District Court Rejects Challenge to ERISA Fiduciary Rule and Best Interest Contract Exemption
Securities and Insurance Law Alert
November 9, 2016
David J. Libowsky
David J. Libowsky
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 (“BICE”) from ERISA’s prohibited transactions provisions.
On November 4, 2016, the Honorable Randolph D. Moss, U.S.D.J. issued his decision rejecting one of the pending legal challenges to the ERISA fiduciary rule and BICE which have been filed in a number of federal courts. In 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), Judge Moss granted summary judgment in favor of the DOL on the challenge to the ERISA fiduciary rule and BICE brought by the National Association for Fixed Annuities (“NAFA”) and denied NAFA’s motion for a preliminary injunction and summary judgment. The district court’s decision can be found at the following link: https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2016cv1035-46.
In upholding the ERISA fiduciary rule and BICE, Judge Moss reached the following conclusions:
• First, the DOL’s new definition of “fiduciary,” including its decision to eliminate the “on a regular basis” condition in connection with the rendering of investment advice under 29 C.F.R.§ 2510.3-21 (2016), satisfied the requirements of Chevron, USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778 (1984) and therefore did not exceed the DOL’s authority under ERISA.
• Second, the DOL had the authority under ERISA to require that fiduciaries who advise Individual Retirement Account (“IRA”) clients agree to be bound by the duties of loyalty and prudence in order to qualify for Prohibited Transaction Exemption 84-24 (“PTE 84-24”) and the BICE.
• Third, with respect to the BICE’s written contract requirement, the BICE does not impermissibly create a private cause of action with respect to IRAs and other plans that are not subject to Title I of ERISA.
• Fourth, the “reasonable compensation” condition of the BICE is not void for vagueness under the Due Process Clause of the U.S. Constitution.
• Fifth, the DOL’s decision to require that fixed indexed annuities proceed under the BICE rather than under PTE 84-24 was not arbitrary and capricious and thus satisfies the requirements of the Administrative Procedures Act (“APA”), 5 U.S.C. § 706(2)(A) (2016).
• Sixth, the DOL’s final Regulatory Impact Analysis (“RIA”) with respect to the new rules was adequate and thus meets the requirements of the Regulatory Flexibility Act, 5 U.S.C. § 604 (2016).
NAFA has filed an appeal with the United States Court of Appeals for the District of Columbia Circuit from Judge Moss’s grant of summary judgment in favor of DOL, requesting expedited review by that court. No timetable has been set for when NAFA’s appeal will be adjudicated. Additionally, there are several other legal challenges to the ERISA fiduciary rule and BICE that are still pending in district courts across the country, including the challenge brought by the Securities Industry and Financial Markets Association (“SIFMA”) which is pending in federal court in Dallas; oral argument on SIFMA’s challenge is scheduled for November 17, 2016.