BARBARA M. G. LYNN, CHIEF JUDGE.
Before the Court are the parties' Cross-Motions for Summary Judgment (ECF Nos. 48, 51, 54, 67). On November 17, 2016, the Court held oral argument on the Motions. For the reasons stated below, Plaintiffs' Motions for Summary Judgment are
Plaintiffs U.S. Chamber of Commerce ("COC"), the Indexed Annuity Leadership Council ("ALCI") and the American Council of Life Insurers ("ACLI") (collectively, "Plaintiffs") bring this lawsuit to challenge three rules published by the Department of Labor ("DOL") on April 8, 2016, which were to become effective on April 10, 2017.
Prior to the new rules, a financial professional who did not give advice to a consumer on a regular basis was not a "fiduciary," and therefore was not subject to fiduciary standards under the Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code (the "Code"). Unless fiduciaries qualify for an exemption, they are prohibited by ERISA and the Code from receiving commissions, which are considered to present a conflict of interest. Prior to the new rules, fiduciaries could qualify for an exemption known as the Prohibited Transaction Exemption 84-24 ("PTE 84-24"), which, if they qualified, allowed them to receive commissions on all annuity sales as long as the sale was as favorable to the consumer as an arms-length transaction and the adviser received no more than reasonable compensation.
The new rules modify the regulation of conflicts of interest in the market for retirement investment advice, and consist of: 1) a new definition of "fiduciary" under ERISA and the Code; 2) an amendment to, and partial revocation of, PTE 84-24; and 3) the creation of the Best Interest Contract Exemption ("BICE"). The first rule revises the definition of "fiduciary" under ERISA and the Code, and eliminates the condition that investment advice must be provided "on a regular basis" to trigger fiduciary duties.
Plaintiffs complain that financial professionals are improperly being treated as fiduciaries and should not be required to comply with heightened fiduciary standards for one-time transactions. Plaintiffs also complain that the conditions to qualify for an exemption under BICE are so burdensome that financial professionals will be unable to advise the IRA market and sell most annuities to ERISA plans and IRAs. They challenge the new rules and rulemaking procedure, and ask the Court to vacate them in their entirety.
Annuities are insurance contracts where the purchaser invests money and receives payments at set intervals or over the lifetime of the individual. They are generally used as retirement vehicles. Annuity payments may be immediate or deferred. Deferred annuities have two phases: in the first phase, they accumulate value through premium payments and interest; in the second phase, they pay out based on an application of a predetermined formula. The three most common types of deferred annuities are fixed rate annuities, variable annuities, and FIAs (fixed indexed annuities).
Fixed rate annuities guarantee the purchaser will earn a minimum rate of interest during the accumulation phase. Insurance companies bear the market risk on fixed rate annuities because the annuity is guaranteed to earn at least the declared interest rate for the time period specified in the contract. When the purchaser begins to receive payments, income payments are either based on the original guaranteed rate or the insurer's current rate, whichever is higher. Fixed rate annuities are subject to state insurance regulations and are not regulated by federal securities laws. Fixed rate annuities are usually sold by banks and insurance agents.
Variable annuities do not guarantee future income. Instead, returns on such annuities depend on the success of the underlying investment strategy. Premiums are invested, and the consumer bears the investment risk for both principal and interest. There is opportunity for greater return, but it comes with a higher risk. Variable annuities are regulated under federal securities laws and are usually sold by broker-dealers.
FIAs share features of fixed rate and variable annuities. FIAs earn interest based on a market index, such as the Dow Jones Industrial Average, or the S&P 500. Depending on the performance of the market index chosen by the consumer, returns on FIAs can be higher or lower than the guaranteed rate of a fixed rate annuity. At the same time, the rate of return cannot be less than zero, even if the index is negative for the relevant time period. Principal, therefore, is shielded from poor market performance. FIAs give the purchaser more risk but more potential return than fixed rate annuities, but less risk and less potential return than variable annuities. FIAs are not regulated under federal securities laws and are usually sold by insurance agents. They, like fixed rate annuities,
Three groups of professionals generally provide investment advice to retirees: registered investment advisers, broker-dealers, and insurance agents. Registered investment advisers must register with the Securities and Exchange Commission ("SEC"). Broker-dealers are not required to register with the SEC as investment advisers if their advice is "solely incidental" to the conduct of their business and they receive no "special compensation" for advisory services.
Financial professionals generally charge for their services in one of two ways. In a transaction-based compensation model, the professional receives a commission, mark-up, or sales load on a per transaction basis. In a fee-based compensation model, the investor pays based on either the amount of assets in the account, or pays a flat, hourly, or annual fee.
FIAs are most often sold by independent insurance agents. Independent marketing organizations ("IMOs") serve as intermediaries between independent agents and insurance companies, and provide product education, marketing, and distribution services to agents.
To protect employee benefit plan beneficiaries, Title I of ERISA, 29 U.S.C §§ 1021 et seq., imposes obligations on persons who engage in activities related to employee benefit plans as fiduciaries. Under Title I, a person "is a fiduciary with respect to a plan" if:
Under Title I, a fiduciary must adhere to the duties of loyalty and prudence, which requires the fiduciary to:
Title I also protects plan beneficiaries from a broad range of transactions deemed to present a conflict of interest for fiduciaries.
Congress delegated authority to the DOL to grant conditional or unconditional exemptions from the prohibited transaction rule, so long as such an exemption is 1) administratively feasible; 2) in the interests of the plan, its participants and beneficiaries; and 3) protective of the rights of the plan participants and beneficiaries.
Title II of ERISA establishes rules for the tax treatment of IRAs and other plans not subject to Title I. Unlike Title I, Title II applies to IRAs and other plans that are not created or maintained by either the plan beneficiary's employer or union.
Under the second prong of ERISA's fiduciary definition, a person is a fiduciary
Until the DOL's recent rulemaking, the five-part test had governed the applicability of the prohibited transaction rules under Title I and Title II. Because of the second element of the test, sporadic or one-time advice would not constitute advice on a regular basis that would activate ERISA's prohibited transaction rule, which only applies to fiduciaries.
The DOL originally adopted PTE 84-24 in 1977 as PTE 77-9, providing exemptive relief for parties who "receive[d] commissions when plans and IRAs purchased recommended insurance and annuity contracts."
In 2010, the DOL published a notice proposing to revise the 1975 regulation's
The DOL stated in the 2015 notice that the five part-test had been created "prior to the existence of participant-directed 401(k) plans, widespread investments in IRAs, and the now commonplace rollover of plan assets from fiduciary-protected plans to IRAs," and that these rollovers "will total more than $2 trillion over the next 5 years."
The 2015 notice also stated that since 1975, "the variety and complexity of financial products has increased," and that retirees "are increasingly moving money from ERISA-covered plans, where their employer has both the incentive and the fiduciary duty to facilitate sound investment choices, to IRAs where both good and bad investment choices are myriad and advice that is conflicted is commonplace."
The DOL also proposed significant modifications to PTE 84-24. The proposal "revoke[d] [PTE 84-24] relief for insurance agents, insurance brokers and pension consultants to receive a commission in connection with the purchase by IRAs of variable annuity contracts and other annuity contracts that are securities under federal securities laws."
Finally, the DOL proposed BICE, a new exemption from prohibited transactions for
The DOL provided a ninety-day comment period on the three proposed rules, during which it held a four-day public hearing in August 2015, and received over three thousand comment letters. On April 8, 2016, the DOL published its final rules.
