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Judge Hammers DOL on Fiduciary Rule’s BICE

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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.” 

The former chief judge indicated that the failure to address the relationship between the two exemptions “creates some tension,” Sweeney said.

Chief Judge Stewart ordered the parties to address the relationship between the BIC and EIAA Exemptions in 10-page briefs due in 10 days, according to Sweeney.  

On the IRA front, Judge Jones pressed Shih, “demanding to know exactly how many regulations and prohibited transaction exemptions the DOL had promulgated and issued addressing IRAs,” according to Sweeney.

Judge Jones proffered that the Employee Retirement Income Security Act covers “employment plans and is not directed at IRAs,” Sweeney continued. “She further offered that the fiduciary rule ‘transforms the lenient treatment of IRAs into an architecture of regulation.’” 

Shih stated that the BIC exemption “did not create a private right of action because a state law cause of action always existed for investment advice recipients to bring an action against advice providers,” Sweeney said. But Judge Jones disagreed, noting that “’only if you had a contract saying [the investment advisor] is a fiduciary.’” 

Along those lines, “Judge Jones asked Shih whether disclosure would be sufficient instead of requiring execution of a contract under the BIC exemption, a concept that the DOL recently raised in its request for information” on the fiduciary rule, Sweeney explained.  

Clement probed Scalia on “the bottom line” regarding the fiduciary rule, asking: “Along with Judge Jones, I’m sort of befuddled about why this whole hornet’s nest was created. What’s the bottom line? What does the Department of Labor want to do with this revision” under ERISA?

Scalia responded: “Right now, salespeople of annuities and broker-dealers are subject to a suitability standard for annuities [with the] suitability standard for annuities that is somewhat comparable to suitability for broker-dealers. The Labor Department thinks that’s not enough. The Labor Department is used to regulating with fiduciary duties and thinks everybody should have fiduciary duties.”

Labor is currently seeking feedback on its fiduciary rule. Until July 21, Labor took comments on whether to extend the Jan. 1 applicability date of certain provisions in the BICE; the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs; and Prohibited Transaction Exemption 84-24, which deals with annuities.

Comments in response to the other 18 questions in the RFI are due Aug. 7.

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