CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA; FINANCIAL SERVICES INSTITUTE, INCORPORATED; FINANCIAL SERVICES ROUNDTABLE; GREATER IRVING-LAS COLINAS CHAMBER OF COMMERCE; HUMBLE AREA CHAMBER OF COMMERCE, doing business as Lake Houston Chamber of Commerce; INSURED RETIREMENT INSTITUTE; LUBBOCK CHAMBER OF COMMERCE; SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION; TEXAS ASSOCIATION OF BUSINESS v. UNITED STATES DEPARTMENT OF LABOR; R. ALEXANDER ACOSTA, SECRETARY, U.S. DEPARTMENT OF LABOR
No. 17-10238
United States Court of Appeals, Fifth Circuit
March 15, 2018
CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA; FINANCIAL SERVICES INSTITUTE, INCORPORATED; FINANCIAL SERVICES ROUNDTABLE; GREATER IRVING-LAS COLINAS CHAMBER OF COMMERCE; HUMBLE AREA CHAMBER OF COMMERCE, doing business as Lake Houston Chamber of Commerce; INSURED RETIREMENT INSTITUTE; LUBBOCK CHAMBER OF COMMERCE; SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION; TEXAS ASSOCIATION OF BUSINESS,
Plaintiffs - Appellants
v.
UNITED STATES DEPARTMENT OF LABOR; R. ALEXANDER ACOSTA, SECRETARY, U.S. DEPARTMENT OF LABOR,
Defendants - Appellees
..................................................................................................................
AMERICAN COUNCIL OF LIFE INSURERS; NATIONAL ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS; NATIONAL ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS - TEXAS; NATIONAL ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS - AMARILLO; NATIONAL ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS - DALLAS; NATIONAL ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS - FORT WORTH; NATIONAL ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS - GREAT SOUTHWEST; NATIONAL ASSOCIATION OF INSURANCE AND FINANCIAL ADVISORS - WICHITA FALLS;
Plaintiffs - Appellants
v.
UNITED STATES DEPARTMENT OF LABOR; R. ALEXANDER ACOSTA, SECRETARY, U.S. DEPARTMENT OF LABOR,
Defendants - Appellees
INDEXED ANNUITY LEADERSHIP COUNCIL; LIFE INSURANCE COMPANY OF THE SOUTHWEST; AMERICAN EQUITY INVESTMENT LIFE INSURANCE COMPANY; MIDLAND NATIONAL LIFE INSURANCE COMPANY; NORTH AMERICAN COMPANY FOR LIFE AND HEALTH INSURANCE,
Plaintiffs - Appellants
v.
R. ALEXANDER ACOSTA, SECRETARY, U.S. DEPARTMENT OF LABOR; UNITED STATES DEPARTMENT OF LABOR,
Defendants - Appellees
Appeals from the United States District Court for the Northern District of Texas
Before STEWART, Chief Judge, and JONES and CLEMENT, Circuit Judges.
Three business groups1 filed suits challenging the “Fiduciary Rule” promulgated by the Department of Labor (DOL) in April 2016. The Fiduciary Rule is a package of seven different rules that broadly reinterpret the term “investment advice fiduciary” and redefine exemptions to provisions concerning fiduciaries that appear in the Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829 (ERISA), codified as amended at
The district court rejected all of these challenges. Finding merit in several of these objections, we VACATE the Rule.
I. BACKGROUND
As might be expected by a Rule that fundamentally transforms over fifty years of settled and hitherto legal practices in a large swath of the financial services and insurance industries, a full explanation of the relevant background is required to focus the legal issues raised here.
Congress passed ERISA in 1974 as a “comprehensive statute designed to promote
ERISA Title II created tax-deferred personal IRAs and similar accounts within the Internal Revenue Code.
The critical term “fiduciary” is defined alike in both Title I,
- exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,”
29 U.S.C. § 1002(21)(A)(i) ;
- “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so,”
29 U.S.C. § 1002(21)(A)(ii) ; or - “has any discretionary authority or discretionary responsibility in the administration of such plan.”
29 U.S.C. § 1002(21)(A)(iii) .
Subsection ii of the “fiduciary” definition is in issue here.
In 1975, DOL promulgated a five-part conjunctive test for determining who is a fiduciary under the investment-advice subsection. Under that test, an investment-advice fiduciary is a person who (1) “renders advice...or makes recommendation[s] as to the advisability of investing in, purchasing, or selling securities or other property;” (2) “on a regular basis;” (3) “pursuant to a mutual agreement...between such person and the plan;” and the
The 1975 regulation captured the essence of a fiduciary relationship known to the common law as a special relationship of trust and confidence between the fiduciary and his client. See, e.g., GEORGE TAYLOR BOGERT, ET AL., TRUSTS & TRUSTEES § 481 (2016 update). The regulation also echoed the then thirty-five-year old distinction drawn between an “investment adviser,” who is a fiduciary regulated under the Investment Advisers Act, and a “broker or dealer” whose advice is “solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.”
In the decades following the passage of ERISA, the use of participant-directed IRA plans has mushroomed as a vehicle for retirement savings. Additionally, as members of the baby-boom generation retire, their ERISA plan accounts will roll over into IRAs. Yet individual investors, according to DOL, lack the sophistication and understanding of the financial marketplace possessed by investment professionals who manage ERISA employer-sponsored plans. Further, individuals may be persuaded to engage in transactions not in their best interests because advisers like brokers and dealers and insurance professionals, who sell products to them, have “conflicts of interest.” DOL concluded that the regulation of those providing investment options and services to IRA holders is insufficient. One reason for this deficiency is the governing statutory architecture:
Although ERISA‘s statutory fiduciary obligations of prudence and loyalty do not govern the fiduciaries of IRAs and other plans not covered by ERISA, these fiduciaries are subject to prohibited transaction rules under the [Internal Revenue] Code. The statutory exemptions in the Code apply and the [DOL] has been given the statutory authority to grant administrative exemptions under the Code. [footnote omitted] In this context, however, the sole statutory sanction for engaging in the illegal transactions is the assessment of an excise tax enforced by the [IRS].
Definition of Fiduciary, 81 Fed. Reg. at 20946, 20953 (Apr. 8, 2015) (to be codified at 29 C.F.R. pts. 2509, 2510, 2550).
A second reason for the gap lies in the terms of the 1975 regulation‘s definition of an investment advice fiduciary. In particular, by requiring that the advice be given to the customer on a “regular basis” and that it must also be the “primary basis” for investment decisions, the definition excluded one-time transactions like IRA rollovers. As DOL saw it, the term “adviser” should extend well beyond investment advisers registered under the Investment Advisers Act of 1940 or under state law. Semantically, the term “investment advice fiduciary” can include “an individual or entity who is, among other things, a representative of a registered investment adviser, a bank or similar financial institution, an insurance company, or a broker-dealer.” 81 Fed. Reg. at 20946 n.1. Further, “[u]nless they are fiduciaries, these consultants and advisers are free under ERISA and the Code, not only to receive such conflicted compensation, but also to act on their conflicts of interest to the detriment of their customers.” 81 Fed. Reg. at 20956.
II. THE FIDUCIARY RULE
Now to the relevant highlights of the Fiduciary Rule.3 In lieu of the 1975 definition of an investment advice fiduciary, the Fiduciary Rule provides that an individual “renders investment advice for a fee” whenever he is compensated in connection with a “recommendation as to the advisability of” buying, selling, or managing “investment property.”