By this rule ("Fiduciary Rule"), the DOL replaced the five-part test with a new approach to the analysis of when one "renders investment advice," and in turn redefined who is a fiduciary under ERISA. The DOL concluded that significant developments since 1975 in the retirement savings and investment market warranted removing the "regular basis" limitation in the definition of "fiduciary."
The Fiduciary Rule defines "recommendation" as "a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action."
The DOL's final revised PTE 84-24 eliminated the 2010 proposal's exemption for FIAs.
To qualify for BICE
If a Financial Institution provides investment advice to IRAs or other plans not covered by Title I, it must enter into a written contract with the consumer that includes all but the fourth provision listed above.
Plaintiffs' challenge is based on several grounds. First, Plaintiffs argue the Fiduciary Rule exceeds the DOL's statutory authority under ERISA. Second, Plaintiffs argue BICE exceeds the DOL's exemptive authority, because it requires fiduciaries who advise Title II plans, such as IRAs, to
Courts analyze an agency's interpretation of a statute using the two-step approach set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). At step one, courts assess "whether the intent of Congress is clear," and if "Congress has directly spoken to the precise question at issue." Id. at 842-43, 104 S.Ct. 2778. If it has, "that is the end of the matter," and courts "must give effect to the unambiguously expressed intent of Congress." Id. If it has not, courts move to step two, and must defer to the agency's interpretation of ambiguous statutory language if it is based on a "permissible construction of the statute." Id. Plaintiffs challenge the Fiduciary Rule under both steps of Chevron.
A person is a "fiduciary" under ERISA if "he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan."
The plain language of ERISA does not foreclose the DOL's interpretation. ERISA does not expressly define "investment advice," and expressly authorizes the DOL to "prescribe such regulations as [it] finds necessary or appropriate to carry out the provisions of [ERISA]," and to "define [the] accounting, technical and trade terms used in [ERISA]."
Plaintiffs argue Congress confined the definition of "fiduciary" under ERISA to relationships where special intimacy or trust and confidence exists between parties, in accordance with the common law of trusts. Plaintiffs contend that because everyday business interactions are not relationships of trust and confidence, a person acting as a broker or an insurance agent engaged in sales activity is not a fiduciary. This argument is not supported by the plain language of ERISA.
Although fiduciary duties under ERISA "draw much of their content from the common law of trusts," "trust law does not tell the entire story ... [and] will offer only a starting point." Varity Corp. v. Howe, 516 U.S. 489, 496-97, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996); see also Pegram v. Herdrich, 530 U.S. 211, 225, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000) ("[t]he analogy between ERISA fiduciary and common law trustee becomes problematic"). When Congress enacted ERISA, it made a "determination that the common law of trusts did not offer completely satisfactory protection." Varity Corp., 516 U.S. at 497, 116 S.Ct. 1065.
In its reply brief, COC claims that the express statutory departure referenced by the Supreme Court in Mertens applies only to "those expressly named as trustees."
Further, even if the interpretation of "renders investment advice" were limited to the common law of trusts, Plaintiffs do not convince the Court that the Fiduciary
The IAA defines the term "investment adviser," and in doing so, specifically excludes "any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no compensation therefor." Plaintiffs assert this distinction must be maintained by the DOL because in drafting ERISA, Congress closely tracked the IAA's definition of an investment adviser.
In defining a "fiduciary," ERISA does not exempt investment advice that is "solely incidental to the conduct of [the] business."
A person is a fiduciary under ERISA if he:
Plaintiffs argue the Fiduciary Rule exceeds the coverage of ERISA because it imposes fiduciary status on those who earn a commission merely for selling a product, regardless of whether advice is given. Actually, the Fiduciary Rule plainly does not make one a fiduciary for selling a product without a recommendation. The rule states:
Because Plaintiffs' contention is directly contradicted by the plain language of the Fiduciary Rule, the Court rejects it.
Plaintiffs also argue that financial professionals who receive sales commissions are not rendering investment advice for a fee. However, Plaintiffs' interpretation truncates the statute and does not address the next clause, "or other compensation, direct or indirect." The word "indirect" contradicts the notion that compensation must be paid principally for investment advice, as opposed to advice rendered in the course of a broader sales transaction. Plaintiffs' interpretation is also at odds with market realities and their own description of the role insurance agents and brokers play in annuity sales. ACLI notes that insurance agents and broker-dealers help consumers assess whether an annuity is a good choice and which types of annuities and optional features suit consumers' financial circumstances. Such advice requires significant and detailed analysis, often more than is required to sell other financial products, and therefore "insurers typically pay a sales commission to compensate agents and broker-dealers for the significant effort involved in learning about, marketing, and selling annuities."
Plaintiffs argue the first and third prongs of ERISA's definition of fiduciary require a "meaningful, substantial, and ongoing relationship to the plan," and that advice must be "provided on a regular basis and through an established relationship," as had been required by the five-part test.
Plaintiffs also claim that the first and third prongs of ERISA's definition of a fiduciary involve a direct connection to the essentials of plan operation and that management and administration of a plan are central functions; as a result, they argue the second prong must be read consistently with the other two subsections, and a
Plaintiffs argue that because § 913(g) of the Dodd-Frank Act prohibits the SEC from adopting a standard of conduct that disallows commissions for broker-dealers, it is implausible that Congress intended to allow the DOL, through ERISA, to promulgate a regulation that would do just that. The enactment of § 913(g) in Dodd-Frank does not address what Congress intended when it enacted ERISA. Further, the DOL's final rules do not prohibit commissions for broker-dealers. They only provide for modifications to exemptions from prohibited transactions, and if a person or entity qualifies for an exemption, that would allow the applicant to receive commissions and other forms of third party compensation.
Plaintiffs argue that because Congress has repeatedly amended ERISA since 1975, without ever amending the five-part test, that test has de facto been incorporated into ERISA by way of ratification.
There is a stark difference between Congress acquiescing to a permissible interpretation and Congress affirmatively deciding that an interpretation is the only permissible one. If Plaintiffs' argument were correct, the DOL could never revisit the five-part test because it has been, in effect, enshrined into the statute. To the contrary, courts have "consistently required express congressional approval of an administrative interpretation if it is to be viewed as statutorily mandated." AFL-CIO v. Brock, 835 F.2d 912, 915 (D.C. Cir. 1987) (citing cases). Congress has not taken any express action or otherwise indicated that the five-part test is the only possible way to determine who is a fiduciary under ERISA. Plaintiffs concede that the DOL's interpretive authority under ERISA and the Code includes the definition of fiduciary.
Because the Fiduciary Rule is not unambiguously foreclosed by the plain language of ERISA, the Court's analysis moves to Chevron step two. Chevron, 467 U.S. at 843, 104 S.Ct. 2778. Plaintiffs advance four arguments that allegedly render the final rules unreasonable under Chevron step two.
Plaintiffs argue the DOL's interpretation of what it means to render investment advice is entitled to no deference, because ERISA requires regular contact between an investor and a financial professional to trigger a fiduciary duty. If anything, however, the five-part test is the more difficult interpretation to reconcile with who is a fiduciary under ERISA. The broad and disjunctive language of ERISA's three prong fiduciary definition suggests that significant one-time transactions, such as rollovers, would be subject to a fiduciary duty. Under the five-part test, however, such a transaction would not trigger a fiduciary duty.
