The 5th Circuit Court of Appeals in a victory for Appellants, U.S. Chamber of Commerce, et.al., by a 2-1 decision ruled on March 15 against the prior District Court decision for DOL, vacating that decision and erasing the Fiduciary Rule. The Appellants questioned whether 1) the new definition of investment advice fiduciary is consistent with ERISA or 2) is it “reasonable” under Chevron as use of regulatory powers. In addition the court considered 3) whether DOL’s moving FIAs to the BICE exemption was inconsistent with ERISA and the APA or 4) does the BICE inappropriately impose a required private right of action. The Court, agreeing with the Chamber, found against the DOL on all counts. The Rule will be null and void when the court mandates its effectiveness, most likely in early May.
Conclusion
Reading the entire 46-page opinion is like watching an MMA beat down of DOL with a first round knockout. The court’s resistance to “legislation by regulation” oozes from every page. This quote paraphrases that at the most strategic level, “…there is no doubt that the Supreme Court has been skeptical of federal regulations crafted from long-extant statutes that exert novel and extensive power over the American economy.” The opinion is meticulously reasoned; this perhaps unexpected given the ubiquitous defense federal courts have given regulatory agencies over recent decades. The court also found agency “turf grabbing” distasteful as well. “Rather than infringing on SEC turf, DOL ought to have deferred to Congress’s very specific Dodd-Frank delegations and conferred with and supported SEC practices to assist IRA and all other individual investors.” As powerful as this opinion is, it may even have ramifications far into the future, beyond one agency and one regulatory issue.
Investment Advice Fiduciary
In the original ERISA legislation, Congress defined who has fiduciary responsibilities in pension plans: whoever “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.” DOL decided in the Fiduciary Rule to assert that this covered all tax-qualified funds everywhere forever, also any advice by anyone making even a passing opinion, even though DOL and Congress had always over 40 years considered stockbrokers and insurance agents to be salespeople. They were not considered fiduciaries; the latter generally fee-based with a confidence and trust relationship via contract with a client. DOL itself decades ago in clarifying regulation noted that the advice had to be provided on a regular basis and the advisor needed to have control and authority for investment decisions. According to the Court, DOL inappropriately decided that they can supplant the original terms of the statute with their own definitions rather than the ones that Congress unambiguously intended.
“In any event, “absent other indication, ‘Congress intend[ed] to incorporate the well-settled meaning of “fiduciary”—the very essence of which is a relationship of trust and confidence.”
“Moreover, DOL’s principal policy concern about the lack of fiduciary safeguards in Title II was present when the statute was enacted, but Congress chose not to require advisers to individual retirement plans to bear the duties of loyalty and prudence required of Title I ERISA plan fiduciaries.”
Reasonable Regulation Under Chevron
The case, Chevron U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984), has become elevated to a doctrine that compels courts to defer to the regulatory actions of agencies as long as they are reasonable relative to their legislatively assigned missions. It has been cited in many subsequent lawsuits. “Given that the text here does not compel departing from the common law (but actually embraces it), and given that the Fiduciary Rule suffers from its own conflicts with the statutory text, the Rule is unreasonable. Moreover, that it took DOL forty years to ‘discover’ its novel interpretation further highlights the Rule’s unreasonableness.”
The court took as further evidence of unreasonableness the twisting and turning DOL had to do to transform “exemptions” into burdensome, punitive, unlegislated “mandates.”
“Illogic and internal inconsistency are characteristic of arbitrary and unreasonable agency action.”
Inconsistent with ERISA and the APA
“BICE extends far beyond creating ‘conditional’ ‘exemptions’ to ERISA’s prohibited transactions provisions. Rather than ameliorate overbreadth, it deliberately extends ERISA Title I statutory duties of prudence and loyalty to brokers and insurance representatives who sell to IRA plans, although Title II has no such requirements.”
“By statute, ERISA plan fiduciaries must adhere to the traditional common law duties of loyalty and prudence in fulfilling their functions, and it is up to DOL to craft regulations enforcing that provision. 29 U.S.C. §§ 1001(b), 1104. IRA plan ‘fiduciaries,’ though defined statutorily in the same way as ERISA plan fiduciaries, are not saddled with these duties, and DOL is given no direct statutory authority to regulate them.”
Impose a Required Private Right of Action
The court frowned on DOL’s requirement that any recommendation be subject to trial lawyers as their enforcers. “Only Congress may create privately enforceable rights, and agencies are empowered only to enforce the rights Congress creates.”
“In ERISA, Congress authorized private rights of action for participants and beneficiaries of employer sponsored plans, 29 U.S.C. § 1132(a), but it did not so privilege IRA owners under Title II. DOL may not create vehicles for private lawsuits indirectly through BICE contract provisions where it could not do so directly.” DOL argued that they were not creating a federal right, only access via a contract to a state right of action. However, the court saw that as an “end run” around Congress’s prohibition.
Dissent by Chief Judge Carl Stewart
One of the three judges on the panel disagreed with the decision, siding with DOL, writing that their Rule is a “valid agency action that demonstrates an expansive-but-permissible shift in DOL policy.” “Notwithstanding their qualms with these regulatory changes and the effect the DOL’s exercise of its regulatory authority might have on certain sectors of the financial services industry, the DOL’s exercise was nonetheless lawful and consistent with the Congressional directive to ‘prescribe such regulations as [the DOL] finds necessary or appropriate to carry out [ERISA’s provisions].’” The dissenting judge disagrees with the majority on every single point. This is a perfect representation of the recent trend where courts bend over backwards to let regulators fill in blanks in legislation at will, redefine terms, and regulate de novo in areas that have been settled for decades. Judge Seward argues well on technical points, but entirely misses the more overarching point. He is perfectly fine with turning the Republic over to unelected, unaccountable, job-protecting officials. Don’t be fooled; this battle with regulatory overreach is not over. But maybe the real accountability lies with a weak and turgid Congress, abdicating their responsibilities, unable to clarify legislation as sea changes occur in regulated markets.
The Future
The ship of increased protections for American investors has sailed and the most virtuous future is to work toward a legislative or coordinated, reasonable regulatory approach. DOL itself under Trump-administration-appointed Secretary Acosta is reviewing their own rule during the current transition period. It’s not clear whether they go back to the drawing board after this decision or let the SEC take the reins (of course, they don’t assert authority directly over fixed annuities). The SEC has bowed to expose its own fiduciary rule soon. Also, the SEC, NAIC, state legislative and regulatory efforts are all moving forward. Each of those has its own domain, of course, so hopes of a coordinated solution are shaky. The best outcome in my mind would be enhanced suitability (or “consumer-focused,” or consumer-centric or in consumer’s clear interest), disclosure requirements for financial transactions, without compulsory contracts, and perhaps with safe harbors for compensation or other conflicts. Even before these develop, but after the courts mandate erasing Fiduciary Rule, most of the principles behind the DOL Fiduciary Rule are good advice for agents, securities reps and advisors. Make and document your quality recommendations in the client’s interest, know your client, your carriers and products, and disclose how you are compensated, things the vast majority of you do now.