To be sure, the new rule purports to withdraw from fiduciary status communications that are not “recommendations,” i.e., those in which the “content, context, and presentation” would not objectively be viewed as “a suggestion that the advice recipient engage in or refrain from taking a particular course of action.”
Critically, the new definition dispenses with the “regular basis” and “primary basis” criteria used in the regulation for the past forty years. Consequently, it encompasses virtually all financial and insurance professionals who do business with ERISA plans and IRA holders. Stockbrokers and insurance salespeople, for instance, are exposed to regulations including the prohibited transaction rules. The newcomers are thus barred, without an exemption, from being paid whatever transaction-
based commissions and brokerage fees have been standard in their industry segments because those types of compensation are now deemed a conflict of interest.
The second novel component of the Fiduciary Rule is a “Best Interest Contract Exemption,” (BICE) which, if adopted by
The BICE supplants former exemptions with a web of duties and legal vulnerabilities. To qualify for a BIC Exemption, providers of financial and insurance services must enter into contracts with clients that, inter alia, affirm their fiduciary status; incorporate “Impartial Conduct Standards” that include the duties of loyalty and prudence; “avoid[] misleading statements;” and charge no more than “reasonable compensation.” As noted above, Title II service providers to IRA clients are not statutorily required to abide by duties of loyalty and prudence. Yet, to qualify as not being “investment advice fiduciaries” per the new definition, the financial service providers must deem
themselves fiduciaries to their clients. In addition, the contracts may not include exculpatory clauses such as a liquidated damages provision nor may they require class action waivers. DOL contends that the enforceability of the BICE-created contract, “and the potential for liability” it offers, were “central goals of this regulatory project.” 81 Fed. Reg. at 21021, 21033. In these respects, a BIC Exemption comes at a high price.5
The third relevant element of the Fiduciary Rule is the amended Prohibited Transaction Exemption 84-24. Since 1977, that exemption had covered transactions involving insurance and annuity contracts and permitted customary sales commissions where the terms were at least as favorable as those at arm‘s-length, provided for “reasonable” compensation, and included certain disclosures. 49 Fed. Reg. 13208, 13211 (Apr. 3, 1984); see 42 Fed. Reg. 32395, (June 24, 1977) (precursor to PTE 84-24). As amended in the Fiduciary Rule package, PTE 84-24 now subjects these transactions to the same Impartial Conduct Standards as in the BICE exemption. 81 Fed. Reg. 21147 (Apr. 8, 2016), corrected at 81 Fed. Reg. 44786 (July 11, 2015), and amended by 82 Fed. Reg. 16902 (Apr. 7, 2017). But DOL removed fixed indexed annuities from the more latitudinarian PTE 84-24, leaving only fixed-rate annuities within its scope. In practice, this action places a disproportionate burden on the market for fixed indexed annuities, as opposed to competing annuity products.
Further, as DOL itself recognized, millions of IRA investors with small accounts prefer commission-based fees because they engage in few annual trading transactions. Yet these are the investors potentially deprived of all investment advice as a result of the Fiduciary Rule, because they cannot afford to pay account management fees, or brokerage and insurance firms cannot afford to service small accounts, given the regulatory burdens, for management fees alone.
The district court rejected all of the appellants’ challenges to the Fiduciary Rule. Timely appeals were filed.
III. DISCUSSION
Appellants pose a series of legal issues, all of which are reviewed de novo on appeal, Kona Tech. Corp. v. S. Pac. Transp. Co., 225 F.3d 595, 601 (5th Cir. 2000), and nearly all of which we must address. The principal question is whether the new definition of an investment advice fiduciary comports with ERISA Titles I and II. Alternatively, is the new definition “reasonable” under Chevron U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984) and not violative of the Administrative Procedures Act (APA),
Beyond that threshold are the questions whether the BICE exemption, including its impact on fixed indexed annuities, asserts affirmative regulatory power inconsistent with the bifurcated structure of Titles I and II and is invalid under the APA. Further, are the required BICE contractual provisions consistent with federal law in creating implied private rights of action and prohibiting certain waivers of arbitration rights?6
A. The Fiduciary Rule Conflicts with the Text of 29 U.S.C. Sec. 1002(21)(A)(ii) ; 26 U.S.C. Sec. 4975(e)(3)(B) .
DOL expanded the statutory term “fiduciary” by redefining one out of three provisions explaining the scope of fiduciary
a person is a fiduciary with respect to a plan to the extent . . . he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so[.]
Expanding the scope of DOL regulation in vast and novel ways is valid only if it is authorized by ERISA Titles I and II. A regulator‘s authority is constrained by the authority that Congress delegated it by statute. Where the text and structure of a statute unambiguously foreclose an agency‘s statutory interpretation, the intent of Congress is clear, and “that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842-43. To decide whether the statute is sufficiently capacious to include the Fiduciary Rule, we rely on the conventional standards of statutory interpretation and authoritative Supreme Court decisions. City of Arlington v. FCC, 133 S. Ct. 1863, 1868 (2013) (quoting Chevron, 467 U.S. at 842-43). The text, structure, and the overall statutory scheme are among the pertinent “traditional tools of statutory construction.” See Chevron, 467 U.S. at 843 n.9.
We conclude that DOL‘s interpretation of an “investment advice fiduciary” relies too narrowly on a purely semantic construction of one isolated provision and wrongly presupposes that the provision is inherently ambiguous. Properly construed, the statutory text is not ambiguous. Ambiguity, to the contrary, “is a creature not of definitional possibilities but of statutory context.” Brown v. Gardner, 513 U.S. 115, 118 (1994). Moreover, all relevant sources indicate that Congress codified the touchstone of common law fiduciary status—the parties’ underlying relationship of trust and confidence—and nothing in the statute “requires” departing from the touchstone. See Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 311 (1992) (where a term in ERISA has a “settled meaning under . . . the common law, a court must infer, unless the statute otherwise dictates, that Congress mean[t] to incorporate the established meaning“) (internal quotation omitted) (emphasis added).
1. The Common Law Presumptively Applies
Congress‘s use of the word “fiduciary” triggers the “settled principle of interpretation that, absent other indication,
The common law term “fiduciary” falls within the scope of this presumption. In Firestone Tire & Rubber Co. v. Bruch, the Supreme Court cited Congress‘s use of “fiduciary” as one example of “ERISA abound[ing] with the language and terminology of trust law.” 489 U.S. at 110 (citing
The common law understanding of fiduciary status is not only the proper starting point in this analysis, but is as specific as it is venerable. Fiduciary status turns on the existence of a relationship of trust and confidence between the fiduciary and client. “The concept of fiduciary responsibility dates back to fiducia of Roman law,” and “[t]he entire concept was founded on concepts of sanctity, trust, confidence, honesty, fidelity, and integrity.” George M. Turner, Revocable Trusts § 3:2 (Sept. 2016 Update). Indeed, “[t]he development of the term in legal history under the Common Law suggested a situation wherein a
person assumed the character of a trustee, or an analogous relationship, where there was an underlying confidence involved that required scrupulous fidelity and honesty.” Id. Another treatise addresses relationships “which require trust and confidence,” and explains that “[e]quity has always taken an active interest in fostering and protecting these intimate relationships which it calls ‘fiduciary.‘” GEORGE G. BOGERT, ET AL., TRUSTS & TRUSTEES § 481 (2017 Update). Yet another treatise describes fiduciaries as “individuals or corporations who
Congress did not expressly state the common law understanding of “fiduciary,” but it provided a good indicator of its intention. In
The unique provision in which Congress did not take that route delineates the term “fiduciary.” Instead, Congress stated that “a person is a
fiduciary with respect to a plan to the extent” he performs any of the enumerated functions.