Plaintiffs argue the coverage of the Fiduciary Rule will be vast, involving billions of dollars, presenting issues "of deep economic and political significance," and that, therefore, the DOL is not entitled to Chevron deference under King v. Burwell, ___ U.S. ___, 135 S.Ct. 2480, 2489, 192 L.Ed.2d 483 (2015). In Burwell, the parties disputed whether the IRS was authorized to interpret the Affordable Care Act to allow tax credits for individuals who enroll in an insurance plan through a Federal Exchange. The Supreme Court found that Chevron analysis was altogether inappropriate, because Chevron is "premised on the theory that a statute's ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps ... however, there may be reason to hesitate before concluding that Congress has intended such an implicit design." Id. at 2488-89 (citations omitted). The hesitation expressed by the Court in Burwell was that the interpretation by the IRS presented a
Id. at 2489. The Court decided Chevron was not applicable in the first instance, not that the IRS' interpretation was entitled to no deference at Chevron step two.
Here, in contrast, the DOL may "prescribe such regulations as [it] finds necessary or appropriate to carry out the provisions of [ERISA]," and to "define [the] accounting, technical and trade terms used in [ERISA]."
Plaintiffs argue the Fiduciary Rule contradicts congressional intent because it in effect rejects the "disclosure regime established by Congress under the securities laws."
Plaintiffs argue the DOL did not justify changing the regulatory treatment of those giving incidental advice in connection with sales of annuities. The DOL may change existing policy "as long as [it] provide[s] a reasoned explanation for the change ... and show[s] there are good reasons for the new policy." Encino Motorcars, LLC v. Navarro, ___ U.S. ___, 136 S.Ct. 2117, 2125-26, 195 L.Ed.2d 382 (2016). Here, the DOL concluded that the five-part test significantly narrowed the breadth of the statutory definition of a fiduciary under ERISA, allowing advisers "to play a central role in shaping plan and IRA investments, without ensuring the accountability that Congress intended for persons having such influence and responsibility."
For the reasons stated above, the Fiduciary Rule is a reasonable interpretation under ERISA and is entitled to Chevron deference.
Plaintiffs next challenge the DOL requirement that fiduciaries who advise Title II plans, such as IRAs, agree to be bound by duties of loyalty and prudence as conditions to qualify for BICE. Although fiduciaries under Title I of ERISA are expressly subject to duties of loyalty and prudence, fiduciaries under Title II are not.
Nothing in ERISA or the Code unambiguously prevents the DOL from conditioning exemptive relief under Title II on the fiduciary's adherence to the duties of loyalty and prudence. The DOL does not impose the duties of loyalty and prudence on fiduciaries covered by Title II; it only provides an exemption from prohibited transactions. In other words, the DOL simply specifies conditions to qualify for exemptions when fiduciaries engage in transactions that are otherwise prohibited by ERISA and the Code.
Congress, however, expressly granted the DOL broad authority to adopt "conditional or unconditional exemption[s]" from prohibited transactions under Title II, so long as any exemption is 1) administratively feasible; 2) in the interests of the plan, its participants and beneficiaries; and 3) is protective of the rights of the plan participants and beneficiaries.
Congress' decision to impose duties of loyalty and prudence to plans under Title I, but not under Title II, does not answer the question of whether Congress intended to foreclose the DOL from requiring that fiduciaries under Title II comply with the duties of loyalty and prudence as a condition for exemptive relief. Congressional silence does not overcome the DOL's express statutory authority to grant exemptive relief. If Plaintiffs' reasoning were correct, the DOL "would be barred from imposing any condition on a [T]itle II exemption that relies on a duty or obligation that Congress imposed categorically on Title I plans." Nat'l Ass'n for Fixed Annuities, 217 F.Supp.3d at 34, 2016 WL 6573480, at *23.
Plaintiffs make two claims as to why BICE fails at Chevron step one; first, that the DOL's exemptive authority is limited to reducing regulatory burdens, and second, that financial professionals have no choice but to comply with BICE, making it a mandate that exceeds the DOL's authority, rather than an exemption.
Any exemption the DOL grants from the prohibited transaction rules reduces the industry's regulatory burden. Without PTE 84-24, BICE, or some other exemption, the plain language of ERISA and the Code would apply, and fiduciaries would be barred from engaging in prohibited transactions altogether. In fact, the DOL is not required to grant any exemptions under ERISA or the Code.
Plaintiffs further argue the DOL has not imposed conditions for exemptions, but instead has created a regulatory mandate where financial professionals have no choice but to meet the requirements of BICE. In particular, Plaintiffs contend that because certain accounts cannot be serviced using a fee-based compensation model and 95% of accounts under $25,000 rely on transaction-based models, in order to serve those customers, financial professionals must rely on BICE.
Because the DOL's use of its exemptive authority in BICE is not unambiguously foreclosed by the statute, the Court moves to an analysis of BICE under Chevron step two. The exemption created by the DOL is entitled to deference unless it is arbitrary and capricious. Am. Trucking Assocs. v. ICC, 656 F.2d 1115, 1127 (5th Cir. 1981). When a statute expressly delegates "the authority to grant [an] exemption and [the agency] is required to make certain other determinations in order to do so ... [t]hat grant and those determinations have legislative effect, and are thus entitled to great deference under the `arbitrary and capricious' standard." AFL-CIO v. Donovan, 757 F.2d 330, 343 (D.C. Cir. 1985). Plaintiffs argue that for two reasons BICE is arbitrary and capricious under Chevron step two.
Plaintiffs cite several cases to support their argument that the DOL's use of exemptive authority is arbitrary and capricious because:
Util. Air Grp. v. EPA, ___ U.S. ___, 134 S.Ct. 2427, 2444, 189 L.Ed.2d 372 (2014) (citing FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 159, 120 S.Ct. 1291, 146 L.Ed.2d 121 (2000)); see also Whitman v. Am. Trucking Ass'n., 531 U.S. 457, 468, 121 S.Ct. 903, 149 L.Ed.2d 1 (2001); MCI Telecomm. Corp. v. Am. Tel. & Tel. Co., 512 U.S. 218, 231, 114 S.Ct. 2223, 129 L.Ed.2d 182 (1994). This case is a far cry from the line of precedent on which Plaintiffs rely. See Verizon v. FCC, 740 F.3d 623, 638 (D.C. Cir. 2014).
In Brown & Williamson, the FDA departed from statements it had repeatedly made to Congress since 1914 that it did not have jurisdiction over the tobacco industry. The FDA changed its position, despite the fact that Congress had created a distinct regulatory scheme over the tobacco industry and expressly rejected proposals to give the FDA such jurisdiction. 529 U.S. at 159-60, 120 S.Ct. 1291. Here, in contrast, the DOL has exercised its exemptive authority by granting conditional exemptions from otherwise prohibited transactions since at least 1977, including regulating investment advice that is rendered to IRAs.
In Whitman, the Supreme Court held Congress "does not alter the fundamental details of a regulatory scheme in vague
In Utility Air, the Supreme Court held that "it would be patently unreasonable — not to say outrageous — for EPA to insist on seizing expansive power that it admits the statute is not designed to grant," and found that a "long-extant statute [did not give EPA] an unheralded power to regulate a significant portion of the American Economy." 134 S.Ct. at 2444. Contrary to the EPA in Utility Air, the DOL has long and continuously exercised the authority to regulate the retirement investment market under ERISA. The DOL has granted conditional exemptions under ERISA and the Code for almost half a century. Nor does the DOL's interpretation "bring about an enormous and transformative expansion in [its] authority without clear congressional authorization." Id. The new rules are compatible with the substance of Congress' regulatory scheme, as the broad remedial purpose of ERISA is to protect retirement investors and benefit plans.
