the First Amendment.”

As for the primary difference in the three lawsuits, they are that the Chamber action, but not the other two suits, challenges the Principal Transactions Exemption on grounds similar to the challenges to the BIC Exemption, and raises a claim under the Federal Arbitration Act regarding a clause in both exemptions prohibiting class action waivers.

Current Hearing

The standing-room only hearing in the U.S. District Court for the Northern District of Texas included Assistant Secretary of Labor Phyllis Borzi and Elizabeth Hopkins, counsel for appellate and special litigation.

Discerning a judge’s potential ruling based on the questions asked during a hearing is an inexact science at best. That said, it’s worth noting that Lynn said, “I understand my task is not to engage in a flurry of second guessing; that I am not being asked what I would do. The question is whether the conclusions [made by the DOL] are justified,” according to the InvestmentNews report.

According to the report, Lynn seemed skeptical about the applicability of the mutual fund environment to that of annuity sales and incentives. As for the concerns that the Best Interest Contract (BIC) Exemption creates a private right of action, InvestmentNews reported that Lynn outlined her understanding of the plaintiffs’ argument as follows: “You are not literally saying that a private right of action has been created; your argument is that the DOL is imposing a regulation on the industry that it is not entitled to impose because it is impossible to conduct business without the BIC, which is a backhanded way of imposing the regulation on the industry.” To the DOL’s response that the legal obligation comes from the contract, not the regulation itself, Lynn replied, “The argument is that the contract is being forced on them — that they can’t operate without the BIC so they have to subject themselves to the BIC.”

Plaintiffs had also raised First Amendment concerns — basically that since the fiduciary regulation “forbids certain speech unless it occurs in a context that the Department defines to be a fiduciary relationship, subject to limitations and burdens created by the Department” — and that since the BIC’s onerous provisions “unduly restrict financial institutions’ and professionals’ ability to engage in truthful, commercial speech,” both “unreasonably and unnecessarily restrict and burden the speech of financial institutions and financial professionals,” and thus violate the First Amendment. The DOL maintained that the regulation did not regulate speech but instead regulated conduct, and, according to the InvestmentNews report, even if the regulation could be construed as regulating speech, all that is being regulated is misleading advice. Lynn pushed back on that view, according to the report, stating that the rule “regulates more than misleading speech — it just punishes misleading speech. Speech is subject to the regulation.”

In response, the DOL said that its position is that the industry “can say whatever they like as long as they are not recommending products that are not in the best interest.”

To that end, Judge Lynn cautioned those in attendance not to read too much into her questions. “My questions are just questions,” she said. “You’ll know what I think when I issue my decision,” she added, according to InsuranceNewsNet. Lynn reportedly mused aloud as to if there would be enough time for the case(s) to be heard by the Supreme Court before the April deadline — acknowledged that that wasn’t going to happen, and then turned her attention to the petition to stay the regulation pending resolution of the litigation.

According to the report, Lynn wrapped up the hearing by suggesting that she may issue her opinion sometime in the next month, and pointed out 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.”