In any event, “absent other indication, ‘Congress intend[ed] to incorporate the well-settled meaning” of “fiduciary“—the very essence of which is a relationship of trust and confidence. See Castleman, 134 S. Ct. at 1410 (quoting Sekhar, 133 S. Ct. at 2724).
2. Displacement of the Presumption?
DOL concedes the relevance of the common-law presumption and the common-law trust-and-confidence standard but then places all its eggs in one basket: displacement of the presumption. Invoking its favorite phrases from Varity Corp., DOL argues that the common law is only “a starting point” and the presumption “is displaced if inconsistent with ‘the language of the statute, its structure, or its purposes.‘” (quoting Varity Corp., 516 U.S. at 497) (emphasis removed). Displacement should occur here, DOL continues, because “DOL reasonably interpreted ERISA‘s language, structure, and purpose to go beyond the trust-and-confidence standard.”
As a preliminary matter, DOL neglects to mention two aspects of Varity Corp. that cut against its position. First, the phrase quoted above is significantly less absolute than DOL lets on: “In some instances, trust law will offer only a starting point, after which courts must go on to ask whether, or to what extent, the language of the statute, its structure, or its purposes require departing from common-law trust requirements.” Varity Corp., 516 U.S. at 497 (emphases added). Thus, it is not the case, as DOL suggests, that any perceived inconsistency automatically requires jettisoning the common-law
Even more important, DOL acknowledges appellants’ argument “that there is nothing inherently inconsistent between the trust-and-confidence standard and ERISA‘s definition” of “fiduciary.” The DOL‘s only response is that it “is not required to adopt semantically possible interpretations merely because they would comport with common-law standards.” But this proves appellants’ point: adopting “semantically possible” interpretations that do not “comport with common law standards” is contrary to Varity Corp. because the statute does not “require departing from [the] common-law” trust-and-confidence standard. Id. at 497. DOL‘s concession should end any debate about the viability and vitality of the common law presumption.
3. Statutory Text—“investment advice fiduciary”
Even if the common law presumption did not apply, the Fiduciary Rule contradicts the text of the “investment advice fiduciary” provision and contemporary understandings of its language. To restate, a person is a fiduciary with respect to a plan to the extent “he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so[.]”
Going straight to dictionary definitions not only conflicts with Varity Corp., but it also fails to take into account whether the words that Congress used were terms of art within the financial services industry. See, e.g., Corning Glass Works v. Brennan, 417 U.S. 188, 201-02 (1974) (rejecting an ordinary understanding of “working conditions” because “the term has a different and much more specific meaning in the language of industrial relations“). Moreover, the technique of defining individual words in a vacuum fails to view the entire provision in context. “[S]tatutory language cannot be construed in a vacuum. It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.” Davis v. Mich. Dep‘t of Treasury, 489 U.S. 803, 809 (1989).
Properly considered, the statutory text equating the “rendering” of “investment advice for a fee” with fiduciary status comports with common law and the structure of the financial services industry. When enacting ERISA, Congress was well aware of the distinction, explained further below, between investment advisers, who were considered fiduciaries, and stockbrokers and insurance agents, who generally assumed no such status in selling products to their clients. The Fiduciary Rule improperly dispenses with this distinction. Had Congress intended to include as a fiduciary any financial services provider to investment plans, it could have written ERISA
Put otherwise, DOL‘s defense of the Fiduciary Rule contemplates a hypothetical law that states, “a person is a fiduciary with respect to a plan to the extent...he receives a fee, in whole or in part, in connection with any investment advice....” This language could have embraced individual sales transactions as well as the stand-alone furnishing of investment advice. But this iteration does not square with the last clause of the actual law, which includes a person who “has any authority or responsibility to [render investment advice].” Only in DOL‘s semantically created world do salespeople and insurance brokers have “authority” or “responsibility” to “render investment advice.” The DOL interpretation, in sum, attempts to rewrite the law that is the sole source of its authority. This it cannot do.
Further, in law and the financial services industry, rendering “investment advice for a fee” customarily distinguished salespeople from investment advisers during the period leading up to ERISA‘s 1974 passage. Congress is presumed to have acted against a background of shared understanding of the terms it uses in statutes. Morissette v. United States,
342 U.S. 246, 263 (1952); see also Miles v. Apex Marine Corp., 498 U.S. 19, 32 (1990) (“We assume that Congress is aware of existing law when it passes legislation.“). And the phrase “investment advice for a fee” and similar phrases generally referenced a fiduciary relationship of trust and confidence between the adviser and client.
To begin with, DOL itself reflected this understanding in its 1975 definition of an “investment advice fiduciary.” There, DOL there explained that a “fee or other compensation” for the rendering of investment advice under ERISA “should be deemed to include all fees or other compensation incident to the transaction in which the investment advice to the plan has been rendered or will be rendered.” Definition of the Term “Fiduciary,” 40 Fed. Reg. 50842, 50842-43 (Oct. 31, 1975). DOL went on to say that this “may include” brokerage commissions, but only if the broker-dealer who earned the commission otherwise satisfied the regulation‘s requirements that the broker-dealer provide individualized advice on a regular basis pursuant to a mutual agreement with his client. See id. Later, DOL reiterated that “the receipt of commissions by a broker-dealer which performs
DOL‘s 1975 regulation flowed directly from contemporary understanding of “investment advice for a fee,” which contemplated an intimate relationship between adviser and client beyond ordinary buyer-seller interactions. The Fiduciary Rule is at odds with that understanding.
Substantial case law has followed and adopted DOL‘s original dichotomy between mere sales conduct, which does not usually create a fiduciary relationship under ERISA, and investment advice for a fee, which does. In the Fifth Circuit, this court held that “[s]imply urging the purchase of its products does not make an insurance company an ERISA fiduciary with respect to those products.” Am. Fed‘n of Unions v. Equitable Life Assurance Soc‘y, 841 F.2d 658, 664 (5th Cir. 1988). Applying the DOL‘s 1975 regulation of an “investment advice fiduciary,” the Seventh Circuit refused to hold a brokerage firm liable for the failure of investments it sold to an ERISA plan, but the court emphasized that there was
nothing in the record to indicate that Jones or its employees had agreed to render individualized investment advice to the Plan. . . . The only ‘agreement’ between the parties was that the trustees would listen to Jones’ sales pitch and if the trustees liked the pitch, the Plan would purchase from among the suggested investments, the very cornerstone of a typical broker-client relationship.
Farm King Supply, Inc. v. Edward D. Jones & Co., 884 F.2d 288, 293 (7th Cir. 1989) (emphasis added). The Eleventh Circuit, relying upon “numerous” cases, dismissed a claim that an insurance company‘s selling of life policies to an ERISA plan, without more, sufficed to give rise to fiduciary duties to the plan. Cotton v. Mass. Mut. Life Ins. Co., 402 F.3d 1267, 1278-79 (11th Cir. 2005).