In contrast to the situations in the cases cited by Plaintiffs, in ERISA Congress did speak clearly, and assigned the DOL the power to regulate a significant portion of the American economy, which the DOL has done since the statute was enacted. The circumstances of Utility Air, Brown & Williamson, MCI, Whitman, and King v. Burwell cannot reasonably be compared to the DOL's decisions to move FIAs from PTE 84-24 to BICE and to condition the availability of BICE on a contract requiring exercise of the duties of loyalty and prudence. Congress gave the DOL broad discretion to use its expertise and to weigh policy concerns when deciding how best to protect retirement investors from conflicted transactions. Although BICE may cover more advisers and institutions and its conditions may be more onerous than past exemptions, it does not follow that the DOL's rules are within the orbit of the cases Plaintiffs cite, nor that the DOL's use of exemptive authority is unreasonable. Nat'l Ass'n for Fixed Annuities, 217 F.Supp.3d at 23-24, 2016 WL 6573480, at *15.
Plaintiffs also argue that if BICE is not arbitrary and capricious, the DOL would have "virtually unfettered authority to create substantive obligations."
Plaintiffs claim the conditions to qualify for BICE, as well as BICE's consequences, are arbitrary and capricious, thus running afoul of Chevron. In particular, Plaintiffs note that certain accounts cannot be serviced using a fee-based compensation model, and that IRA advisers who are paid on a commission basis thus must seek exemptive relief. If such relief is extended via BICE, they will be subject to Title I fiduciary duties, while those duties will not extend to those paid an asset management fee. Plaintiffs assert this outcome is unreasonable. However, the DOL reasonably found that institutions and advisers that are paid on a commission basis may very well make investment recommendations that benefit themselves, at the expense of plan participants and beneficiaries. Advisers who are paid in asset-based fee arrangements are not faced with such a conflict of interest. Because small differences in investment performance will accumulate over time, those differences can have a profound impact on an investor's retirement income; as the DOL noted, an "investor who rolls her retirement savings into an IRA could lose 6 to 12 and possibly as much as 23 percent of the value of her savings over 30 years of retirement by accepting advice from a conflicted financial adviser."
The DOL outlined several ways the industry could innovate and adapt to BICE. In particular, the DOL noted
Here, the input of amicus Financial Planning Coalition ("FPC") is pertinent. Although FPC heard the same concerns regarding compensation when it implemented similar standards to BICE in 2008, commission-based compensation has survived, and FPC's financial professionals continue "to serve middle-income investors using all types of [] compensation models and other innovative methods."
The Court also finds that the conditions to qualify for BICE are reasonable. FPC notes that its almost 80,000 members have since 2008 successfully operated under a regime similar to that in BICE, including a fiduciary standard, a written contract, disclosure of certain fees, costs, and conflicts of interest, prudency standards, and policies to mitigate conflicts.
BICE's written contract requirement is reasonable because state law breach of contract claims for IRAs existed before the rulemaking, as an annuity is a contract enforceable under traditional principles of contract law. The imposition of the duties of loyalty and prudence are reasonable given the DOL's findings on the negative impact that conflicted transactions have on retirement investors, and that the new standards could save retirement investors up to $36 billion over the next ten years, and $76 billion over the next twenty years.
Plaintiffs bring an additional challenge to the DOL's exemptive authority, arguing that BICE and PTE 84-24 impermissibly create a private right of action, in violation of Alexander v. Sandoval, which held that "private rights of action to enforce federal law must be created by Congress." 532 U.S. 275, 286, 121 S.Ct. 1511, 149 L.Ed.2d 517 (2001). There is no dispute that Title I of ERISA expressly creates a private right of action, while Title II does not. According to Plaintiffs, the only possible sanction under federal law for violating Title II is the excise tax and disgorgement.
First, any lawsuit seeking to enforce the terms of the written contract must be brought under state law.
Second, prior to BICE and amended PTE 84-24, annuities held in IRAs were already subject to breach of contract claims. As ACLI noted during the rulemaking, "[i]nsurers are familiar with the idea of an enforceable contract between a financial institution and its customer. All annuity owners have contractual rights enforceable against the insurer and recourse to state insurance departments and state courts;" therefore, BICE and the amended PTE 84-24 do not change the enforcement regime that existed prior to the current rulemaking.
Third, there is precedent for federal regulations that require regulated entities to enter into written contracts with mandatory provisions. The DOL, in fact, has previously imposed similar conditions to qualify for an exemption from a prohibited transaction under ERISA. Qualification for PTE 84-14 is conditioned on "Qualified Professional Asset Managers" acknowledging they are fiduciaries in a "written management agreement."
Regulations with such conditions are not unique to the DOL. Under its export credit guarantee program, the Department of Agriculture requires each exporter to enter into a written sales contract with the importer that must include nine terms.
Plaintiffs attempt to distinguish the details of the aforementioned mandatory contractual terms with BICE and the amended PTE 84-24.
Plaintiffs cite three cases to support their argument that the written contract requirement creates a private right of action. In Astra USA, Inc. v. Santa Clara Cty., the Supreme Court held it was "incompatible with the statutory regime" to permit a medical facility to bring suit as a third-party beneficiary to an agreement between a federal agency, HHS, and drug manufacturers. 563 U.S. 110, 113, 131 S.Ct. 1342, 179 L.Ed.2d 457 (2011). There, the government was required to enter into the contract with drug manufacturers, but the contract only incorporated statutory obligations. The third-party beneficiary suit was nominally a breach of contract suit, but essentially sought to "enforce the statute itself." Id. at 119, 131 S.Ct. 1342. Here, however, investors would not bring suit under any statutory provision. Instead, the legal obligation and potential lawsuit would arise only from the contract, which has its own terms.
In Umland, the plaintiff brought a breach of contract suit based on the "implied terms" of a federal statute, FICA. Umland v. PLANCO Fin. Servs., Inc., 542 F.3d 59 (3d Cir. 2008). The issue was not whether a contract created a private right of action, but whether or not FICA itself created a private right of action. The Third Circuit held that FICA's provisions could not be read into an employment contract, and that FICA did not create a private right of action. In MM&S, the Eighth Circuit held a breach of contract claim was barred by the Securities Exchange Act of 1934, which grants "exclusive jurisdiction to federal courts to hear all claims for breach of duties created under the Exchange
Plaintiffs argue that various parts of the new rules or the rulemaking process were arbitrary and capricious under the APA, for five reasons.
In its proposed rule, the DOL kept existing exemptive relief from prohibited transactions for all fixed annuities. The final version of PTE 84-24, however, provides an exemption only for fixed rate annuity contracts, not variable annuities or FIAs. Plaintiffs claim the DOL failed to provide the requisite notice to the regulated industry or provide an opportunity to comment on its decision to shift FIAs from PTE 84-24 to BICE, in contravention of the APA.
