5th Circuit Panel Presses DOL on Fiduciary Rule

By Nevin Adams • August 07, 2017 • 0 Comments
The fiduciary regulation got another day in court last week — and, for a change, this time the regulation’s challengers appeared to draw blood.

The setting was oral arguments before the 5th Circuit Court of Appeals, with the Labor Department making its case for the regulation challenged by a group of plaintiffs (and what had initially been three separate pieces of litigation) including the U.S. Chamber of Commerce, the Financial Services Institute and the Securities Industry and Financial Markets Association (SIFMA), which had been first to file suit against the fiduciary rule more than a year ago.

A decision on this case is not expected until fall, but court watchers (and listeners an audio is available here) were nearly unanimous in inferring, both from the type and volume of questions directed at the Labor Department, that this might be the case where the agency might see its heretofore unbeaten streak in defending the fiduciary regulation at trial come to an end. The 5th Circuit is, after all, generally considered the most conservative in the country, with decisions that frequently define the government’s role narrowly.

The hearing, which lasted just over an hour, included a number of pointed questions, and a couple of verbal clashes between Michael Shih, who was presenting the Labor Department’s case, and Judge Edith H. Jones. Jones, appointed to the court by President Reagan, heard the case along with Clinton appointee Chief Judge Carl Stewart and Bush appointee Judge Edith Clement.

Harm ‘Less’?

Eugene Scalia, on behalf of the plaintiffs in the case, seemed to find a receptive audience in the three-judge panel. “When an agency declares that it’s curing a harm, it needs to establish the presence of the harm,” Scalia said. “They failed to do that here.” Going on to state that the fiduciary regulation represented the “most sweeping changes to the retail financial services sector since the 1940 enactment of the Investment Advisers Act,” his arguments that the so-called “Harkin amendment” in the Dodd-Frank Act of 2010, in barring the SEC from regulating fixed-indexed annuities as securities, effectively sanctioned the regulation by the states wasn’t challenged. Scalia noted that the Labor Department was “not the federal retirement insurance agency.”

Moreover, when Scalia stated that the Labor Department lacked the authority to regulate advisors, and acted in an “arbitrary and capricious” manner, Judge Clement chimed in, “If they can do that, then [the Department of Health and Human Services] could declare that the doctor-patient relationship is one of a fiduciary duty, right?” Scalia said it could, going on to state that HHS would have more grounds for making that determination that the Labor Department had with the fiduciary rule.

Judge Carl Stewart probed Scalia on “the bottom line” regarding the fiduciary rule, asking: “Along with Judge Jones, I’m sort of befuddled about why this whole hornet’s nest was created. What’s the bottom line? How will it make it better?”

Speaking of IRAs, Scalia said that those marketing practices “are being radically transformed for both the insurance agents and broker-dealers. This change is being made not by Congress, not by the Securities and Exchange Commission, and not by the states, which regulate insurance. It’s being done by an agency that lacks regulatory power over IRAs, broker-dealers and insurance agents. And it’s being done in a manner that repeatedly defies judgments made by Congress.”

Jones pointedly told Shih that “You are deliberately creating fiduciary duties” and a new cause of action via the contract provisions in the BIC. ERISA’s authors never intended to allow regulators to create a new private right of action, Scalia argued, a power reserved to Congress in the case of Alexander v. Sandoval. Shih pushed back, stating that simply articulating “the terms of what a contract may contain does not create a cause of action.”

Labor = Employment

The judges, particularly Judge Jones, kept coming back to a sense that the Labor Department’s focus was employment, and employment-based plans, a focus that they seemed to see as inconsistent with extending the fiduciary regulation to IRAs. Judge Jones went so far as to claim that the purpose of ERISA was not to protect IRAs, but retirement plans. Jones noted that “The Department of Labor admits that it’s trying to transform what was a pretty lenient treatment of IRAs into an architecture of regulation.”

On that issue, Shih pushed back, pointing out that not only did ERISA “create” IRAs, but that Title II gave the Labor Department the authority to decide who is a fiduciary with regard to those accounts. The DOL has regulated IRAs “since the Carter administration,” Shih argued, and has full authority to do so.

Indeed, Shih asserted on several occasions that the Labor Department had, on previous occasions, and for some time, exercised authority within the same bounds that established its authority to promulgate the interpretations of the fiduciary regulation, while Jones repeatedly asked Shih for the agency’s opinions on various cases and/or Department of Labor interpretations of the rule and exemptions. In response, Shih promised a subsequent brief outlining the DOL positions.

There was also discussion as to why disclosure wasn’t sufficient, rather than imposing the new reporting regimen. The response essentially was that the reason they need advice is that individuals don’t know enough to know when they are getting bad advice.

The three-judge panel gave both sides 10 days to submit follow-up “letter” briefs, with a ruling expected this fall.