The SEC has also repeatedly held that “[t]he very function of furnishing [investment advice for compensation]—learning the personal and intimate details of the financial affairs of clients and making recommendations as to purchases and sales of securities—cultivates a confidential and intimate relationship“—rendering a broker-dealer who does so “a fiduciary.” Hughes, Exchange Act Release No. 4048, 1948 WL 29537, at *4, *7 (Feb. 18, 1948), aff‘d sub nom., Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949); see also Mason, Moran & Co., Exchange Act Release No. 4832, 1953 WL 44092, at *4 (Apr. 23, 1953). The SEC cautioned that fiduciary status does not follow “merely from the fact that [the broker-dealer] renders investment advice.” Hughes, 1948 WL 29537, at *7. Indeed, broker-dealers “who render investment advice merely as an incident to their broker-dealer activities” are not fiduciaries “unless they have by a course of conduct placed themselves in a position of trust and confidence as to their customers.” Id.
Significant federal and state legislation also used the term “investment adviser” to exclude broker-dealers when their investment advice was “solely incidental” to traditional broker-dealer activities and for which they received no “special compensation.” The
The contemporary case law similarly demonstrates that when investment advice was procured “on a fee basis,” it entailed a substantial, ongoing relationship between adviser and client. See, e.g., SEC v. Ins. Sec., Inc., 254 F.2d 642, 645 (9th Cir. 1958) (company receives a “management and investment supervisory fee for investment advice” on annual bases); Kukman v. Baum, 346 F. Supp. 55, 56 (N.D. Ill. 1972)(“Supervisor[] furnishes investment advice” and “receives a monthly fee calculated on the net value of the fund‘s assets.“); Norman v. McKee, 290 F. Supp. 29, 34 (N.D. Cal. 1968) (“For its services, including administration, management and investment advice, ISI charges a so-called ‘Management Fee’ of 1 1/2% Per year of the face amount of each outstanding investment
In short, whether one looks at DOL‘s original regulation, the SEC, federal and state legislation governing investment adviser fiduciary status vis-à-vis broker-dealers, or case law tying investment advice for a fee to ongoing relationships between adviser and client, the answer is the same: “investment advice for a fee” was widely interpreted hand in hand with the relationship of trust and confidence that characterizes fiduciary status.
DOL‘s invocation of two dictionary definitions of “investment” and “advice” pales in comparison to this historical evidence. That DOL contradicts its own longstanding, contemporary interpretation of an “investment advice fiduciary” and cannot point to a single contemporary source that interprets the term to include stockbrokers and insurance agents indicates that the Rule is far afield from its enabling legislation. DOL admits as much in conceding that the new Rule would “sweep in some relationships” that “the Department does not believe Congress intended to cover as fiduciary.”
Congress does not “hide elephants in mouseholes.” Whitman v. Am. Trucking Ass‘ns, Inc., 531 U.S. 457, 468 (2001). Had Congress intended to abrogate both the cornerstone of fiduciary status—the relationship of trust and confidence—and the widely shared understanding that financial salespeople are not fiduciaries absent that special relationship, one would reasonably expect Congress to say so. This is particularly true where such abrogation portends consequences that “are undeniably significant.” Accordingly, the Fiduciary Rule‘s interpretation of “investment advice fiduciary” fatally conflicts with the statutory text and contemporary understandings.
4. Consistency with other prongs of ERISA‘s “fiduciary” definition
In addition to the preceding flaws, the Fiduciary Rule renders the second prong of ERISA‘s fiduciary status definition in tension with its companion subsections. The Rule thus poses a serious harmonious-reading problem. See ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXTS 180 (2012) (“The provisions of a text should be interpreted in a way that renders them compatible, not contradictory.“). The investment-advice prong of the statutory application of “fiduciary” is bookended by one subsection that defines individuals as fiduciaries with respect to a plan to the extent they exercise “any discretionary authority or control” over the management of a retirement plan or “any authority or control” over its assets.
Sandwiched between the two “control and authority” prongs, the interpretation of an “investment advice fiduciary” should gauge that subdivision by the company it keeps and should uniformly apply the trust and confidence standard in all three provisions. Roberts v. Sea-Land Servs., Inc., 566 U.S. 93, 101 (2012) (“the words of a statute must be read in their context” (quotation omitted)). The inference of textual consistency is reinforced by the similar phrasing in the last clause of the investment advice fiduciary prong, which refers to a person “with any authority or responsibility” to render investment advice for a fee. Salespeople in ordinary buyer-seller transactions have no such authority or responsibility.11
Countertextually, the Fiduciary Rule‘s interpretation of an “investment advice fiduciary” lacks any requirement of a special relationship. DOL thus asks us to differentiate within the definition of “fiduciary“—rendering the definition a moving target depending on which of the three prongs is at issue. Standard textual interpretation disavows that disharmony.
There is also no merit in DOL‘s reliance on Mertens for the broader proposition that ERISA departed from the common law definition of “fiduciary.” DOL emphasizes the Court‘s statement that, by defining fiduciary in “functional” terms, Congress “expand[ed] the universe of persons subject to fiduciary duties.” Mertens, 508 U.S. at 262.
DOL‘s quotation is correct but beside the point. The question in Mertens was whether individuals who were not subject to fiduciary duties at common law could be sued under ERISA. See id. 261-62. This question arose because under the common law, not only the named trustee, but also individuals who “knowingly participated” in a named trustee‘s breach of his fiduciary duties, could be held liable. Id. 256. The Court held that this was no longer the case under ERISA. Although Congress “expand[ed] the universe of persons subject to fiduciary duties” by defining “fiduciary” “not in terms of formal trusteeship, but in functional terms of control and authority over the plan,” Congress actually limited the number of persons that could be sued. Id. 262. ERISA differed from common law by excluding “persons who [despite participation in the trustee‘s breach] had no real power to control what the plan did.” Id.
Under Mertens, ERISA eliminated the “formal trusteeship” requirement and applied fiduciary status to all individuals who have “control and authority over the plan.” Id. The reason for this is clear: “Professional service providers such as actuaries become liable for damages when they cross the line from adviser to fiduciary.” Id. (emphasis added). Thus, the Court understood ERISA to apply to those who act as fiduciaries, regardless whether they are named fiduciaries. That understanding is
Moreover, although ERISA “abrogate[d] the common law in certain respects” concerning “formal trusteeship,” “we presume that Congress retained all other elements of common-law [fiduciary status] that are consistent with the statutory text because there are no textual indicia to the contrary.” Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 1999 n.2 (2016).12 There is no inconsistency between the statutory structure and the common law trust and confidence standard that “require[s] departing from common-law trust requirements.” Varity Corp., 516 U.S. at 497.
5. Purposes
DOL ultimately falls back on statutory purposes. DOL points to the alleged negative repercussions of appellants’ position, namely that “many investment advisers would be able to ‘play a central role in shaping’ retirement investments without the fiduciary safeguards ‘for persons having such influence and responsibility.‘” (quoting 81 Fed. Reg. 20955). DOL also says that appellants “cannot show that DOL acted unreasonably in determining that their proposed trust-and-confidence requirement would ‘undermine[] rather than promote[]’ ERISA‘s goals.” (quoting 81 Fed. Reg. 20955). Finally, citing United States v. Guidry, 456 F.3d 493, 510-11 (5th Cir. 2006), DOL concludes that “[s]uch inconsistency with statutory purposes is alone sufficient to displace the common law, as Varity reflects and this Court has held in other contexts.”