The APA requires an agency to publish in its proposed rulemaking notice of "either the terms or substance of the proposed rule or a description of the subjects and issues involved." Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 175, 127 S.Ct. 2339, 168 L.Ed.2d 54 (2007). The APA is satisfied if the proposal "fairly apprises interested persons of the subjects and issues the agency is considering; the notice need not specifically identify every precise proposal which the agency may ultimately adopt as a final rule." Chem. Mfrs. Ass'n v. EPA, 870 F.2d 177, 203 (5th Cir. 1989). An agency "may decide to modify its original proposed rule," but the final rule must be a logical outgrowth of the proposal. United Steelworkers of Am. v. Schuylkill Metals Corp., 828 F.2d 314, 317 (5th Cir. 1987). The Supreme Court has interpreted a "logical outgrowth" as something that was reasonably foreseeable. Long Island Care, 551 U.S. at 175, 127 S.Ct. 2339.
In its 2015 notice of proposed rulemaking ("NPRM") for the modified PTE 84-24 and for BICE, the DOL requested comment on the appropriate treatment of annuities. The NPRM distinguished between transactions that involve securities and those that involve insurance products that are not securities. It proposed keeping PTE 84-24 for annuities like FIAs, while subjecting securities, including variable annuities, to BICE.
This language satisfies the APA because it notified the public and the industry about the possibility the DOL would remove FIAs from PTE 84-24 and make them instead subject to BICE. In the NPRM, the DOL expressly asked whether FIA transactions should continue under PTE 84-24. Requiring sellers of FIAs to rely on BICE, as opposed to PTE 84-24, was thus a logical outgrowth of the DOL's proposal. The NPRM contemplated revoking relief for some types of annuities while leaving in place existing exemptive relief for others, but questioned whether the proposal drew the correct lines between types of annuities, and whether the proposal struck the appropriate balance in protecting IRA investors. Thus, it was "reasonably foreseeable" that the DOL could put FIAs on the other side of the line, and Plaintiffs could reasonably have anticipated such a modification.
Some commenters, including IALC, expressly anticipated what became the terms of the final rule, as a logical outgrowth of the DOL's proposal.
The Fifth Circuit's holding in Schuylkill Metals supports the Court's conclusion that the DOL satisfied the APA's notice requirement. 828 F.2d 314 (5th Cir. 1987). There, the agency sought comment on "what should be the appropriate scope" of a provision, which the Fifth Circuit held "more than adequately sufficed to apprise fairly an interested party" on the relevant issue. Id. at 318. The Fifth Circuit noted that "at least one party ... saw fit to comment on precisely this issue," and "other parties provided extensive comments," thus illustrating that "it was readily apparent to the interested parties that the scope of [the provision] was in dispute." Id. The Fifth Circuit's reasoning in Schuylkill Metals is pertinent here, as IALC and several other commenters noted the possibility of the change from the NPRM to the
Plaintiffs also argue they did not have an opportunity to meaningfully comment because the DOL's final rules were based on new reasoning and criteria. In particular, the DOL's proposal reasoned PTE 84-24 would apply depending on whether or not an annuity is a security, but the final rules distinguished between annuities based on their complexity. The APA does not require such a detailed rationale and analysis to satisfy notice requirements. The rationale for a final rule can be different from that of a proposed rule, because the "whole rationale of notice and comment rests on the expectation that the final rules will be somewhat different — and improved — from the rules originally proposed by the agency." Am. Fed'n of Labor & Cong. of Indus. Orgs. v. Donovan, 757 F.2d 330, 338 (D.C. Cir. 1985). Plaintiffs' reading of the APA notice requirement would strip the comment period of its purpose.
Plaintiffs also argue lack of notice because they did not learn the DOL was contemplating a deviation from the NPRM until another industry group's meeting with the DOL in the final days of the comment period. In the meeting, the DOL indicated it was leaning toward grouping FIAs with variable annuities in BICE. The meeting is not relevant to satisfying the APA, as the NPRM itself gave Plaintiffs adequate notice of the potential change. At the meeting, the DOL discussed its preliminary view with the industry, to receive additional feedback before the comment period closed. In any case, Plaintiffs had further opportunity to comment between the meeting and the close of the comment period, and there was nothing improper about the meeting. See Tex. Office of Pub. Util. Counsel v. FCC, 265 F.3d 313, 327 (5th Cir. 2001).
Plaintiffs argue retaining PTE 84-24 for fixed rate annuities, but subjecting FIAs and variable annuities to BICE, is action that is arbitrary and capricious, because fixed rate annuities and FIAs are nearly identical and the DOL failed to give a reasoned explanation for distinguishing them. An agency acts arbitrarily and capriciously if it applies different standards to similarly situated products without providing a reasoned explanation. Burlington N. & Santa Fe Ry. v. Surface Transp. Bd., 403 F.3d 771, 777 (D.C. Cir. 2005). The Court considers whether the agency "examined the pertinent evidence, considered the relevant factors, and articulated a reasonable explanation for how it reached its decision." Associated Builders & Contractors of Tex., Inc. v. NLRB, 826 F.3d 215, 219-20 (5th Cir. 2016). The DOL's "factual findings must be upheld as long as they are supported by substantial evidence ... [which] is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Knapp v. USDA, 796 F.3d 445, 453-54 (5th Cir. 2015). The DOL's decision to exclude FIAs from PTE 84-24 based on their complexity, risk, and conflicts of interest associated with recommendations of FIAs is supported by substantial evidence in the administrative record.
The DOL described the complexity of FIAs in its Regulatory Impact Analysis
Based on the RIA's findings on complexity, the DOL determined that FIAs are "complex products requiring careful consideration of their terms and risks" and that FIA investors
Citing the RIA, the DOL further determined that "increasing complexity and conflicted payment structures associated with [FIAs] have heightened the conflicts of interest experienced by investment advice providers that recommend them."
The DOL then differentiated FIAs from fixed rate annuities. In the RIA, the DOL described record sales of FIAs, cited graphs showing a steady decline of fixed rate annuities accompanied by a steady increase in FIAs, explained the features of the various annuity products, and distinguished them based on complexity and
It should be noted that in American Equity Inv. Life Insurance Co. v. S.E.C., 613 F.3d 166, 172-76 (D.C. Cir. 2010), the D.C. Circuit held that the SEC reasonably interpreted the term "annuity contract" to exclude FIAs, partly because they are hybrid financial products with similarities to variable annuities. Id. This holding supports the conclusion that the DOL acted reasonably when it found FIAs to be more like variable annuities than fixed rate annuities, and thus decided to regulate FIAs and fixed rate annuities differently.
The DOL further justified grouping FIAs with variable annuities. The DOL found FIAs "are as complex as variable annuities, if not more complex," that "[s]imilar to variable annuities, the returns of [FIAs] can vary widely, which results in a risk to investors," and that "[u]nbiased and sound advice is important to all investors but it is even more crucial in guarding the best interests of investors in [FIAs] and variable annuities."
The DOL determined that "[b]oth categories of annuities, variable and [FIAs], are susceptible to abuse, and Retirement Investors would equally benefit in both cases from the protections of [BICE]."
