Here’s What Labor Dept. Might Do Next With the Fiduciary Rule

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By Carmen Castro-Pagan and Madison Alder

Ten days after an appeals court in New Orleans vacated an Obama-era consumer protection rule on retirement savings, the Labor Department, industry groups, and attorneys can’t seem to make sense of what will happen next.

The National Association for Fixed Annuities and the DOL on March 23 dropped a challenge that was pending in an appeals court in Washington, after the industry group agreed with the decision by the U.S. Court of Appeals for the Fifth Circuit vacating the fiduciary rule.

Why would the DOL agree to drop the challenge in the D.C. Circuit? Does it mean the DOL won’t seek review of the Fifth Circuit ruling? What will happen now to the fiduciary rule? Among the many questions about the Fifth Circuit ruling is this: What will the DOL do next?

The financial sector and investors are eager to know how the DOL will move forward with the rule. Major companies already have invested millions of dollars to adhere to the stricter standards set up by the rule. The stakes are high and the deadlines are fast approaching.

The department has a strict deadline to seek review of the Fifth Circuit decision. If it doesn’t meet the April 30 deadline, the Fifth Circuit’s mandate will go into effect May 7 and the fiduciary rule would dissolve. The DOL also has until June 13 to ask the U.S. Supreme Court to hear its appeal of the decision.

The Labor Department referred questions to the Department of Justice, which declined Bloomberg Law’s request for comment on the D.C. Circuit case and whether it would appeal the Fifth Circuit decision.

Why D.C. Review Matters

The Labor Department’s decision to drop its appeal in the D.C. Circuit likely was because that court’s judges lean liberal and it has a more prominent stance on rulings involving agency regulatory authority, Paul Secunda, a Marquette University law professor who specializes in labor and employment law, told Bloomberg Law. The DOL might have agreed to drop the case last week because it was concerned the D.C. Circuit might uphold the rule, Secunda added.

Earlier this month, the Tenth Circuit issued a decision upholding the rule, finding that the DOL gave sufficient notice of the proposed rule change and that it acted reasonably in treating fixed indexed annuities differently than other fixed annuities. The case would be ready for Supreme Court review because of the apparent split in the circuit court rulings.

But the Tenth Circuit decision involved a narrower issue about the fiduciary rule, while the Fifth Circuit’s decision was about the entire rule, so the rulings might not have been truly split. “The DOL doesn’t want another ruling on the fiduciary rule,” Secunda said.

NAFA’s action in voluntarily dismissing the appeal was anticipated, employee benefits attorney Marcia S. Wagner of the Wagner Law Group told Bloomberg Law. If NAFA appealed, it ran the risk of a clear split between the Fifth Circuit and the D.C. Circuit, and its view is that the Fifth Circuit decision would vacate the fiduciary rule nationwide, Wagner said.

At most, DOL’s agreement to join the voluntary dismissal of the NAFA case might indicate the agency has limited its options to requesting a review by a full panel of the Fifth Circuit or accepting the Fifth Circuit decision, Wagner said. It is also possible department attorneys believe the decision by the Tenth Circuit creates enough of a circuit split to allow the Supreme Court to hear the case, Wagner added.

Kevin Walsh, an employment attorney with Groom Law Group, echoed Secunda, telling Bloomberg Law the D.C. Circuit case was essential in creating a circuit split. The DOL has a few options now, including appealing the case to the full Fifth Circuit, asking the Supreme Court for review, or letting the Fifth Circuit’s decision be, Walsh said.

The appeal dates will be helpful indications of what the DOL is planning to do, he said. Even if the DOL tries to change the dates procedurally, it would indicate the agency is working on something related to an appeal.

The DOL might have reason to appeal the Fifth Circuit decision in an effort to protect its future regulatory authority, Walsh said. But political pressure might sway the DOL to let the Fifth Circuit ruling stand. “The current political staff might decide they want to move on to different initiatives,” Walsh said.

Will DOL Seek Review?

Attorneys agree that the DOL’s consent to drop the appeal in the D.C. Circuit doesn’t give a clear indication on how it will move forward.

“I don’t think the DOL’s move to drop the appeal in the D.C. Circuit means that it won’t challenge the Fifth Circuit decision,” Erin M. Sweeney, an attorney at Miller & Chevalier in Washington, told Bloomberg Law.

Although the DOL announced it won’t enforce the fiduciary rule, Sweeney said the Fifth Circuit ruling only applies to states within that jurisdiction—Mississippi, Louisiana, and Texas. If the DOL doesn’t challenge the Fifth Circuit ruling, other proponents of the fiduciary rule, such as AARP, will be willing to jump in and defend the litigation, she added. The DOL is unlikely to allow other groups to take over the litigation for them, Sweeney said.

“I don’t believe that the decision of the DOL to join in the voluntary dismissal of the NAFA case has any necessary implications for the action that the agency decision will ultimately take with respect to responding to the Fifth Circuit decision vacating the fiduciary rule,” Sweeney said.

The DOL won’t seek review of the Fifth Circuit ruling because the agency agrees with the outcome, Secunda said.

It would be easier for the DOL to let the Fifth Circuit ruling stand, Peter Gulia, a fiduciary guidance counsel, told Bloomberg Law. The DOL could say that “it wouldn’t be an efficient use of the government’s resources to seek a rehearing or review of a court decision that, even if incorrect, recognizes weaknesses” in the rule.

Even if the rule dissolves, consumers can get fiduciary rule-like protection without relying on public law, Gulia said. “Just don’t consider a recommendation from someone who hasn’t pledged legally enforceable standards of loyalty and care.”

“I would speculate that the parties may well realize at this point that the Fifth Circuit decision may well be the end game for the fiduciary rule, either way,” Andrew L. Oringer, an attorney at Dechert LLP in New York, told Bloomberg Law.

If the agency chooses not to contest the Fifth Circuit decision and the decision then becomes final, it could be the end of the rule, regardless of activity in other courts, Oringer said. If the DOL goes forward with appeals, the resulting decisions may well subsume claims being made in the D.C. Circuit.

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