None of these arguments holds water. DOL‘s invocation of ERISA‘s purposes is unpersuasive in light of Mertens. There, the petitioners asked for a particular interpretation of ERISA “in order to achieve the ‘purpose of ERISA to protect plan participants and beneficiaries.‘” 508 U.S. at 261. The petitioners complained that a different interpretation would “leave[] beneficiaries like petitioners with less protection than existed before ERISA, contradicting ERISA‘s basic goal of ‘promot[ing] the interests of employees and their beneficiaries in employee benefit plans.‘” Id. (quoting Shaw, 463 U.S. at 90). Mertens rejected these complaints because “vague notions of a statute‘s ‘basic purpose’ are nonetheless inadequate to overcome the words of its text regarding the specific issue under consideration.” Id. Indeed, the Court said that “[t]his is especially true with legislation such as ERISA, an enormously complex and detailed statute that resolved innumerable disputes between powerful competing interests—not all in favor of potential plaintiffs.” Id. 262; see also Darden, 503 U.S. at 324-25 (rejecting broader definition of employee based solely on the “goals” of ERISA). DOL‘s complaints here about “undermining ERISA‘s goals” are no less vague than the notions rejected in Mertens and Darden.
Moreover, DOL‘s principal policy concern about the lack of fiduciary safeguards
Finally, DOL‘s reliance on Guidry is misleading and misplaced. Guidry was a criminal kidnapping-enhancement case in which this court was required to define the term “kidnap.” 456 F.3d at 509-11. This court noted that “[w]e do not use the common law definition of any term where it would be inconsistent with the statute‘s purpose, notably where the term‘s definition has evolved.” Id. 509. This court applied the modern definition because the term “kidnap” had evolved so far from the antiquated common law that the common-law definition “would come close to nullifying the term‘s effect in the statute.” Id. 510-11 (quoting Taylor v. United States, 495 U.S. 575, 594 (1990)). Unlike the term “kidnap,” the term “fiduciary” has not “evolved” over time.
In sum, using the “regular interpretive method leaves no serious question, not even about purely textual ambiguity” in ERISA. Gen. Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 600 (2004). DOL cannot displace the presumption of common-law meaning because there is no inconsistency between the common-law trust-and-confidence standard and the statutory definition of “fiduciary.” The Fiduciary Rule conflicts with the plain text of the “investment advice fiduciary” provision as interpreted in light of contemporary understandings, and it is inconsistent with the entirety of ERISA‘s “fiduciary” definition. DOL therefore lacked statutory authority to promulgate the Rule with its overreaching definition of “investment advice fiduciary.”13
B. The Fiduciary Rule fails the “reasonableness” test of Chevron step 2 and the APA.
Under Step 2 of Chevron, “if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency‘s answer is based on a permissible construction of the statute.” Chevron, 467 U.S. at 843. Notwithstanding the preceding discussion, we assume arguendo that there is some ambiguity in the phrase “investment advice for a fee.” In that case, the Chevron doctrine requires that DOL‘s regulatory interpretation be upheld if it is “reasonable.” Id. 845.14
Bear in mind that DOL‘s 1975 regulations only covered “investment advice fiduciaries” who rendered advice regularly and as the primary basis for clients’ investment decisions. The Fiduciary Rule extends regulation to any financial transaction involving an ERISA or IRA plan in which “advice” plays a part, and a fee, “direct or indirect,” is received. The Rule expressly includes one-time IRA rollover or annuity transactions where it is ordinarily inconceivable that financial salespeople or insurance agents will have an intimate relationship of trust and confidence with prospective purchasers. Through the BIC Exemption, the Rule undertakes to regulate these and myriad other transactions as if there were little difference between them and the activities of ERISA employer-sponsored plan fiduciaries. Finally, in failing to grant certain annuities the long-established protection of PTE 84-24, the Rule competitively disadvantages their market because DOL believes these annuities are unsuitable for IRA investors.
Not only does the Rule disregard the essential common law trust and confidence standard, but it does not holistically account for the language of the “investment advice fiduciary” provision or for the additional prongs of ERISA‘s fiduciary definition. The Supreme Court has warned that “there may be a question about whether [an agency‘s] departure from the common law...with respect to particular questions and in a particular statutory context[] renders its interpretation unreasonable.” NLRB v. Town & Country Elec., Inc., 516 U.S. 85, 94 (1995). Given that the text here does not compel departing from the common law (but actually embraces it), and given that the Fiduciary Rule suffers from its own conflicts with the statutory text, the Rule is unreasonable.
Moreover, that it took DOL forty years to “discover” its novel interpretation further highlights the Rule‘s unreasonableness. See Util. Air Regulatory Grp. v. EPA, 134 S. Ct. 2427, 2444 (2014) (hereinafter,
The following problems highlight the unreasonableness of the Rule and its incompatibility with APA standards.
First, the Rule ignores that ERISA Titles I and II distinguish between DOL‘s authority over ERISA employer-sponsored plans and individual IRA accounts. By statute, ERISA plan fiduciaries must adhere to the traditional common law duties of loyalty and prudence in fulfilling their functions, and it is up to DOL to craft regulations enforcing that provision.
DOL‘s response to the statutory distinction is that it has broad power to exempt “prohibited transactions.” See
Additionally, the “exemptions” actually subject most of these newly regulated actors and transactions to a raft of affirmative obligations. Among the new requirements, brokers and insurance salespeople assume obligations of loyalty and prudence only statutorily required of ERISA plan fiduciaries. Further, when brokers and insurance representatives use the BICE exemptions (as they must in order to preserve their commissions), they are required to expose themselves to potential liability beyond the tax penalties provided for in ERISA Title II. See
Second, insofar as the Fiduciary Rule defines “investment advice fiduciary” to include anyone who makes a suggestion “to a specific advice recipient... regarding the advisability of a particular investment... decision,” it comprises nearly any broker or insurance salesperson who deals with IRA clients. Under ERISA, however, fiduciaries are generally prohibited from selling financial products to plans.
Another such marker is the overbreadth of the BIC Exemption when compared with an exception that Congress enacted to the prohibited transactions provisions.
Even more remarkable, DOL had to exclude Congress‘s nuanced § 4975(d)(17) exemption from the BICE exemption‘s onerous provisions. 81 Fed. Reg. 20982 n.33. But for this exclusion, the BIC Exemption would have brazenly overruled Congress‘s careful striking of a balance in the regulation of “prohibited transactions” concerning certain self-directed IRA plans. DOL candidly summarizes the intersection of its far broader Rule with Congress‘s exclusion contained in the Pension Protection Act of 2006 (PPA):
[T]he PPA created a new statutory exemption that allows fiduciaries giving investment advice to individuals...to receive compensation from investment vehicles that they recommend in certain circumstances.
29 U.S.C. 1108(b)(14) ;29 U.S.C. 4975(d)(17) . Recognizing the risks presented when advisers receive fees from the investments they recommend to individuals, Congress placed important constraints on such advice arrangements that are calculated to limit the potential for abuse and self-dealing....Thus, the PPA statutory exemption remains available to parties that would become investment advice fiduciaries [under the Fiduciary Rule] because of the broader definition in this final rule....
