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Court vacates fiduciary rule

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Banking, Consumer Protection, Legislation
Monday, March 19, 2018

Two of three panel judges of the Fifth Circuit Court of Appeals overturned a lower court’s ruling on the Department of Labor’s (DOL) fiduciary rule, vacating the rule in its entirety. The ruling signals victory for a coalition of financial and business trade groups who challenged the 2016 rule, shortly after President Barack Obama’s administration finalized it.

Following the ruling, the coalition – which includes the U.S. Chamber of Commerce, the Financial Services Institute, the Financial Services Roundtable, the Insured Retirement Institute and the Financial Markets Association – released a joint statement noting their belief that the court’s decision will be positive for retirement savers and investors.

“The court has ruled on the side of America’s retirement savers, preserving access to affordable financial advice,” the coalition said. “Our organizations have long supported the development of a best interest standard of care and the Securities and Exchange Commission (SEC) should now take the lead on a clear, consistent, and workable standard that does not limit choice for investors.”

House Financial Services Committee Chairman Jeb Hensarling (R-Texas), a vocal opponent of the fiduciary rule, also noted his support for the court’s ruling.

“The flawed DOL fiduciary rule is the epitome of regulatory overreach that would harm the very people it’s allegedly intended to help,” Hensarling said in a statement. “It is vital that we preserve access, choice and affordability for retirement planners, and in doing so, empower these hard-working Americans to make financial decisions that work best for their families. I look forward to continuing to work with Members of Congress – like Rep. Ann Wagner, who has been a leader on this issue – to enact a clear and workable standard that empowers Americans with their own futures, as opposed to unelected, unaccountable bureaucrats.”

The “fiduciary rule,” as it commonly is called, refers to a package of seven rules that broadly interpret who constitutes an “investment advice fiduciary,” and redefine provision exemptions concerning fiduciaries that appear in the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.

The package expanded the definition of “fiduciary” under ERISA to require financial institutions and professionals who offer retirement investment advice to abide by a fiduciary standard to act only in their clients’ best interests. The change caused many in the financial industry to reassess their methods for marketing and selling their retirement products and services, such as employee benefit plans and individual retirement accounts, in case the rule was implemented.

District Court Judges Edith Jones and Edith Brown Clement found that the rule’s new definition of fiduciary conflicts with the ERISA. Together, they formed the court’s majority opinion on the matter.

“First, the rule ignores that ERISA Titles I and II distinguish between DOL’s authority over ERISA employer-sponsored plans and individual IRA accounts,” the majority opinion states. “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. 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. As to IRA plans, DOL is limited to defining technical and accounting terms, and it may grant exemptions from the prohibited transactions provisions. Hornbook canons of statutory construction require that every word in a statute be interpreted to have meaning, and Congress’s use and withholding of terms within a statute is taken to be intentional. It follows that these ERISA provisions must have different ranges; they cannot mean that DOL may comparably regulate fiduciaries to ERISA plans and IRAs. Despite the differences between ERISA Title I and II, DOL is treating IRA financial services providers in tandem with ERISA employer-sponsored plan fiduciaries. The fiduciary rule impermissibly conflates the basic division drawn by ERISA.”

The majority also noted that the DOL’s definitions of a fiduciary’s functions and authority do not align with related statutes, which does not allow those definitions to be applied uniformly across applicable provisions.

“The investment-advice prong of the statutory application of ‘fiduciary’ is bookended by one subsection that defines individuals as fiduciaries with respect to a plan to the extent they exercise ‘any discretionary authority or . . . control’ over the management of a retirement plan or ‘any authority or control’ over its assets,” the majority stated.

“Countertextually, the fiduciary rule’s interpretation of an ‘investment advice fiduciary’ lacks any requirement of a special relationship,” the majority stated. “DOL thus asks us to differentiate within the definition of ‘fiduciary’ — rendering the definition a moving target depending on which of the three prongs is at issue. Standard textual interpretation disavows that disharmony.”

The judges also ruled that the DOL did not meet the “reasonableness” tests required under Chevron deference, which enables courts to defer to reasonable agency statutory interpretations, and under the Administrative Procedures Act (APA), which governs agency rulemaking.

“Under that test, an investment-advice fiduciary is a person who (1) ‘renders advice…or makes recommendation[s] as to the advisability of investing in, purchasing, or selling securities or other property;’ (2) ‘on a regular basis;’ (3) ‘pursuant to a mutual agreement…between such person and the plan;’ and the advice (4) ‘serve[s] as a primary basis for investment decisions with respect to plan assets;’ and (5) is ‘individualized . . . based on the particular needs of the plan,’ ” the majority noted.

