Supreme Court in Play for Fiduciary Rule Showdown

By John Hilton

The Department of Justice could appeal to the Supreme Court last week’s surprising Fifth Circuit decision throwing out the Department of Labor fiduciary rule.

Whether DOJ lawyers would even want to is the subject of intense debate.

The issue that is likely to pique the interest of the high court: defining the regulatory power of U.S. government agencies. That opportunity could be appealing to conservative elements eager to rein in the government, said one industry lawyer.

Among those who serve in the government bureaucracy, however, a SCOTUS ruling could create chaos. Ongoing work on regulations might be halted, while existing rules could face withering legal attacks.

How the DOJ proceeds could depend on whether political or bureaucratic forces are making the decision.

Appealing to the SCOTUS is not the only option to respond to the Fifth Circuit Court of Appeals 2-1 decision tossing the controversial fiduciary rule.

Judge Edith H. Jones wrote in the majority opinion that the DOL rule "fails the reasonableness test" of the Administrative Procedures Act by extending the department's ERISA authority to one-time IRA rollovers and similar transactions.

The decision went on to admonish the DOL for exceeding its authority and re-affirmed the role of Congress and the Securities and Exchange Commission in regulating agents and advisors.

The ruling takes effect in 45 days. Until then, the ball is in the government’s court, with three options on the table:

• Request an en banc re-review by the full judiciary. Although rare, this request can be made by Chief Judge Carl E. Stewart, who wrote the dissenting opinion. More likely, the request would come from the government. En banc reviews are generally requested on issues of great importance. Such a request must be made within 45 days from March 15 -- or May 7.

• Petition the Supreme Court to hear the case. The high court is under no obligation to take on the case, and in fact, accepts just 100-150 of the 7,000 or so petitions it receives annually. Cases with broad national implications, such as the fiduciary rule, generally receive high priority.

• Do nothing. The government could accept the ruling and let the fiduciary rule fade to oblivion.

If the government opts for either of the first two scenarios, it is likely that a stay will be granted and the fiduciary rule's impartial conduct standards will remain in effect, Drinker Biddle & Reath said in a client alert.

Semi-Split Decisions

In addition to untangling the regulatory power of the federal government, the SCOTUS could be drawn to the broad impact on retirement savers. Furthermore, the Fifth Circuit decision was somewhat countered by a 10th Circuit ruling a day earlier.

In that decision, which focused narrowly on the treatment of fixed indexed annuities, the Denver-based appeals court ruled in the government’s favor. While not an apples-to-apples comparison, both cases focused on the DOL’s power to regulate.

The 10th Circuit appeal came from a lawsuit filed in Topeka, Kan., by Market Synergy Group claiming irreparable harm if FIA sales require a Best Interest Contract Exemption. In February 2017, Judge Daniel Crabtree granted a summary judgment to the DOL, ruling that the agency was within its rights to move FIAs into the BICE.

"The DOL considered both sides of this issue and ultimately decided to treat FIAs differently than fixed rate annuities because of their risk, complexity and conflicts of interests," the 10th Circuit ruled in a 16-page decision. "It did so with evidentiary support in the record."

The Fifth Circuit took a much different view on the DOL rulemaking approach.

“DOL has made no secret of its intent to transform the trillion-dollar market for IRA investments, annuities and insurance products, and to regulate in a new way the thousands of people and organizations working in that market,” Judge Jones wrote.

The Supreme Court might have some interest in sorting this out. While some industry attorneys doubt the government is interested in that scrutiny, Bruce L. Ashton doesn’t agree.

“I think there is a chance it will because of the harsh stance the opinion takes on the DOL’s regulatory authority,” said Ashton, an ERISA expert with Drinker Biddle & Reath.

“Yes, you can read the opinion as narrowly attacking them on just the fiduciary rule and exemptions, but I think it can also be read more broadly and that – setting aside how one feels about the policies issues – the DOL might want to have this opinion revisited to get away from the strictness of how the court viewed its ability to adopt regulations.”

No Enforcement

So far, the only response from the DOL is a statement indicating the department will no longer be enforcing the fiduciary rule.

Any decisions on the next step could be influenced by a variety of factors, insiders say. The general view of the Trump administration has been to undo as much of the Obama regulatory legacy as possible across all departments.

However, the fiduciary rule might not make it to the West Wing radar screen. Gary Cohn, former investment banker and chief economic advisor to Trump, was seen as the main voice opposing the fiduciary rule. His departure removes a key ally for the industry.

Secretary of Labor Alexander Acosta is known to have greater ambitions than just running the labor department. His profile to date is one of caution, with strict adherence to legal principles. Although Acosta is on record opposing the fiduciary regulation, the department defended it in a legal brief to the Fifth Circuit.

In the meantime, the DOL is meeting with industry groups and working to amend the second phase of the fiduciary rule, slated to take effect July 2019.

"If the process is fully stretched out, the stays could be in effect for a year or more," Drinker Biddle said in its alert. "In that case, we think the DOL will propose a new regulation and exemptions during that time, which will start an entirely new process. The SEC might also propose its own fiduciary rule during that period."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.