Id. (emphasis added). Unlike the BIC Exemption regulations, Congress‘s exemption did not require detailed contractual provisions or subject “fiduciaries” involved in Section 4975(d)(17) transactions to the possibility of class actions suits without damage limitations. When Congress has acted with a scalpel, it is not for the agency to wield a cudgel. See Fin. Planning Ass‘n. v. SEC, 482 F.3d 481 (D.C. Cir. 2007) (overturning SEC‘s broad regulatory exemption contrary to Congress‘s narrower exemption).
Third, the Rule‘s status is not salvaged by the BICE, which as noted was designed to narrow the Rule‘s overbreadth. The Supreme Court addressed such a tactic when it held that agencies “are not free to adopt unreasonable interpretations of statutory provisions and then edit other statutory provisions to mitigate the unreasonableness.” See UARG, 134 S. Ct. at 2446 (internal quotations and alterations omitted). This is the vice in BICE, which exploits DOL‘s narrow exemptive power in order to “cure” the Rule‘s overbroad interpretation of the “investment advice fiduciary” provision. DOL admitted that without the BIC Exemptions, the Rule‘s overbreadth could have “serious adverse unintended consequences.” 81 Fed. Reg. at 21062. That a cure was needed “should have alerted [the agency] that it had taken a wrong interpretive turn.” UARG, 134 S. Ct. at 2446. The BIC Exemption is integral to retaining the Rule. Because it is independently indefensible, this alone dooms the entire Rule.
Fourth, BICE extends far beyond creating “conditional” “exemptions” to ERISA‘s prohibited transactions provisions. Rather
Fifth, the BICE provisions regarding lawsuits also violate the separation of powers, as reflected in Alexander v. Sandoval and its progeny. Armstrong v. Exceptional Child Ctr., Inc., 135 S. Ct. 1378, 1387-88 (2015) (“a private right of action under federal law is not created by mere implication, but must be ‘unambiguously conferred‘“) (quoting Gonzaga Univ. v. Doe, 536 U.S. 273, 283 (2002)); Alexander v. Sandoval, 532 U.S. 275, 286 (2001) (“private rights of action to enforce federal law must be created by Congress“). Only Congress may create privately enforceable rights, and agencies are empowered only to enforce the rights Congress creates. See Alexander, 532 U.S. at 291. In ERISA, Congress authorized private rights of action for participants and beneficiaries of employer sponsored plans,
Further, whether federal or state law may be the vehicle for DOL‘s BICE-enabled lawsuits is immaterial in the absence of statutory authorization. If the IRA owners’ lawsuits are intended to be cognizable under federal law, the absence of statutory basis is obvious. If the BICE-mandated provisions are intended to authorize new claims under the fifty states’ different laws, they are no more than an end run around Congress‘s refusal to authorize private rights of action enforcing Title II fiduciary duties. Paraphrasing the Supreme Court, “[t]he absence of a private right to enforce [Title II fiduciary duties] would be rendered meaningless if [IRA owners] could overcome that obstacle by suing to enforce [DOL-imposed contractual] obligations instead. The statutory and contractual obligations, in short, are one and the same.” Astra USA, Inc., 563 U.S. at 117; see also Umland v. Planco Fin. Serv., Inc., 542 F.3d 59, 67 (3d Cir. 2008)(reading FICA‘s provisions into every employment contract would contradict Congress‘s decision not to expressly include a private right of action). DOL‘s assumption of non-existent authority to create private rights of action was unreasonable and arbitrary and capricious.
Although it is now disavowed by DOL, another unsustainable feature of the BIC Exemption is the forced rejection, in transactions involving transaction-based compensation, of contractual provisions that would have allowed arbitration of class action claims. This contractual condition violates the Federal Arbitration Act. The Supreme Court has broadly applied the Federal Arbitration Act‘s promotion of voluntary arbitration agreements. Moses H. Cone Mem‘l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). State law provisions that have attempted to condition or limit the availability of an arbitral forum have been consistently struck down. See, e.g, AT&T
Mobility, Inc. v. Concepcion, 563 U.S. 333, 336 (2011) (conditions on class-wide arbitration struck down); OPE Int‘l LP v. Chet Morrison Contactors, Inc., 258 F.3d 443, 447 (5th Cir. 2001) (state may not condition enforcement of an arbitration agreement on absence of a forum selection clause). That DOL has retreated from its overreach (although not yet by formal rule amendment) does not detract from the impermissible nature of the provisions in the first place. See also Thrivent Fin. for Lutherans v. Acosta, No. 16-cv-03289, 2017 WL 5135552 (D. Minn. Nov. 3, 2017) (granting injunction against enforcement of the BICE exemption anti-arbitration condition).
The sixth “unreasonable” feature of the Fiduciary Rule lies in DOL‘s decision to outflank two Congressional initiatives to secure further oversight of broker/dealers handling IRA investments and the sale of fixed-indexed annuities. The 2010 Dodd Frank Act amended both the Securities Exchange Act and the Investment Advisers Act of 1940, empowering the SEC to promulgate enhanced, uniform standards of conduct for broker-dealers and investment advisers who render “personalized investment advice about securities to a retail customer....”
Another provision of Dodd-Frank was spawned by a federal court‘s rejection of an SEC initiative to regulate fixed indexed annuities as securities. See Am. Equity Inv. Life Ins. v. SEC, 613 F.3d 166, 179 (D.C. Cir. 2010). In Dodd-Frank, Congress opted to defer such regulation to the states, which have traditionally and under federal law borne responsibility for thoroughgoing supervision of the insurance business.
The Fiduciary Rule conflicts with both of these efforts. The SEC has the expertise and authority to regulate brokers and dealers uniformly. DOL has no such statutory warrant, but far from confining the Fiduciary Rule to IRA investors’ transactions, DOL‘s regulations effect dramatic industry-wide changes because it is impractical to separate IRA transactions from non-IRA securities advice and brokerage. Rather than infringing on SEC
DOL contends that legislation pertaining to the SEC does not detract from its authority to regulate “fiduciaries” to IRA investors, but we are unconvinced. Congress does not ordinarily specifically delegate power to one agency while knowing that another federal agency stands poised to assert the very same power. DOL‘s direct imposition on the delegation to SEC is made plain by the text of
The Commission may promulgate rules to provide that the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice. In accordance with such rules, any material conflicts of interest shall be disclosed and may be consented to by the customer. Such rules shall provide that such standard of conduct shall be no less stringent than the standard applicable to investment adviser[s] under
sections 206(1) and (2) of this Act when providing personalized investment advice about securities, except the Commission shall not ascribe a meaning to the term customer that would include an investor in a private fund managed by an investment adviser, where such private fund has entered into an advisory contract with such adviser. The receipt of compensation based on commission or fees shall not, in and of itself, be considered a violation of such standard applied to a broker, dealer or investment adviser. (emphasis added)
As a major securities law treatise explains, the genesis of this provision was an SEC initiative commencing in 2006 to address “Trends Blurring the Distinction Between Broker-Dealers and Investment Advisers.” See LOUIS LOSS, ET AL., 2 FUNDAMENTAL OF SECURITIES REGULATION 1090-94 (2011). Congress was concerned to protect all retail investment clients, and there is no evidence that Congress expected DOL to more restrictively regulate a trillion dollar portion of the market when it delegated the general question to the SEC (for broker-dealers and registered investment advisers) and conditionally deferred to state insurance practices.16
These decisions are not, as DOL contends, distinguishable. They restate fundamental principles deriving from the Constitution‘s separation of powers within the federal government. Congress enacts laws that define and, equally important, circumscribe the power of the Executive to control the lives of the citizens. When agencies within the Executive Branch defy Congressional limits, they lord it over the people without proper authority. Most instances of regulatory activity, no doubt, are underpinned by direct or necessary consequences of enabling statutes. But the guiding inquiry under Chevron Step Two is whether Congress intended to delegate interpretive authority over a question to the agency asserting deference. City of Arlington, 133 S. Ct. at 1868. It is not hard to spot regulatory abuse of power when “an agency claims to discover in a long-extant statute an unheralded power to regulate a significant portion of the American economy....” UARG, 134 S. Ct. at 2444 (internal quotation omitted).
