The Department of Labor stands at a legal crossroads with its new fiduciary rule, known as the “Retirement Security Rule.”
Does the agency appeal the two temporary stays on the implementation of its expansive, new fiduciary rule, ordered by two different courts as the judges deliberate whether or not to vacate the entire regulation?
Or, does the DOL let the injunctions go unchallenged and let them remain in effect until after the presidential election, given the odds that if a Republican administration is elected Nov. 5, former President Donald Trump is likely let the clock run out on the new rule, effectively killing the regulation as he did its predecessor rule?
What we know so far is that the DOL and Department of Justice are actively debating whether or not to appeal the stays, according to a memo they filed with the courts August 21. The memo “indicated they had not yet decided whether to file an appeal of the stay. It is always possible, but an appeal of the stay seems unlikely,” Allie Itami, a partner with Lathrop GPM said.
“Given the findings in the stay orders, the outcome is likely a rejection of the rulemaking. That decision on the merits is more likely to be appealed,” Itami added.
The U.S. District Court for the Northern District of Texas issued a stay of the fiduciary rule July 26, as requested by the American Council of Life Insurers and nine trade groups, ruling the plaintiffs met all the requirements for a stay, including showing that they have a substantial likelihood of vacating the rule. The court also said the DOL overshot its Congressional authority, which was granted by ERISA, by trying to regulate brokers and insurance agents as fiduciaries and found the plaintiffs demonstrated that the rule would create irreparable harm.
One day prior, the U.S. District Court for the Eastern District of Texas granted a stay on the implementation of the rule to the Federation of Americans for Consumer Choice and several independent insurance agency plaintiffs, while it deliberates their multiple claims that the rule should be vacated.
Fred Reish, a partner with Faeger Drinker, said the DOL has its work cut out for it in deciding whether to appeal the injunctions. “If they appeal the stay, it will likely delay the hearings on whether the rules were validly issued. If the DOL wants to move the case along, they will not appeal the stay. While I don’t know what their strategy will be, I think there is a good chance that they will not appeal the stays,” he said.
Reish said it is “highly likely” that the courts do indeed vacate the fiduciary rule. “In order to issue the stays, the courts had to determine that it was likely that the plaintiffs will prevail in the case. In addition, it appears that the courts feel bound by the 2018 Firth Circuit decision that set aside the Obama-era fiduciary regulation and exemption.”
No matter what the DOL decides, the political clock is ticking, Reish added. “The trial courts may not rule until after the election and perhaps not even until after the inauguration. If the Democrats win the White House, it is almost certain that the decisions would be appealed. However, if the Republicans win, they may not appeal.”
Duane Thompson, longtime industry lobbyist and president and founder of Potomac Strategies, believes the DOL will take a more aggressive route. “Given both District Courts’ preliminary views indicating the rule is unlawful, I think the DOL will appeal the stay directly to the Fifth Circuit, probably sometime in October,” Thompson predicted.
Will the rule, which would extend a fiduciary standard to insurance agents and brokers, those who recommend investments inside a qualified plan and first-time advice and annuities recommendations, be vacated or survive? “Given that the financial service industry is forum shopping to the business-friendly Fifth Circuit—not to forget that it vacated a similar rule in 2016—I wouldn’t bet on the rule surviving a second review,” he said.
Will the DOL appeal a decision to vacate the rule? ? It depends on who wins the White House Nov. 5, Thompson, the former top lobbyist for the FPA, said. “If Trump wins, I think it’s likely the DOL will drop its defense in court once he has appointed a new Labor Secretary, just as it did in 2016. If Harris wins, the DOL will keep fighting and appeal to the full Fifth Circuit and/or to the Supreme Court,” he said.
Itami said she thinks it seems somewhat unlikely that the Supreme Court would take up a challenge citing the Administrative Procedure Act case so soon after its Loper-Bright decision, which expanded the judiciary’s power to review and reject how congressional statutes are amended and adopted by federal administrative agencies like the DOL.
“Significantly, if the Fifth Circuit limits the agency’s regulatory scope ... that would likely give the Fifth Circuit the last word unless new cases are filed separately,” Itami said.
A DOL spokesperson referred Financial Advisor to the DOJ for comment on its legal strategy. DOJ did not reply to a request for comment by deadline.