“Not only does the rule disregard the essential common law trust and confidence standard,” the majority stated, “but it does not holistically account for the language of the ‘investment advice fiduciary’ provision or for the additional prongs of ERISA’s fiduciary definition. The Supreme Court has warned that “there may be a question about whether [an agency’s] departure from the common law…with respect to particular questions and in a particular statutory context[] renders its interpretation unreasonable.’ 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.”

Judge Carl Stewart dissented from the majority opinion, stating that he believes “the DOL’s new regulations are a statutorily permissible and reasonable exercise of its regulatory authority.”  

“The panel majority’s conclusion that the DOL exceeded its regulatory authority by implementing the regulatory package that included a new definition of investment-advice fiduciary and both modified and created new exemptions to prohibited transactions is premised on an erroneous interpretation of the grant of authority given by Congress under ERISA and the Code,” Stewart said in his individual opinion. “I would hold that the DOL acted well within its regulatory authority — as outlined by ERISA and the Code — in expanding the regulatory definition of investment-advice fiduciary to the limits contemplated by the statute, and would uphold the DOL’s implementation of the new rules.”

He noted that the majority opinion heavily relied on principles outside directly applicable statutes. Such principles include those outlined in the Investment Advisers Act (IAA) and the SEC's interpretations of “investment advice for a fee.”

“It is only after invoking common law trust principles that the panel majority turns to the statutory text,” Stewart said. “Instead of assessing the DOL’s regulations based on the plain language of the statute, the panel majority relies on several extra-statutory sources which purportedly shed light on how an investment-advice fiduciary should be defined. In so doing, the panel majority maintains that the relevant provisions in ERISA and the code contemplated a hard distinction between investment advisers and those who merely sell retirement products, and that the DOL dispensed with this distinction in the new rule by conferring fiduciary status on one-time sellers of products.”

Stewart also asserted that one point about fiduciary definitions the investment-advice provision is “bookended” by support a conclusion opposite the one drawn by the panel majority.

“The panel majority also emphasizes that the investment-advice provision is ‘bookended’ by two separate definitions of fiduciary which purportedly incorporate common law trust principles and apply to individuals vested with responsibilities to manage and control the plan,” Stewart said. “From this, the panel majority extrapolates that the investment advice prong requires the existence of a ‘special’ relationship so as to harmonize with the statutory definitions of fiduciary that come before and after it. However, that the other two prongs of the statutory definition of ‘fiduciary’ describe those involved in managing or administering a plan provides support for the opposite conclusion. Because the other disjunctive prongs of the statutory definition already address ‘the ongoing management [and administration] of an ERISA plan,’ the panel majority’s reading of the ‘investment advice’ prong would strip that prong of independent meaning and render it superfluous.”

In their majority opinion, the judges cited a DOL estimate that the fiduciary would impose compliance costs on the regulated parties of as much as $31.5 billion over 10 years with a “primary estimate” of $16.1 billion.

In early 2017, Secretary of Labor Alex Acosta declined to delay the rule’s effectiveness that year, but he did delay the applicability of key exemptions under the rule until 2019 to give covered institutions more time to comply.

The American Bankers Association and the Financial Services Roundtable are among trade associations that long have advocated for delaying the rule’s implementation and for revisions to ensure it does not negatively impact the services available to bank customers.

The final rule became effective on June 7, 2016, and had an original applicability date of April 10, 2017, which will be delayed 60 days to June 9 if a proposed rule published March 2 by the DOL is adopted. The proposed rule delaying the applicability of the new fiduciary definition was issued in accordance with a Feb. 3 presidential memorandum advising the DOL to spend more time examining the rule.

In response to a September 2017 proposal to delay implementation of the fiduciary rule, Sen. Elizabeth Warren (D-Mass.) wrote a letter to Acosta urging him to reconsider.

“Such a delay would endanger billions of dollars in Americans’ hard-earned retirement savings, and, if you enact the delay, it would ignore the preparation and positive outlook on the rule that many financial services and insurance companies have repeatedly expressed,” Warren wrote. “The fiduciary rule's requirement that retirement investment advisers adhere to ‘impartial conduct standards,’ and thus give advice that it is in the best interest of their clients, went into effect on June 9, 2017, following your initial two-month delay.  The rule’s ‘phased implementation period’ is scheduled to end on Jan. 1, 2018, when the department will begin enforcing all parts of the rule, including the Best Interest Contract (BIC) Exemption.”

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