DOL has made no secret of its intent to transform the trillion-dollar market for IRA investments, annuities and insurance products, and to regulate in a new way the thousands of people and organizations working in that market. Large portions of the financial services and insurance industries have been “woke” by the Fiduciary Rule and BIC Exemption. DOL utilized two transformative devices: it reinterpreted the forty-year old term “investment advice fiduciary” and exploited an exemption provision into a comprehensive regulatory framework. As in the UARG case, DOL found “in a long-extant statute an unheralded power to regulate a significant portion of the American economy.” And,
CONCLUSION
The APA states that a “reviewing court shall...hold unlawful and set aside agency action...found to be...arbitrary, capricious,...not in accordance with law” or “in excess of statutory ...authority[] or limitations.”
JUDGMENT REVERSED; FIDUCIARY RULE VACATE
CARL E. STEWART, Chief Judge, dissenting:
Over the last forty years, the retirement-investment market has experienced a dramatic shift toward individually controlled retirement plans and accounts. Whereas retirement assets were previously held primarily in pension plans controlled by large employers and professional money managers, today, individual retirement accounts (“IRAs“) and participant-directed plans, such as 401(k)s, have supplemented pensions as the retirement vehicles of choice, resulting in individual investors having greater responsibility for their own retirement savings. This sea change within the retirement-investment market also created monetary incentives for investment advisers to offer conflicted advice, a potentiality the controlling regulatory framework was not enacted to address. In response to these changes, and pursuant to its statutory mandate to establish nationwide “standards . . . assuring the equitable character” and “financial soundness” of retirement-benefit plans,
Despite the relevant context of time and evolving marketplace events, Appellants and the panel majority skew valid agency action that demonstrates an expansive-but-permissible shift in DOL policy as falling outside the statutory bounds of regulatory authority set by Congress in ERISA and the Code. Notwithstanding their qualms with these regulatory changes and the effect the DOL‘s exercise of its regulatory authority might have on certain sectors of the financial services industry, the DOL‘s exercise was nonetheless lawful and consistent with the Congressional directive to “prescribe such regulations as [the DOL] finds necessary or appropriate to carry out [ERISA‘s provisions].”
I.
A comprehensive recitation of the relevant regulatory and statutory background
For 41 years, the DOL employed a five-part test to determine whether a person is an investment-advice fiduciary under ERISA and the Code, and that test limited the reach of the statutes’ prohibited transaction rules to those who rendered advice “on a regular basis,” and to instances where such advice “serve[d] as a primary basis for investment decisions with respect to plan assets.” See
The rule challenged on appeal addresses these and other changes in the retirement investment advice market by, inter alia, abandoning the five-part test in favor of a definition of fiduciary that includes “recommendation[s] as to the advisability of acquiring . . . investment property that is rendered pursuant to [an] . . . understanding that the advice is based on the particular investment needs of the advice recipient.”
II.
As the panel majority acknowledges, the DOL‘s authority to implement a new definition of investment-advice fiduciary implicates the two-step analytical framework established in Chevron. “First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842–43. However, “if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency‘s answer is based on a permissible construction of the statute.” Id. at 843 (emphasis added). The agency‘s view “governs if it is a reasonable interpretation of the statute—not necessarily the only possible interpretation, nor even the interpretation deemed most reasonable by the courts.” Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208, 218 (2009) (emphasis in original). Importantly, a court may not substitute its own construction of a statutory provision of a reasonable interpretation made by the administrator of an agency. Chevron, 467 U.S. at 844.
The Chevron inquiry necessarily begins with the text of the statutory definition of investment-advice fiduciary. See
That the text of ERISA does not unambiguously foreclose the DOL‘s regulatory interpretation of fiduciary satisfies step one of Chevron. Nonetheless, the panel majority reaches additional erroneous conclusions to make a case for a contrary holding. The panel majority primarily contends that the DOL‘s new interpretation is inconsistent with common law fiduciary standards that Congress contemplated and retained in enacting ERISA. Under those common law standards, fiduciary status turns on the existence of a relationship of trust and confidence between the fiduciary and the client, a relationship that the panel majority maintains never materializes when a financial services professional does not engage in the type of ongoing transactional relationships that plan managers and administrators traditionally do.
No one seriously challenges that the courts have, at times, looked to the common law of trusts in interpreting the nature and scope of fiduciary duties under ERISA. The Supreme Court has “recognize[d] that the [ ] fiduciary duties [found in ERISA] draw much of their content from the common law of trusts,” which “governed most benefit plans before ERISA‘s enactment.” Varity Corp. v. Howe, 516 U.S. 489, 496 (1996). But the Court has “also recognize[d] . . . that trust law does not tell the entire story,” and that “ERISA‘s standards and procedural protections partly reflect a congressional determination that the common law of trust did not offer completely satisfactory protection.” Id. at 497. Accordingly, the Court concluded that “[i]n some instances, trust law . . . offer[s] only a starting point, after which courts must go on to ask whether, or to what extent, the language of the statute, its structure, or its purposes require departure from common-law trust requirements.” Id. (emphasis added).
It is only after invoking common law trust principles that the panel majority turns to the statutory text. Instead of assessing the DOL‘s regulations based on the plain language of the statute, the panel majority relies on several extra-statutory sources which purportedly shed light on how an investment-advice fiduciary should be defined. In so doing, the panel majority maintains that the relevant provisions in ERISA and the Code contemplated a hard distinction between investment advisers
As an initial matter, the new rule does not make one a fiduciary for selling a product without a recommendation upon which an investor might reasonably rely. See Fiduciary Rule, 81 Fed. Reg. 20,984; see also
The panel majority first highlights the Investment Advisers Act of 1940 (“the IAA“), which precedes the disputed regulations by some 76 years and which informed Congress‘s use of the phrase “renders investment advice for a fee or other compensation” in ERISA and the Code. The IAA defines an “investment adviser” as “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities,”
Additionally, the panel majority‘s reliance on the DOL‘s original regulation, SEC interpretations of “investment advice for a fee,” and case law tying investment advice for a fee to “ongoing relationships between adviser and client” are similarly unavailing. First, because the DOL limited the scope of its original regulation such that it did not touch the breadth of the statutory definition of fiduciary, all interpretations rendered pursuant to that regulation will necessarily be limited in a way that the new regulation seeks to remedy. Further, that the SEC and case law have
The panel majority also emphasizes that the investment-advice provision is “bookended” by two separate definitions of fiduciary which purportedly incorporate common law trust principles and apply to individuals vested with responsibilities to manage and control the plan. From this, the panel majority extrapolates that the investment advice prong requires the existence of a “special” relationship so as to harmonize with the statutory definitions of fiduciary that come before and after it. However, that the other two prongs of the statutory definition of “fiduciary” describe those involved in managing or administering a plan provides support for the opposite conclusion. Because the other disjunctive prongs of the statutory definition already address “the ongoing management [and administration] of an ERISA plan,” the panel majority‘s reading of the “investment advice” prong would strip that prong of independent meaning and render it superfluous. See, e.g., U.S. v. Menasche, 348 U.S. 528, 538–39 (1955) (“It is our duty to give effect, if possible, to every clause and word of a statute.“) (citation and internal quotation marks omitted).
