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States Step Forward in Fiduciary Fight

Three states have now entered the fiduciary rule litigation arena, claiming that they “can no longer rely on DOL to adequately represent their interests.”

The states involved – California, New York and Oregon – have filed two separate motions: one to intervene in the March 15 decision of the U.S. Court of the Appeals for the 5th Circuit which vacated the fiduciary rule “in toto,” the other to obtain an “en banc” review of that 2-1 decision by the entire court.

The arguments presented in support of those motions boil down to three key areas.

1. Rely ‘Able’?

First, they claim that the states can no longer rely on the Labor Department to represent their interests, noting that “it now appears that DOL will not seek further appellate review of the panel’s decision,” though a formal decision by the Labor Department has not yet been declared.

“Until recently, DOL vigorously defended that Rule in this and other courts,” according to the motion. “Now, however, DOL appears ready to abandon its effort to protect retirement investors by acquiescing to a split decision of this Court – even though every other court to issue a final judgment on the Rule’s legality has upheld it.”

2. Tax ‘Treatment’

The second argument is an economic one on behalf of the states. Citing the analysis conducted by the Obama administration, the motion says that allowing the fiduciary rule to take effect “would increase investors’ returns by at least $33 billion over the next ten years” – gains that the plaintiffs here say would “translate directly into increased income tax revenues for California and New York” – at least $38 million over the next decade for California, and $14.9 million between 2018 and 2026 for the Empire State, “if the Fiduciary Rule takes effect.”

By vacating the rule, the plaintiffs explain, the DOL can’t enforce it and the residents of the states “will thus never realize the increase in their retirement investment returns had the Fiduciary Rule taken effect, and the States will never see the resulting growth in income tax revenues that would flow directly from these increased returns,” they argue. This, they argue, provides them with Article III standing to intervene, since they “seek to remedy a decision that will cost them millions of dollars each year for the foreseeable future,” and are seeking to intervene “in response to a major change in the status quo – the panel’s decision vacating the Fiduciary Rule.”

2. Parens Theoretical

Their third argument is based on “parens patriae,” literally the “parent of the fatherland.” The motion notes that, “The States have a ‘quasi-sovereign interest’ in the ‘physical and economic’ well-being of their residents.”

“This appeal affects the welfare of their current and future retirees, who are among the States’ most vulnerable residents,” they claim. “Implementation of the Fiduciary Rule would substantially further this interest: as DOL has concluded,” they write, “it will result in billions of additional dollars in retirees’ accounts. And the panel’s decision impairs that interest.”

En Banc ‘Shot’

As in the motion for a rehearing, in making their case for a review by the full court, the states cite their “vital interest,” noting that “California and New York alone will lose more than $52 million in tax revenue from retirement investment income over the next ten years if the panel’s decision remains in place,” and that their residents “stand to lose billions of dollars in retirement investment gains. Intervention is necessary to prevent those results,” they write.

As for the “en banc” review, the plaintiffs here claim that the 5th Circuit’s decision “…impermissibly elevates the common law understanding of the term “fiduciary,” concluding that the only permissible definition of a “fiduciary” under ERISA is the one recognized by the law of trusts, which they characterize as a “limited understanding” that “casts aside the plain meaning of ERISA’s text, and conflicts with two Supreme Court decisions” (Mertens v. Hewitt Associates, which they note held that ERISA “expanded the universe of persons subject to fiduciary duties” beyond those covered by “traditional trust law,” and Varity Corp. v. Howe, which, according to the motion, “stated that trust law offers only a ‘starting point,’” after which courts must go on to ask whether the “language of the statute, its structure, or its purposes require department from common-law trust requirement”).

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They also argue that the judges erred in their determination that the Labor Department’s interpretation of an “investment advice” fiduciary was unreasonable. “To the contrary,” they argue, “that definition mirrors ERISA’s text, is consistent with the statute’s broad protective purposes, and better reflects how individuals invest for retirement today.” The plaintiffs also argue that the conclusion that the Best Interest Contract (BIC) Exemption is unlawful “rests on a fundamental misunderstanding" of ERISA and the Supreme Court’s decision in Alexander v. Sandoval. And, if that weren’t enough, they say that one part of the decision conflicts with the 10th Circuit’s decision in another litigation involving the fiduciary rule, Market Synergy Group v. U.S. Department of Labor, specifically that the Labor Department’s changes to PTE 84-24 are unlawful.

The plaintiffs describe the 5th Circuit’s definition of a fiduciary as “narrow” and “inconsistent with ERISA’s history and purpose,” which they write was “adopted to give retirees protections that extended beyond those offered by existing laws.”

The motion claims that the 5th Circuit’s conclusion about the BIC Exemption “…rests on a fundamental misunderstanding" of it, going on to claim that the BIC Exemption does not create a private right of action. Instead, citing Judge Stewart’s dissenting opinion, they claim that the BIC Exemption “merely dictates terms that otherwise-conflicted financial institutions must include in written contracts with IRA and other non-title I owners in order to qualify for the exemption” – and that actions brought enforce those terms “…are brought in state court under state law, which would ultimately control the enforceability.”

Having now heard from states and AARP that don’t think the Labor Department will defend the fiduciary rule, we’ll have to see what the 5th Circuit makes of all this – and what, if anything, the Labor Department may actually decide to do.

On April 26, the U.S. Chamber of Commerce, Financial Services Institute, Financial Services Roundtable, Insured Retirement Institute, and Securities Industry and Financial Markets Association released the following statement on motions to intervene in order to petition the full 5th Circuit Court of Appeals to rehear the recent decision vacating the Department of Labor’s fiduciary rule in its entirety: “The 5th Circuit got it right in its March 15, 2018 opinion striking the DOL fiduciary rule in toto. We will oppose any motion to intervene in this case at this late stage.”