D.C. District Court: No Pause on Fiduciary Ruling Pending Appeal

By Nevin Adams • November 28, 2016 • 0 Comments
Though acknowledging that the fiduciary rule is likely to cause “significant changes” in how the industry operates, along with “substantial compliance costs,” and “economic losses,” the federal judge who recently rejected a legal challenge to the Labor Department’s fiduciary rule won’t hold up application of the rule while it’s being appealed.

It was less than a month ago that Judge Randolph Moss rejected a challenge to the fiduciary rule by the National Association for Fixed Annuities. Last week Judge Moss refused to put the rule on hold while NAFA appealed to the U.S. Court of Appeals for the D.C. Circuit, though he did grant their request for an expedited ruling.

On Nov. 14, 2016, NAFA filed a notice of appeal, a motion for a preliminary injunction to prevent the new rules from taking effect “until at least ten months (or as much as two years) following the final disposition of th[e] litigation,” and a motion seeking either an “expedited status conference” or “expedited relief” on NAFA’s renewed motion for a preliminary injunction.

Injunction Requirements

Judge Moss noted that to secure a preliminary injunction, a plaintiff “must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.” However, Moss noted that in this particular case, the court had not only already concluded that NAFA is unlikely to prevail on the merits, but had rejected NAFA’s claims in a final judgment.

Moss went on to say that, even were he to apply a sliding-scale approach, “NAFA has failed to carry its burden of demonstrating entitlement to a preliminary injunction,” that the court was required to consider the “likelihood of success on the merits in that overall balance,” and that even if it was demonstrated that “a serious legal question is presented,” the party moving for that relief “bears the heavy burden of demonstrating that little if any harm will befall other interested persons or the public and that the movant, in contrast, will suffer irreparable injury if denied preliminary relief.”

Applying this standard, Moss concluded that NAFA’s motion fails for three reasons:

First, Moss noted that NAFA faces a “particularly heavy burden” because the court has already held that NAFA’s challenges fail on the merits. “The Court, accordingly, is not engaged in the process of predicting how it is likely to decide the case — it has already decided the case,” he wrote. While acknowledging that the Court of Appeals may reach a different conclusion, Moss said that “NAFA has not presented any argument that causes this Court to question the result it has already reached or to believe that the Court of Appeals is likely to reach a contrary conclusion.”

Second, Moss held that this not a case in which other interested parties or the public will suffer “little if any harm” if the new rules are enjoined pending appeal. Instead, he noted that protecting the public was the rationale behind the fiduciary rule.

Finally, Moss held that NAFA’s showing of irreparable injury is “insufficient to overcome its failure to demonstrate a likelihood of success on the merits or that others will suffer little or no injury from issuance of an injunction.”

Big Changes Acknowledged

“This is not to suggest that NAFA members will be unaffected by the approaching applicability dates in April 2017 and January 2018, or even that some or all of NAFA’s predictions will not come to pass,” Moss wrote. He said that “ the fixed indexed annuity industry will certainly incur substantial compliance costs; that business practices will change when the new rules take effect; and that those involved at various levels of the fixed indexed annuities industry will sustain economic losses from, for example, receiving lower commissions or facing altered competition in the marketplace,” but that those types of costs, even if irreparable, “are not sufficient to overcome the substantial weight that the Court must accord to the fact that it has already concluded that NAFA’s claims fail on the merits and the Department’s reasonable conclusion that retirement investors will likely be harmed if the rules do not take effect over the next several months.”

Moss concluded that not only did NAFA’s case have little likelihood of success, but that the new rules were adopted to protect retirement investors from conflicted advice and potential losses to their retirement savings, and that “enjoining the rule would delay this protection” and would “also interfere with the implementation of three regulations that were lawfully adopted after nearly six years of study, public comment, and consideration.”

Even though members of NAFA will incur significant, unrecoverable costs if the rules take effect, Moss noted that “NAFA has failed to carry its heavy burden of showing that its members are ‘certain’ to sustain injuries that are so extraordinary that preliminary relief is warranted even though this Court has rejected NAFA’s claims on the merits and others will likely sustain losses if the rules are enjoined. The Court, accordingly, concludes that the overall balance of equities tips decidedly against granting preliminary relief.”

While the NAFA suit was the first to be ruled upon, other challenges to the fiduciary regulation are still pending in the District of Kansas (oral arguments heard on Sept. 23), as well as a consolidation of three separate lawsuits that was heard last week in the 5th Circuit. A sixth, filed in the U.S. District Court for the District of Minnesota, is also pending. Of course, not only are the cases filed in different federal court districts, there are significant differences in the causes of action alleged.