In sum, the statutory definition of “fiduciary” does not unambiguously foreclose the DOL‘s updated regulatory definition of “investment-advice fiduciary.” The text and structure of the statute support this conclusion, and the panel majority‘s reliance on common law presumptions and extra-statutory interpretations of “renders investment advice for a fee” do not upset this conclusion. Accordingly, I conclude that the DOL acted well within the confines set by Congress in implementing the challenged regulatory package, and said package should be maintained so long as the agency‘s interpretation is reasonable.
III.
In applying Chevron step two to cases where an agency has changed its existing policy, the court defers to the agency‘s permissible interpretation, but only if the agency has offered a reasoned explanation for why it chose that interpretation. See Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2125 (2016). Analysis at this step is analogous to the “arbitrary or capricious” standard under the APA. See Judulang v. Holder, 565 U.S. 42, 52 n.7 (2011).
The DOL‘s interpretation of “renders investment advice” is reasonably and thoroughly explained. The new interpretation fits comfortably with the purpose of ERISA, which was enacted with “broadly protective purposes” and which “commodiously imposed fiduciary standards on persons whose actions affect the amount of benefits retirement plan participants will receive.” Perez, 217 F. Supp. 3d at 28 (quoting John Hancock Mut. Life Ins. Co. v. Harris Tr. & Sav. Bank, 510 U.S. 86, 96 (1993)). In light of changes in the retirement investment advice market since 1975, mentioned above, the DOL reasonably concluded that limiting fiduciary
Notwithstanding the DOL‘s reasoned explanation for the new regulations, the panel majority maintains that the DOL acted unreasonably and arbitrarily when it promulgated the new fiduciary rule and, in a strained attempt to justify this conclusion, the panel majority disregards the requirement of showing judicial deference under Chevron by highlighting purported issues with other provisions of the regulation. Each of the panel majority‘s positions fails for reasons more fully explained below.
A. PTE 84-24, the BIC Exemption, and the DOL‘s Exemption Authority
Beyond its qualms with the new regulatory delineations on who qualifies as an investment-advice fiduciary, the panel majority takes substantial issue with the DOL‘s exercise of its exemption authority to amend PTE 84–24 and create the new BIC Exemption. The DOL may supplement statutorily created exemptions by implementing new exemptions under the prohibited transaction rules, which apply to retirement investment instruments under Titles I and II and “supplement[ ] the fiduciary‘s general duty of loyalty to the plan‘s beneficiaries . . . by . . . barring certain transactions deemed likely to injure the pension plan.” Harris Tr. & Sav. Bank, 530 U.S. at 241–42. ERISA and the Code authorize the DOL to adopt “conditional or unconditional exemption[s]” for otherwise prohibited transactions, the only limitation on this expansive authority being that the exemption must be “administratively feasible,” “in the interest of the plan and its participants and beneficiaries,” and “protective of the rights of [plan] participants and beneficiaries.”
The panel majority concludes that because the DOL is given no direct statutory authority to regulate IRA plan fiduciaries under Title II, and because the DOL has used its exemption authority to “subject most of these newly regulated actors and transactions to a raft of affirmative obligations,” the agency necessarily abused its exemption authority. However, the panel majority‘s interpretation of the DOL‘s use of its exemption authority all but ignores the statutory directive given to the DOL to create “conditional or unconditional” exemptions from otherwise prohibited transactions. ERISA and the Code do not qualify the form conditions must take or limit the scope of the DOL‘s exemption authority to mirror specific exemptions created by
Further, the panel majority accepts Appellants’ contention that the BIC Exemption creates a private right of action in contravention of Alexander v. Sandoval, 532 U.S. 275 (2001) by requiring the inclusion of specific contractual terms as a condition of qualifying for and receiving the prohibited transaction exemption. However, the BIC Exemption does not create a private right of action. “[I]t merely dictates terms that otherwise-conflicted financial institutions must include in written contracts with IRA and other [Title II] owners in order to qualify for the exemption.” Perez, 217 F. Supp. 3d at 36. Any action brought to enforce the terms of the written contract created pursuant to the BIC Exemption would be brought under state law, and state law would ultimately control the enforceability of any of the required contractual terms.
The panel majority also urges that in moving fixed indexed annuities from PTE 84–24 to the BIC Exemption, the DOL failed to account for state regulation of sales of annuities. See Maj. Opn. at 41–42 (citing American Equity Inv. Life Ins. Co. v. S.E.C., 613 F.3d 166 (D.C. Cir. 2010)). However, ERISA contains no statutory requirement that the DOL check for efficiency when changing which annuities qualify for a specific exemption, as was the case in American Equity. Further, before making the relevant amendments to the exemptions, the DOL comprehensively assessed existing securities regulation for variable annuities, state insurance regulation of all annuities, and consulted with numerous government and industry officials, including the SEC, the Department of the Treasury, and the Consumer Financial Protection Bureau, among others. The DOL found the protections prior to the current rulemaking insufficient to protect investors and acted within its prerogative to modify the regulatory regime as it deemed necessary.
Similarly, the panel majority observes that because
B. Questions of Deep “Economic and Political Importance”
Finally, the panel majority‘s contention that the DOL is using a “long-extant” statute to implement an “enormous and transformative expansion in regulatory authority without clear congressional authorization” is misplaced. Maj. Opn. at 44–45. The panel majority relies on several Supreme Court cases in support of this position but fails to recognize a meaningful distinction between those opinions and the case sub judice: in each of these cases, the relevant agency clearly exceeded the scope of delegation created by the enabling statute. See Util. Air Regulatory Grp. v. EPA, 134 S. Ct. 2427, 2444 (2014) (holding that “it would be patently unreasonable—not to say outrageous—for [the] EPA to insist on seizing expansive power that it admits the statute is not designed to grant,” and finding that a “long-extant statute [did not give EPA] an unheralded power to regulate a significant portion of the American economy“) (emphasis added); FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 159–160 (2000) (rendering as invalid regulations in which the FDA departed from statements it had made to Congress for over ninety years that it did not have jurisdiction over the tobacco industry, and ignoring that Congress had created a distinct regulatory scheme over the tobacco industry and expressly rejected proposals to give the FDA such jurisdiction). Here, in contrast, the DOL has acted within its delegated authority to regulate financial service providers in the retirement investment industry—which it has done since ERISA was enacted—and has utilized its broad exemption authority to create conditional exemptions on new investment-advice fiduciaries. That the DOL has extended its regulatory reach to cover more investment-advice fiduciaries and to impose additional conditions on conflicted transactions neither requires nor lends to the panel majority‘s conclusion that it has acted contrary to Congress‘s directive.
IV.
The panel majority‘s conclusion that the DOL exceeded its regulatory authority by