Contrary to Plaintiffs' argument, the DOL drew a reasonable distinction between FIAs and fixed rate annuities and justified moving FIAs from PTE 84-24 to BICE. The DOL thoroughly considered and analyzed the relevant data and evidence, and determined that FIAs should be moved from PTE 84-24 to BICE because variable annuities and FIAs share common complexity, high commissions, and resulting conflicts of interest. The DOL acknowledged some similarities between FIAs and fixed rate annuities, but found the differences between them sufficient to justify different treatment. Because the DOL's determinations
Relying on American Equity, Plaintiffs argue that in moving FIAs from PTE 84-24 to BICE, the DOL failed "to determine whether, under the existing regime, sufficient protections existed" for annuities. 613 F.3d at 179. In American Equity, the D.C. Circuit vacated a final rule because the Securities Act of 1933 required the SEC to "determine whether an action is necessary or appropriate in the public interest ... [for] the protection of investors [and] whether the action will promote efficiency, competition and capital formation," but the SEC failed to do so in its rulemaking. Id. at 176-77 (citing 15 U.S.C. § 77b(b)). In particular, the SEC did not analyze the efficiency of the existing state law regulatory regime, which "render[ed] arbitrary and capricious the SEC's judgment that applying federal securities law would increase efficiency." Id. at 179. To change which annuities qualify for a certain exemption under ERISA, there is no similar statutory requirement that the DOL analyze for efficiency.
The standard for determining whether the DOL's decision to move FIAs from PTE 84-24 to BICE was arbitrary and capricious is "whether the agency examined the pertinent evidence, considered the relevant factors, and articulated a reasonable explanation for how it reached its decision." Associated Builders, 826 F.3d at 219-20. The administrative record shows the DOL met this standard.
The DOL comprehensively assessed existing securities regulation for variable annuities, state insurance regulation of all annuities, academic research, government and industry statistics on the IRA marketplace, and consulted with numerous government and industry officials, including the National Association of Insurance Commissioners ("NAIC"), SEC, FINRA, the Department of the Treasury, the Consumer Financial Protection Bureau, the Council of Economic Advisers, and the National Economic Council. The DOL found the protections prior to the current rulemaking insufficient to protect investors.
The DOL found the annuity market to be influenced by contingent commissions, which "align the insurance agent or broker's incentive with the insurance company, not the consumer," that existing protections do not "limit or mitigate potentially harmful adviser conflicts," and that "notwithstanding existing [regulatory] protections, there is convincing evidence that advice conflicts are inflicting losses on IRA investors."
The DOL also found that state insurance laws and their enforcement vary significantly because only thirty-five states have adopted the NAIC model regulation, producing inconsistent protections and confusion for consumers. The U.S. Department of the Treasury noted that the absence of a national standard is problematic because there are unprecedented numbers of retirement investors, and financial professionals are selling increasingly complex products, therefore more uniform regulation is necessary to protect investors.
The DOL considered comments recommending more regulation "to enhance retirement investor protection in an area lacking sufficient protections for investors in tax qualified accounts."
With all these considerations in mind, the DOL explained:
The DOL's rationale and findings satisfy the APA. Plaintiffs argue, however, that the DOL acted unreasonably when it relied upon studies focused almost exclusively on mutual funds, as opposed to FIAs, and that the studies relied on data collected before more stringent annuity regulation went into effect. The Court would find that the DOL satisfied the APA even without the mutual fund studies because the DOL relied on other evidence, as described below, but the Court will nonetheless address the mutual fund studies.
The DOL acted reasonably when it relied on studies that primarily involved mutual funds. It found FIAs and mutual funds comparable, because both are subject to disclosure and suitability requirements, and agents selling both products are compensated with upfront commissions that depend on the product sold.
The conclusion that the DOL reasonably extrapolated from mutual fund studies is further supported by the fact that annuity data is not readily and widely available, while mutual fund studies are obtainable because the relevant data is publicly disclosed under SEC regulations. The DOL requested annuity data from industry groups as early as 2011, but was told the information was not available and would be prohibitively expensive to collect.
Plaintiffs also argue the DOL acted unreasonably because it relied on studies from periods prior to the strengthened NAIC model rules, which mitigated the need for new regulation. But the DOL considered data through 2015, reviewed data from 2008 through 2014 submitted by commenters, considered that regulators continued to express concern that the prior regulatory scheme did not provide adequate protections, and came to the same conclusions.
It was reasonable to shift FIAs from PTE 84-24 to BICE given the DOL's analysis of mutual fund studies; changes in the marketplace since 1975; harmful conflicts that could cost investors over the next decade, despite existing regulation; the opaque nature and incentives of commission-based compensation; concerns from SEC and FINRA regulators; and the lack of uniformity among the states.
Plaintiffs' next argument is that BICE is unworkable, and therefore contravenes the APA. Here, the Court is to determine "whether the agency examined the pertinent evidence, considered the relevant factors, and articulated a reasonable explanation for how it reached its decision." Associated Builders, 826 F.3d at 219-20. The DOL's decision will not be vacated unless it "entirely failed to consider an important aspect of the problem," and courts "will uphold an agency's action if its reasons and policy choices satisfy minimum standards of rationality." Markle Interests, L.L.C. v. U.S. Fish & Wildlife Serv., 827 F.3d 452, 460 (5th Cir. 2016). Whether the DOL's decision was "ideal, or even necessary, is irrelevant to the question of whether it was arbitrary and capricious so long as the agency gave at least minimal consideration to the relevant facts as contained in the record." City of Arlington v. FCC, 668 F.3d 229, 261 (5th Cir. 2012). Plaintiffs make five arguments that BICE is unworkable.
IMOs and their independent insurance agents are the largest distribution channel for FIAs, and approximately 65% of FIAs are sold by insurance agents who are not affiliated with a broker-dealer. Plaintiffs claim that under the new rules, insurance companies selling covered annuities will be unable to maintain their independent agent distribution model, through which FIAs are primarily sold. However, the record reflects the DOL acknowledged the importance of independent insurance agents, IMOs, and the current distribution channel, but found that conflicts of interest for
The DOL discussed the various ways IMOs and independent agents could respond to the new rules, including: relying on BICE or another exemption, avoiding potential conflicts and thereby minimizing the need for an exemption, or ceasing to advise IRA clients to buy covered annuities.
The DOL anticipated the most common distribution model would remain workable, predicting firms "will gravitate toward structures and practices that efficiently avoid or manage conflicts to deliver impartial advice consistent with fiduciary conduct
Plaintiffs argue there is no meaningful guidance in the rules on what constitutes "reasonable compensation," which is a provision in the written contract required to qualify for BICE, and that the exemption is therefore unworkable. In fact, the DOL has used the same "reasonable compensation" language in BICE in numerous exemptions from prohibited transactions going back to 1977.
Plaintiffs respond that this provides no clarity. The DOL considered this critique and rejected it, noting that the standard "has long applied to financial services providers," that parties could "refer to [the DOL's] interpretations under ERISA § 408 (b)(2) and Code § 4975(d)(2)" for further guidance, that the industry could request the DOL to provide guidance, and that nothing prevents parties from "seeking impartial review of their fee structures to safeguard against abuse."
Plaintiffs argue the "vague" and "ill-defined" best interest standard, along with inconsistent state law enforcement of contracts required under BICE, make those potentially covered by the exemption susceptible to unforeseeable, potentially conflicting, and staggering liability from private litigation.
The best interest standard is not vague; the standard is explained thoroughly in BICE, and is drawn from the duties of loyalty and prudence, which are "deeply rooted in ERISA and the common law of agency and trusts."
Proprietary products are defined in BICE as products "that are managed, issued or sponsored by the Financial Institution or any of its Affiliates."
Plaintiffs claim insurance companies will be unable to comply with the responsibilities BICE imposes on financial institutions to supervise independent agents. COC presented for consideration by the Court a hypothetical case, where an independent agent sells seven FIAs established by four different insurance companies, which would evidence a conflict of interest if the agent's compensation varied from insurer to insurer.
The DOL considered the relevant factors for BICE's workability, addressed commenter concerns, and reasonably justified its conclusions, thereby satisfying the APA's requirements.
