We are issuing the latest update to our series of Alerts regarding the final rules issued by the Department of Labor (“DOL”) with respect to fiduciaries under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the DOL’s Best Interest Contract Exemption (“BIC Exemption”) from ERISA’s prohibited transactions provisions.
On February 8, 2017, the Honorable Barbara M. G. Lynn, U.S.D.J., became the third federal judge to reject a challenge to the Fiduciary Rule and BIC Exemption. In Chamber of Commerce of the United States of America v. Edward Hugler, Acting Secretary of the United States Department of Labor, et al., Civil Action No. 16-cv-01476-M, 2017 U.S. Dist. LEXIS 17619 (N.D.Tex. Feb. 8, 2017), Judge Lynn granted summary judgment in favor of the DOL on the challenge to the ERISA fiduciary rule and BIC Exemption brought by the Chamber of Commerce of the United States of America (“COC”), Indexed Annuity Leadership Council (“IALC”) and the American Council of Life Insurers (“ACLI”) and denied the plaintiffs’ motion for summary judgment. The Securities Industry and Financial Markets Association (“SIFMA”) is one of the plaintiffs in this lawsuit.
In upholding the Fiduciary Rule and BIC Exemption, Judge Lynn reached the following conclusions:
- First, the Fiduciary Rule is a reasonable interpretation under ERISA and is thus entitled to deference under Chevron, USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778 (1984).
- Second, the DOL did not exceed its authority under ERISA in granting conditional exemptions with respect to the BIC Exemption and amended Prohibited Transaction Exemption 84-24 (“PTE 84-24”);
- Third, with respect to the BIC Exemption’s written contract requirement, the BIC Exemption and PTE 84-24 do not impermissibly create a private cause of action with respect to Individual Retirement Account (“IRA”) clients;
- Fourth, the new rules and the rule making process, including the BIC Exemption itself and the movement of fixed indexed annuities from PTE 84-24 to the BIC Exemption, do not violate the Administrative Procedures Act (“APA”), 5 U.S.C. § 706(2)(A) (2017);
- Fifth, the BIC Exemption satisfies the requirements under ERISA for obtaining exemptive relief from a prohibited transaction;
- Sixth, Plaintiffs had waived their right to assert a challenge to the new rules on First Amendment grounds by not raising such a challenge during the rule making process, and even if such a challenge had not been waived, the DOL’s new rules do not violate the First Amendment; and
- Seventh, the portions of the BIC Exemption and PTE 84-24 which require that financial institutions receiving exemptions under them preserve an investor’s right to bring or participate in a class action do not violate the Federal Arbitration Act.
Following the issuance of Judge Lynn’s decision, the plaintiffs publicly stated that “We continue to believe that the Department of Labor exceeded its authority, and we will pursue all of our available options to see that this rule is rescinded.” Presumably, such options will include filing an appeal with the United States Court of Appeals for the Fifth Circuit. As noted above, Judge Lynn’s decision is now the third federal court decision in favor of the DOL on the validity of the Fiduciary Rule and BIC Exemption; the other two decisions are (i) The National Association for Fixed Annuities v. Thomas E. Perez, Secretary of the United States Department of Labor, et al., Civil Action No. 16-1035 (RDM), 2016 U.S. Dist. LEXIS 153214 (D.D.C. Nov. 4, 2016) (Honorable Randolph D. Moss, U.S.D.J.); and (ii) Market Synergy Group, Inc. v. United States Department of Labor, et al., 16-cv-4083-DDC-KGS, 2016 U.S. Dist. LEXIS 163663 (D. Kan. Nov. 28, 2016) (Honorable Daniel D. Crabtree, U.S.D.J.). Based on what we have seen so far from the courts which have spoken on this issue, it does not appear likely that relief from the Fiduciary Rule and BIC Exemption is going to be obtained from the courts. Whether relief will ultimately be obtained as a result of the review of the Fiduciary Rule which has been mandated by President Trump’s February 3, 2017 Memorandum or the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act legislation that is pending in Congress thus remains to be seen.