Judge Hammers DOL on Fiduciary Rule’s BICE

Republican circuit court Judge Edith Jones on Monday “relentlessly peppered” the Department of Labor on what she viewed as trouble spots in its fiduciary rule’s controversial best interest contract exemption during oral arguments in the case brought by nine plaintiffs against the rule, according to Miller & Chevalier attorney Erin Sweeney.

Jones, a Reagan appointee, was part of a three-judge panel that heard oral arguments at the U.S. Court of Appeals for the Fifth Circuit in the U.S. Chamber of Commerce’s appeal, which resulted from an adverse lower decision issued by the U.S. District Court for the Northern District of Texas. 

Sweeney, who attended the arguments, said Jones probed Labor’s attorney, Michael Shih, with questions on how the BICE “could be ‘harmonized’ with the statutory ‘eligible investment advice arrangement’ exemption, the basis for the DOL’s authority over individual retirement accounts, and whether the BICE impermissibly creates a private right of action.”

(Related: ‘Greater Clarity’ Needed on SEC, DOL Fiduciary Rules: Clayton)

Gibson, Dunn & Crutcher partner Eugene Scalia, representing the plaintiffs — which include the Chamber, the Securities Industry and Financial Markets Association and the Financial Services Institute — again argued that the fiduciary rule is “overly broad,” and that the rule and its exemptions should be vacated. He stressed during the hour-long hearing that the rule institutes the “most sweeping changes to the retail financial services sector since the 1940 enactment of the Investment Advisers Act.”

(Listen to a recording of the hearing.)

Practices in the marketing of IRAs, Scalia said, “are being radically transformed for both the insurance agents and broker-dealers. This change is being made not by Congress, not by the Securities and Exchange Commission, and not by the states, which regulate insurance. It’s being done by an agency that lacks regulatory power over IRAs, broker-dealers and insurance agents. And it’s being done in a manner that repeatedly defies judgments made by Congress.”

Kent Mason, a parter at Davis & Harman in Washington, relayed to ThinkAdvisor that based on conversations with a colleague who attended the hearing, the three-judge panel “raised excellent questions” regarding Labor’s authority to expand the definition of a fiduciary to cover pure sales activity, to regulate IRAs, and to create a new cause of action.

However, “the judges gave no indication of how they would rule, but DOL went far beyond its authority on all three points,” Mason, a fiduciary rule opponent, opined. “So I am hopeful that the court will take appropriate action here to stop this rule, which is causing immense damage without any legal basis.”

Given the “relatively few” comments made by the other panelists — Clinton appointee Chief Judge Carl Stewart and Bush appointee Judge Edith Clement — Sweeney added that it’s “difficult to predict the outcome of the hearing, which has been scheduled for expedited treatment.” A decision is expected in the fall, Sweeney said.

Regarding Jones’ probing on BICE, she “asked both parties why they did not address the relationship between the BIC and the EIAA exemptions in their briefs,” Sweeney said, and “appeared exasperated when Shih could not explain why, how and whether the EIAA exemption might provide some clarity regarding whether investment product sales constitute investment advice.”