Plaintiffs make four arguments that the DOL overstated the benefits and underestimated the costs of its rulemaking, and thus violated the APA, by conducting an unreasonable cost-benefit analysis. Plaintiffs' claims are to be analyzed under the same standard of deference to the agency as their "workability" argument. An agency is not required to "conduct a formal cost-benefit analysis in which each advantage and disadvantage is assigned a monetary value." Michigan v. EPA, ___ U.S. ___, 135 S.Ct. 2699, 2711, 192 L.Ed.2d 674 (2015).
First, Plaintiffs claim the DOL inappropriately relied on a single unrepresentative factor, front-end-load mutual fund conflicts, to conclude the rulemaking would save retirement investors billions of dollars.
The DOL's assessment of mutual fund performance was reasonable. It did not, as COC argues, select an unrepresentative time frame. Using 1993 through 2009 as a relevant time period was not arbitrary, as it was the period used in the CEM study upon which the DOL relied. But this was not the only data set the DOL relied on. It conducted its own review of mutual fund performance analysis at points from 1980 through 2015, considered a study referenced by a commenter which used data from 2008 to 2014, and updated the record to include another study which used data from 2003 through 2012.
Nor did the DOL ignore criticisms made during the comment period of its methodology and its estimates of savings for consumers. The DOL responded to concerns cited by Plaintiffs and other commenters, but concluded its data was fairly representative and its methodology was sound.
Next, Plaintiffs claim the DOL did not consider the costs to the industry of more class action lawsuits or the costs to consumers of decreased access to investment advice. The DOL did not specifically quantify potential class action litigation costs, but it is not required to do so. It considered the relevant issues and satisfied the APA's requirements. The DOL requested the industry provide supplemental litigation cost data, but again, the industry did not do so because "of the extreme uncertainties surrounding litigation risk."
The DOL provided at least two reasons why Plaintiffs' cost concerns are overstated. First, BICE's class action provision does not drastically change the regulatory regime. Prior to the rulemaking, transactions regulated by FINRA were already subject to class actions, and there were
The DOL also assessed Plaintiffs' concerns that the rules would decrease access to investment advice.
Third, Plaintiffs argue the DOL did not consider the cost for IMOs, and other agents who sell FIAs, to comply with BICE. In fact, the DOL considered compliance costs, which were quantified based on the industry's own estimates.
The final estimate of "ten-year compliance cost [with the new rules] is estimated to be between $10.0 billion and $31.5 billion," while estimated gain for IRA investors would be "between $33 billion and $36 billion over 10 years and between $66 and $76 billion over 20 years."
Fourth, Plaintiffs argue the DOL did not weigh the costs and benefits of excluding FIAs and variable annuities from PTE 84-24. Actually, the DOL calculated additional costs for the FIA industry to comply with BICE, rather than PTE 84-24. It found providing relief under PTE 84-24 instead of BICE would reduce costs
Plaintiff IALC argues the rulemaking is arbitrary and capricious because the DOL did not show the benefits of compliance would outweigh these costs. The DOL had no specific data to quantify likely investor gains from applying BICE to FIAs, either from its own work or that of the industry.
As noted above, to grant exemptive relief from a prohibited transaction, the DOL must find the exemption is 1) administratively feasible; 2) in the interests of the plan, its participants and beneficiaries; and 3) is protective of the rights of the plan participants and beneficiaries.
First, assessing whether BICE is feasible for the industry would always require a cost-benefit or economic-impact analysis. When Congress requires a cost-benefit or economic-impact analysis to be conducted by an agency, it expressly states in a statute what is required.
Plaintiffs did not raise any First Amendment issues during the rulemaking process. However, Plaintiffs now assert a First Amendment claim. Plaintiffs argue the rules violate the First Amendment because
Before the Court can address the First Amendment issue, it must decide the threshold issue of whether this argument was waived because it was not raised during the rulemaking process.
Plaintiffs advance three arguments against waiver: first, that typical waiver principles do not apply because they assert a pre-enforcement First Amendment claim under the Declaratory Judgment Act; second, that it is impossible to waive a constitutional objection to an agency rule; and third, that the substance of the First Amendment was in fact raised in several comments. The Court finds these arguments unpersuasive.
Plaintiffs confuse issue exhaustion and administrative remedies under an existing statute with waiver principles arising from a notice and comment process. ACLI cites Weaver v. U.S. Info. Agency, 87 F.3d 1429 (D.C. Cir. 1996), arguing that typical waiver principles do not apply to pre-enforcement attacks on regulations restricting speech. Actually, Weaver did not hold that First Amendment objections under the Declaratory Judgment Act are immune to waiver before enforcement. Weaver concerned failure to exhaust administrative remedies under the Civil Service Reform Act ("CSRA"). It held that the CSRA's exhaustion requirements generally apply to constitutional claims. Id. at 1433. However, in reversing the trial court, the D.C. Circuit made an exception to the general rule, because in Weaver there was no administrative process available for plaintiff to exhaust. Id. at 1433-34. This reading is confirmed by courts that have interpreted Weaver to mean "that exhaustion is required for constitutional claims for equitable relief under the CSRA when an administrative process is available." Ramirez v. U.S. Customs & Border Protection, 709 F.Supp.2d 74, 83 (D.D.C. 2010). Thus, even if Weaver applied here, Plaintiffs have not explained why a nearly six-year process of rulemaking, including two notice and comment periods, did not constitute an administrative process that had to be utilized to preserve the claim.
In the Court's view, however, Weaver does not affect an analysis of the regulations promulgated by the DOL under ERISA. A statute requiring administrative exhaustion before a claim is brought in federal court plainly differs from a waiver of a challenge to an agency's rulemaking.
With respect to an agency's notice and comment rulemaking process, the Fifth Circuit has held:
BCCA Appeal Grp. v. EPA, 355 F.3d 817, 828-29 (5th Cir. 2003) (internal quotations omitted); see also Tex Tin Corp. v. EPA, 935 F.2d 1321, 1323 (D.C. Cir. 1991) ("Absent special circumstances, a party must initially present its comments to the agency during the rulemaking in order for the court to consider the issue.").
This rationale is directly applicable to the DOL's rules, as this Court's review of the First Amendment claim would "usurp the agency's function and deprive the [agency] of an opportunity to consider the matter, make its ruling, and state the reasons for its action." BCCA Appeal, 355 F.3d at 828-29.
At oral argument, Plaintiffs argued waiver was inapplicable, because a person's rights would be violated if he did not participate in a rulemaking process.
363 F.3d at 1020. The Ninth Circuit refuted that argument, and its reasoning is directly on point:
Id. at 1021. The Court finds the Ninth Circuit's reasoning in Thompson persuasive. The Plaintiffs in this case have waived their First Amendment arguments, because they were well aware that the rulemaking process was relevant to them, it could have a direct impact on their industry, and the size of the administrative record shows the interest of the industry. Plaintiffs were not blindsided.
Finally, the argument that several commenters raised the substance of the First Amendment during the notice and comment period, thus not waiving it, is contradicted by the record; the citations Plaintiffs present neither name a First Amendment claim nor mention First Amendment principles.
