Trump Faces Longer Odds To Ax Fiduciary Rule After DOL Win
By Carmen Germaine
Law360, New York (February 9, 2017, 10:25 PM EST) — The Trump administration will need to build a robust administrative record if it wants to convince the public and courts a full-scale repeal of the new fiduciary rule for retirement account advisers is justified and not merely a political about-face, experts said, after a Texas federal judge on Wednesday issued the third lengthy opinion endorsing the U.S. Department of Labor’s original analysis.
U.S. District Judge Barbara M.G. Lynn granted the Labor Department’s motion for summary judgment on Wednesday in an 81-page opinion finding the agency did not exceed its authority and properly considered the costs and benefits when promulgating the rule — just hours after the DOL had asked to stay the case while it completes a review of the rule mandated by President Donald Trump.
Although the DOL appears certain to delay the rule’s implementation date, currently set for April 10, and likely to revise or even rescind the rule in light of the review Trump requested last week, experts said that the agency will have a tough time justifying changes after three federal judges have found its original analysis robust enough to withstand scrutiny.
“For those who are supporters of the rule, I don’t think that you could have asked for a better opinion,” said Charles Field, co-chair of the financial services practice at Sanford Heisler LLP.
The fiduciary rule, promulgated in April 2016, requires financial professionals who advise retirement account holders to act in the best interests of their clients when recommending investment products, a higher standard than the current approach of promoting products that are merely suitable to an investor.
Industry groups launched a host of lawsuits, including the Texas action filed by the U.S. Chamber of Commerce and other business groups, alleging the Labor Department ignored critical commentators and failed to properly analyze the costs and benefits of the rule when drawing up the regulation.
Many of the suits also targeted the rule’s so-called best interest contract exemption, which allows brokers to continue earning commissions from sales of investment products provided they enter a contract with customers in which they pledge to act in the clients’ best interests and disclose any conflicts of interest.
But with the Wednesday opinion, judges in Washington, D.C., Kansas and now Texas have created a robust judicial record of 263 pages at the district court level finding that the rule withstands scrutiny.
Among other things, Judge Lynn said that the Employment Retirement Income Security Act clearly empowered the Labor Department to define terms and pass necessary rules and regulations to protect retirement investors and employee benefit plan participants.
She found the DOL adequately considered criticisms voiced during the rulemaking process and weighed the costs and benefits of the rule, saying the rule is reasonable given the agency’s findings that the new standards “could save retirement investors up to $36 billion over the next 10 years.”
And she ruled that the BIC exemption’s effect on compensation models is not arbitrary or capricious, noting that many firms have deemed the exemption’s conditions workable.
“Although the industry may have less ideal options than before the current rulemaking, the industry has been given viable choices,” Judge Lynn said.
Despite the court support, however, the DOL will soon consider whether to tweak the rule. Trump’s memorandum directed the secretary of labor to review the rule, asking the secretary to consider whether the rule could harm investors by reducing access to certain retirement savings offerings, whether the rule has resulted in disruptions in the retirement services industry that could adversely affect investors and whether it could cause an increase in litigation or raise prices for investors.
If the secretary makes an affirmative finding on any of those points, the memo directs the secretary to publish a proposed rule rescinding or revising the fiduciary rule.
In its motion for a stay of the Texas litigation, the DOL said it was “carefully reviewing” the identified issues and assessing its legal options for delaying the rule’s April implementation deadline. The stay motion suggested changes to the rule are quite possible, as the agency said that after it completes its review process the final version of the rule could differ in “relevant ways” from the version challenged by the lawsuit.
But while revisions to or even a rescission of the rule seems probable in light of the change in administration, experts said that Judge Lynn’s opinion and the other district court decisions show the Trump administration will face an uphill battle.
“To have it come out of Texas, and to have a strong opinion like this, is very strong support for this rule,” Field said. “Based on this strong opinion, the Department of Labor is going to be hard-pressed logically to repeal at this stage.”
Field said the opinion will make it difficult for the agency to develop a logical argument for repealing the rule, because it will have to justify why it is reversing reasoning it successfully defended in three hard-fought legal challenges.
Tess Ferrera, head of the ERISA litigation group at Schiff Hardin LLP and a former Labor Department ERISA trial attorney, said that the agency will have to be “very cautious and careful” if its review finds a basis for amending or rescinding the rule to make sure it doesn’t run afoul of the Administrative Procedure Act.
“It’s always going to be more challenging to take action when there’s another branch of government that has come out very strongly in support of this rule,” Ferrera said.
