On February 8, 2017, the United States District Court for the Northern District of Texas (Dallas Division) ruled in favor of the Department of Labor in Chamber Of Commerce of the United States of America, et al. v. Edward Hugler, Acting Secretary of Labor, the lawsuit brought by the Chamber of Commerce and other industry groups challenging the legality of DOL’s Conflict of Interest rule (and related rulings).
DOL request for stay
The ruling came on the same day that the Department of Justice requested, on behalf of DOL (the defendant in this case), a stay in these proceedings “pending the results of the review [by DOL] directed by the President” in his recent Executive Order.
That Executive Order directed DOL to “examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” And, if the Secretary of Labor determines that the current rule is inconsistent with the those priorities, he “shall publish for notice and comment a proposed rule rescinding or revising the Rule, as appropriate and as consistent with law.”
The court did not grant the stay.
The judge’s decision
The judge’s opinion generally vindicates DOL’s action in adopting the Conflict of Interest rule, finding that its adoption did not: exceed DOL’s authority; impermissibly create an “private right of action;” violate the requirements of the Administrative Procedure Act; violate ERISA’s standards for granting prohibited transaction exemptions; violate the First Amendment to the Constitution; or violate the Federal Arbitration Act.
Some of the court’s language could be read as supporting the adoption of the rule. The court found, for instance, that DOL was not, under ERISA, limited by the securities laws’ preference for a disclosure regime: “ERISA was enacted on the premise that the then-existing disclosure requirements did not adequately protect retirement investors, and that more stringent standards of conduct were necessary.” And, despite plaintiffs’ arguments to the contrary, the court found that the Best Interest Contract Exemption was not unworkable and that DOL’s cost benefit analysis was reasonable.
After the Executive Order was issued, Acting U.S. Secretary of Labor Ed Hugler issued a brief statement: “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.” Reports are that he is likely to order a six month delay of the application of the rule (currently scheduled to begin applying April 10) while DOL undertakes (in light of the Executive Order) its review.
In a press briefing the day the Executive Order was issued, President Trump’s Press Secretary stated that “the rule is a solution in search of a problem” and an example of “government regulatory overreach the President was put in office to stop.” So, at the moment at least, the Trump Administration appears to favor revision or repeal.
Legislation (the Retail Investor Protection Act (RIPA)) has been introduced in Congress that would take jurisdiction of the definition “fiduciary” away from DOL and give it to the Securities and Exchange Commission.
Proponents of the rule may cite portions of the judge’s opinion in arguing that the Trump Administration and Congress should leave the current rule in place. Other than in that respect (that is, as support for proponents’ arguments), this decision will probably have little effect on the process of reconsideration of the rule. Obviously, if the decision had gone the other way – if the court had found the rule in some or all respects invalid – it would have been more significant.
We will continue to follow this issue.
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