Court Won’t Stop the Fiduciary Rule

Plaintiffs seeking an emergency injunction in federal court against the implementation of the fiduciary regulation got a quick answer this week.

Last week plaintiffs in the case, including the U.S. Chamber of Commerce, the Financial Services Institute, and the Securities Industry and Financial Markets Association, had asked for a ruling by Judge Barbara M.G. Lynn citing “…their urgent need for relief.”

On Monday, Judge Lynn gave them her answer – a resounding “no.”

In explaining her ruling, Judge Lynn noted that “although this case was originally defended by the DOL in the Obama administration, the injunction request is vigorously opposed by the DOL under the current administration.” She explained that there are four factors considered in determining whether to grant an injunction pending appeal, and noted that an injunction is an “extraordinary remedy and is never awarded as of right.”

Here’s what she said regarding those four factors and the plaintiffs’ arguments:

1. The likelihood that the moving party will ultimately prevail on the merits of the appeal

Lynn noted that she had “already found Plaintiffs’ position on the merits unpersuasive,” and that moreover, “two other district courts have reached the same conclusion in similar cases, and neither court has enjoined enforcement of the rules.” And since in her estimation, “plaintiffs have not presented any arguments that would cause the Court to question its decision or persuade it that the Fifth Circuit is likely to reach a contrary conclusion,” they failed to satisfy the first factor.

2. The extent to which the moving party would be irreparably harmed by denial

Judge Lynn noted that the plaintiffs argued that they would “…face unrecoverable compliance costs due to the impending effective date of the statute,” and that they “…have incurred compliance costs before and throughout this litigation, and that the industry has already done much preparing to comply.” But since compliance costs already incurred “…cannot constitute the irreparable harm Plaintiffs must show because the standard is inherently prospective,” and since the plaintiffs hadn’t argued that additional compliance costs “between now and the applicability date would be substantial or prohibitively expensive,” moreover, “even if the final rules go into effect on April 10, 2017, the deadline for providers who wish to rely on the Best Interest Contract Exemption (“BICE”) is not until January 1, 2018.” She went on to explain that of the seven principal arguments made by Plaintiffs in their Motions for Summary Judgment, five related to the terms and conditions of BICE, and since the Labor Department has proposed to further delay the rule’s applicability date, and since a recent Field Assistance Bulletin had clarified that the Labor Department would “not initiate immediate enforcement action on the rules even if the April 10, 2017, applicability date were not delayed.” The bottom line for her was that even if the applicability date was not delayed, the costs alleged by the plaintiffs were, by their own admission, “speculative,” since the nature or timing of those costs was uncertain. “In short,” she wrote, “it appears that the industry is waiting to see if the rules will become applicable, and if they do, the industry apparently will take the requisite actions.” Judge Lynn felt that this “supports the conclusion that the DOL’s actions will have a greater impact on compliance and costs incurred by industry members than will the Court possibly enjoining the rules.” She was, as she had been in her initial decision, dismissive of the notion that “independent marketing organizations (“IMOs”) will be unable to comply with the new rules and will be forced out of business due to an adverse impact on their common distribution model.”

3. The potential harm to opposing parties if the injunction is issued

Lynn noted that “Congress gave the DOL express statutory authority to grant conditional or unconditional exemptions from ERISA’s prohibited transactions,” and that in her previous ruling she had noted that Congress also gave the DOL “broad discretion to use its expertise and to weigh policy concerns when deciding how best to protect retirement investors from conflicted transactions.” The bottom line: Granting an injunction would interfere with the DOL’s statutory authority, its expertise, and its policy-making role.

4. The public interest

Here, though the plaintiffs had argued otherwise, Lynn noted that “the premise of the DOL’s rules are that those who provide investment advice to ERISA and IRA plans have conflicts of interest, and absent further protection, the public will be harmed.” She noted that she had previously determined that “the DOL acted reasonably,” and that the plaintiffs “…have not provided significant evidence in contravention of the DOL’s reasonable conclusions, so the Court defers to the DOL’s judgment.”

What’s Next?

Under the circumstances, Judge Lynn’s ruling was predictable – her February ruling on the case basically took apart each and every one of the plaintiff’s arguments in the case, with nothing to suggest that there was any daylight to exploit in persuading her that a delay in the fiduciary regulation’s applicability was warranted.

But while the court refused to intervene to impose a delay, it seems highly likely that the process now underway in response to President Trump’s Executive Memorandum will provide some respite for those hoping to find one while the plaintiffs while they take – and make – their case to the U.S. Court of Appeals for the 5th Circuit.

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