Justifying changes could be especially difficult considering the depth of review the agency undertook the first time around, when the Labor Department considered 3,000 comment letters and held four days of hearings — after taking five years to reconsider regulations first proposed in 2010.
If the Labor Department decides in its review, for example, that the costs of implementing the rule are too high for financial services companies, it will have to provide ample evidence to illustrate how it reached a conclusion opposite to its thinking just last year. The fact that a number of firms have already taken steps to comply with the rule could add a further hurdle to that analysis.
That justification is necessary because any changes will no doubt face fierce opposition from supporters of the rule. The Public Investors Arbitration Bar Association President Marnie C. Lambert issued a statement Friday saying that the three court opinions show that the rule is “carefully crafted” and “capable of timely implementation by the industry.”
“To have the DOL revisit these issues again, rather than advancing its efforts to implement and enforce the rule, is a waste of resources,” Lambert said. “The investing public and the industry should have certainty moving forward.”
But while the Labor Department will have to show its work in any bid to change the rule, it’s far from impossible for the agency to enact a rollback, experts said.
Ferrera noted that as long as the agency does follow the APA, it will enjoy a highly deferential legal standard in court.
“You’ve got district courts that have ruled, and this last opinion is very eloquent, but it doesn’t mean that the department can’t take contrary action,” Ferrera said. “It just has to make sure that whatever action it’s taking, it thinks very carefully about how it’s going to approach this issue.”
Some experts even argued that Judge Lynn’s decision could help the Labor Department face down any future challenges to a repeal effort.
Lawrence K. Cagney, chair of the executive compensation and employee benefits group at Debevoise & Plimpton LLP, said the opinion is arguably even supportive of whatever action the Trump administration could take.
“Judge Lynn recognized that the Obama administration, in making its interpretation of the law, is entitled to deference,” Cagney explained. “If that carries through to the Trump administration, then the Department of Labor under the Trump administration will have broad deference to provide exemptive relief or carry out a new rule that would change the interpretation of the prior department.”
And while Judge Lynn endorsed the Labor Department’s analysis of the rule’s costs and benefits, Cagney noted that she didn’t rule that any other conclusion or action would be unreasonable. If the Trump administration reopens the evaluation and looks at different factors and different data, Cagney said, it could well reach a different conclusion that would also be considered reasonable by the courts.
Cagney suggested that the case could particularly help the Labor Department if it decides to allow the bulk of the rule to stand, but eases the compliance burdens by relaxing the requirements for firms seeking to use the best interest contract and other exemptions.
That path could be more attractive for the agency, but not just because of Wednesday’s decision. Experts noted that other potential obstacles to repeal have been building since the final rule was issued last year — many financial firms have already done much of the work to comply with the rule, while investors have become more aware that not all financial professionals are held to a best-interest standard.
Sen. Elizabeth Warren, D-Mass., outlined some of those changes in a letter she sent Tuesday to acting Secretary of Labor Edward Hugler, saying that firms including Vanguard Group Inc., BlackRock Inc. and Wells Fargo & Co. expressed support for applying a best-interest standard in communications with her.
She also said that many firms have told her they were already prepared to meet the April implementation deadline, and argued that a delay or repeal could have “unfair repercussions for companies that have acted in good faith to implement this rule.”
Given those industry changes, the Department of Labor may be less eager to walk back a rule that firms have already spent millions to comply with and are now touting to investors.
“The industry does not have a single voice clamoring for the repeal of this rule as it would have had a year ago,” Cagney said.
Field said that although some firms that have not yet complied with the rule are unlikely to move to a best-interest standard if the regulation is repealed, many have embraced the new standard despite the regulatory uncertainty.
“It’s awakened the industry to that need, that they need to start paying more attention to the financial interest of their clients instead of what’s going to be the best commission-paying product that they can sell,” Field said.
And for those firms that have already made the change, Ferrera said a delay or repeal is unlikely to make them pull back significantly.
Moving back to their old models and the lower suitability standard could even be politically difficult for firms that have capitalized on growing investor awareness by advertising their fiduciary status as a way to compete with other institutions.
“Even if it’s rescinded or parts of it are modified to conform in a friendlier way to the industry, I don’t think that those institutions that embraced this rule, advertised themselves as being more customer-friendly, can do an about-face,” Ferrera said.
The case is Chamber v. U.S. Department of Labor et al., case number 3:16-cv-01476, in the U.S. District Court for the Northern District of Texas.
–Editing by Katherine Rautenberg and Mark Lebetkin.