C1 Insider
  • DOL
  • Regulatory / Compliance
  • Tax
  • Industry / Practice Management
  • Client Related

Select Page

DOL Rule Opponents Have Good Day in Appeals Court

Aug 2, 2017 | DOL

DOL Rule Opponents Have Good Day in Appeals Court

The Fifth Circuit Court of Appeals lived up to its reputation for being tough on government regulators Monday during a hearing on the controversial Department of Labor fiduciary rule.

The 68-minute hearing was marked by several spirited clashes between government attorney Michael Shih and Judge Edith H. Jones over the DOL’s authority to regulate individual retirement accounts and how investment advice works in practice.

The appeals court, which has a reputation for narrowly defining federal powers, can throw out the rule if it chooses. The so-called “Harkin amendment” in the Dodd-Frank Act of 2010 gives it reason to do so, said Eugene Scalia, plaintiff attorney. Initiated by former Sen. Tom Harkin, D-Iowa, the amendment bars the SEC from regulating fixed-indexed annuities as securities, as it tried to do with Rule 151A.

At one point, Shih earned the judge’s ire by interrupting her description of an advisor to a long-term plan.

“I’m getting to what I think is the decisive point,” Jones shot back. “They said that this fellow was no different from a car salesman in that when you walk onto the floor, the car salesman is trying to find out what you’re interested in for a car.”

“With respect, your honor, the department has looked at the record before the agency and determined that’s not how that market works today,” said Shih, a Department of Justice attorney.

The industry plaintiffs are consolidated from three lawsuits that were filed last summer in U.S. District Court for the Northern District of Texas. While the plaintiffs lost the federal court decisions, the Dallas court was chosen specifically because appeals would go to the Fifth Circuit.

The Fifth Circuit is generally considered the most conservative in the country, with decisions that frequently define the government’s role narrowly. In addition to tossing the rule, court has two other options: affirm the rule, or send it back to lower court on a minor issue.

Scalia, attorney for the U.S. Chamber of Commerce, the lead plaintiff, opened with a smooth presentation outlining familiar arguments: the DOL lacks the authority to regulate advisors, acted in an “arbitrary and capricious” manner, and violated plaintiffs’ First Amendment rights.

“When an agency declares that it’s curing a harm, it needs to establish the presence of the harm,” Scalia said. “They failed to do that here.”

At Last, a Friendly Court

The first phase of the fiduciary rule went into effect June 9. It requires advisors and agents to act as fiduciaries, make no misleading statements and accept only “reasonable” compensation.

Still, opponents are aiming mostly at phase two rules that establish a class-action right to sue under the Best Interest Contract Exemption. The BICE will be required to sell fixed indexed and variable annuities beginning Jan. 1, 2018.

The DOL continues to work regulatory channels to reshape phase two of the rule and many expect the Jan. 1 date to be delayed. A win at the appeals level would reshape the entire DOL rule debate.

After a string of federal court losses last year, DOL rule opponents finally found a friendly court.

“If they can do that, then [the Department of Health and Human Services] could declare that the doctor-patient relationship is one of a fiduciary duty, right?” asked Judge Edith Brown Clement.

It could, Scalia responded, adding that HHS would have more grounds for that decision than the DOL does with its fiduciary rule.

The three-judge panel gave both sides 10 days to submit follow-up briefs. A ruling could come by late September or early October, said Erin M. Sweeney, a lawyer with Miller & Chevalier in Washington, D.C., who attended the hearing.

“It was a very unusual hearing,” she said. “Every single thing was openly hostile to the Department of Labor’s view.”

Jones repeatedly asked Shih for opinions on various cases and/or Department of Labor interpretations of the rule and exemptions. On the latter points, Shih demurred and promised to submit a brief outlining the DOL positions.

The DOL has regulated IRAs “since the Carter administration,” Shih argued, and has full authority to do so.

“Opposing counsel said the department has no regulatory authority over IRAs,” he told Jones. “That is simply not true.”

Jones appeared to favor a more narrow interpretation of DOL authority, pointing out that “it is the Department of Labor,” emphasizing the last word should limit it to employer plans.

“The Department of Labor admits that it’s trying to transform what was a pretty lenient treatment of IRAs,” the judge added, “into an architecture of regulation.”

‘No, Your Honor’

ERISA authors never intended to allow regulators to create a new private right of action, Scalia argued. Only Congress has that power, he added, citing the Alexander vs. Sandoval as case precedent.

The private right of action refers to the right to sue contained in the Best Interest Contract Exemption. Plaintiffs consider that contract provision the most loathsome part of the DOL rule.

But federal court judges have consistently ruled that Sandoval does not apply.

Again, Jones appeared to favor a narrower view, telling Shih: “You are deliberately creating fiduciary duties” and a new cause of action.

The fiduciary standard already exists, Shih countered.

“No, your honor, there is a very significant difference,” he said. “Simply specifying the terms of what a contract may contain does not create a cause of action.”

In addition to the chamber, other plaintiffs include the American Council of Life Insurers, National Association of Insurance and Financial Advisors, the Insured Retirement Institute, and many others.

Published by Insurance News Net August 1 2017

Written by John Hilton

Share:

Previous25 Best Countries for Retirement Security: 2017
Next4 Annuity Rules You Should Know by Heart

Related Posts

‘Hit Pause’ on DOL Fiduciary Rule, Insurer’s Lawyers Urge Federal Judge

‘Hit Pause’ on DOL Fiduciary Rule, Insurer’s Lawyers Urge Federal Judge

September 26, 2016

House Passes SECURE Act

House Passes SECURE Act

December 23, 2019

Fate of DOL Fiduciary Rule in Question After Court Ruling

Fate of DOL Fiduciary Rule in Question After Court Ruling

March 16, 2018

Trump to Direct DOL to Delay Fiduciary Rule: Sources

Trump to Direct DOL to Delay Fiduciary Rule: Sources

February 1, 2017

Recent Posts

  • House Passes SECURE Act
    House Passes SECURE Act
    Dec 23, 2019 | DOL
  • House Passes Secure Act With Year-End Spending Bill
    House Passes Secure Act With Year-End Spending Bill
    Dec 21, 2019 | Regulatory / Compliance
  • Stories Help People Understand Annuities: Economists
    Stories Help People Understand Annuities: Economists
    Sep 4, 2019 | Client Related
  • Ten Signs Your Client Has Dementia
    Ten Signs Your Client Has Dementia
    Aug 21, 2018 | Client Related
  • IRS Announces Forthcoming Section 67(g) Clarifications
    IRS Announces Forthcoming Section 67(g) Clarifications
    Aug 14, 2018 | Tax

Archives

  • December 2019
  • September 2019
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016

One Team / One Voice / One Vision

As One Team, we provide the best producer experience.

With One Voice, we champion the cause of hard-working producers.

Guided by One Vision - to maximize your potential - we serve as your Most Trusted Partner.

Since 1984, CreativeOne has partnered with annuities, life insurance and securities producers to help them find the best products for their clients, market their services, and reward their hard work and dedication.

Navigation

  • DOL
  • Regulatory / Compliance
  • Tax
  • Industry / Practice Management
  • Client Related

Contact

Have questions? Reach out.

11460 Tomahawk Creek Parkway
Leawood, KS 66211
800.992.2642

© 2023 C1 Insider

  • CreativeOne
  • Creative Edge
  • ClientOne Securities
  • Dynamic Marketing Portal
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

This material is designed for insurance licensed financial professionals. This is provided for informational purposes only and may not be all encompassing of items to consider. CreativeOne does not provide legal advice. Please check the laws and regulations of each state where you do business to ensure you are in compliance with the specific requirements of those states. You are encouraged to consult your attorney, or regulators in the states where you conduct business.

All third party materials contained herein are being provided as a service to you. Please note that these third party materials information and opinions included have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by CreativeOne. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Financial Professionals should ensure they continue to follow the current policies on the use of any advertising, third-party materials and/or social media as required by your broker/dealer and/or the carriers that you represent.