Even if Plaintiffs' First Amendment challenge were not waived, the DOL's rules do not violate the First Amendment. The parties dispute whether Plaintiffs' pre-enforcement First Amendment claim under the Declaratory Judgment Act is a facial challenge or an as-applied challenge. The Court concludes it is a facial challenge, for three reasons. First, the rules have not been implemented. See Bowen v. Kendrick, 487 U.S. 589, 601, 108 S.Ct. 2562, 101 L.Ed.2d 520 (1988) ("Only a facial challenge could have been considered, as the Act had not been implemented."). Second, this conclusion follows Supreme Court precedent for pre-enforcement First Amendment claims under the Declaratory Judgment Act. Sorrell v. IMS Health Inc., 564 U.S. 552, 568, 131 S.Ct. 2653, 180 L.Ed.2d 544 (2011) (acknowledging that a pre-enforcement First Amendment claim under the Declaratory Judgment Act was a facial challenge). Third, Plaintiffs do not argue their particular speech is protected from an otherwise valid law. Instead, Plaintiffs seek "vacatur of the Rule as a whole."
The Court finds the rules regulate professional conduct, not commercial speech, and therefore any incidental effect on speech does not violate the First Amendment. Under the professional speech doctrine, the government may regulate a professional-client relationship, as a "professional's speech is incidental to the conduct of the profession," and the First Amendment "does not prevent restrictions directed at commerce or conduct from imposing incidental burdens on speech." Hines v. Alldredge, 783 F.3d 197, 201-02 (5th Cir. 2015).
The Fifth Circuit recently addressed when the professional speech doctrine applies in Serafine v. Branaman, 810 F.3d 354 (5th Cir. 2016).
Here, the DOL's rules only regulate personalized investment advice to a paying client, and thus would have an incidental effect on speech, if any. For example, the Fiduciary Rule frames the definition of recommendation to include advice "based on the particular investment needs of the advice recipient" and "advice to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision."
Plaintiffs argue the professional speech doctrine is inapplicable because the rules are not targeted at conduct, but instead directly regulate speech that proposes commercial transactions, and have more than an incidental burden on speech. Plaintiffs acknowledge that annuity salespeople help consumers assess whether an annuity is a good choice, and that the sales are made on a personalized basis. There is no dispute that the DOL's rules regulate personalized advice in a private setting to a paying client.
Plaintiffs also contend the professional speech doctrine is inapposite because it has never commanded a majority of the Supreme Court.
Plaintiffs argue the DOL's rules infringe on their right to commercial expression in personal solicitations, and therefore violate the First Amendment. Edenfield v. Fane, 507 U.S. 761, 113 S.Ct. 1792, 123 L.Ed.2d 543 (1993). In Edenfield, an accountant challenged a Florida law prohibiting personal solicitations to obtain new clients. The Supreme Court held the law banning solicitations violated the First Amendment in an as-applied challenge. In Edenfield, the Court struck down a blanket ban on personal solicitation, as opposed to a rule regulating the practice of a profession in the context of individualized advice. Edenfield first noted "this case comes to us testing the solicitation, nothing more." Id. at 765, 113 S.Ct. 1792. Specifically, the accountant "obtained business clients by making unsolicited telephone calls to their executives and arranging meetings to explain his services and expertise... this direct, personal, uninvited solicitation" was banned by Florida law. Id. at 763, 113 S.Ct. 1792. The DOL's rules not only do not ban personal solicitation, they do not regulate personal solicitation. Nothing prevents an agent selling FIAs or variable annuities from picking up the phone to arrange a meeting to explain the agent's services or expertise. This is confirmed by the language of the Fiduciary Rule, which states
Next, Plaintiffs argue the rules are content-based and incompatible with the Supreme Court's holding in Sorrell. In Sorrell, a Vermont law was held to violate the First Amendment because it prohibited certain healthcare entities from "disclosing or otherwise allowing prescriber-identifying information to be used for marketing." 564 U.S. at 563, 131 S.Ct. 2653. Sorrell held the law was content-based, because it allowed disclosure or sale of the information for academic and research purposes, but prohibited the information for marketing. The Vermont law was characterized as designed to "diminish the effectiveness of [manufacturer] marketing," and was held unconstitutional. Id. at 565, 131 S.Ct. 2653.
The DOL's rules do not regulate the content of speech. Instead, they require individuals who qualify as fiduciaries under ERISA to conduct themselves according to fiduciary standards. Plaintiffs claim the new rules create liabilities for receipt of commission-based compensation based on the content of speech.
The new rules must also be viewed in the context of ERISA's prohibited transaction rule, in which Congress deemed certain transactions so fraught with conflicts that it banned them. As early as 1977, the DOL determined that, without an exemption, commission-based compensation would trigger the prohibited transaction rules.
Plaintiffs argue the rules make two specific content-based distinctions. First, they claim the Fiduciary Rule regulates speech with a particular subject matter, including investment advice or recommendations to purchase retirement products. If this were content-based regulation, then ERISA's plain language, including the statute's fiduciary definition, various prohibited transaction exemptions since 1974, and numerous securities laws would all trigger heightened scrutiny. As other courts have held, that position is untenable.
At worst, the only speech the rules even arguably regulate is misleading advice. Plaintiffs and their members may speak freely, so long as they recommend products that are in a consumer's best interest. If an investment adviser recommends a product merely because the product makes the most money for the adviser or financial institution, despite the product not being in the investor's best interest, such advice is not appropriate for the investor and would be misleading. Thus, even if Plaintiffs' First Amendment claim were analyzed as a regulation of commercial speech, the rules would withstand First Amendment scrutiny because they only seek to regulate misleading advice and statements. For commercial speech to warrant First Amendment protection, the speech must "not be misleading," because the government may regulate communication that is "more likely to deceive the public than to inform it." Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n of N.Y., 447 U.S. 557, 563, 567, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980). Therefore, Plaintiffs cannot establish that there are "no set of circumstances exists under which [the regulations] would be valid," which is required for a successful facial challenge. Richards, 755 F.3d at 273. The rules are valid because they regulate conduct, not speech, and any incidentally affected speech is subject to regulation because it is deemed misleading.
Finally, Plaintiffs argue the rules "effectively ban[] commercial sales speech" because "all recommendations to retirement savers must be made in a fiduciary capacity or not at all."
The FAA provides that a written provision in any contract that "settle[s] by arbitration a controversy thereafter arising out of such contract ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."
The DOL determined the protections associated with class litigation "ensure adherence to the impartial conduct standards and other anti-conflict provisions of the exemptions," finding the provisions satisfied the three exemption requirements under ERISA and the Code.
Plaintiffs brought to the Court's attention a recent district court decision which held a regulation promulgated by the Center for Medicare and Medicaid Service likely violated the FAA. Am. Health Care Ass'n v. Burwell, 3:16-CV-00233, 217 F.Supp.3d 921, 2016 WL 6585295 (N.D. Miss. Nov. 7, 2016). There, the agency's regulation threatened to withhold federal funding to disincentive nursing homes from entering into new arbitration agreements. The court found the provisions likely violated the FAA, for two reasons. First, nursing homes are so dependent upon Medicare and Medicaid funding that the regulation was a de facto ban on pre-dispute nursing home arbitration contracts. Second, citing CompuCredit Corp v. Greenwood, 565 U.S. 95, 132 S.Ct. 665, 670, 181 L.Ed.2d 586 (2012), the court held that in the absence of a congressional command to the contrary, the FAA "bars not only a rule prohibiting enforcement of existing agreements, but also a rule prohibiting new arbitration agreements." Am. Health Care, 217 F.Supp.3d at 930, 2016 WL 6585295, at *5 (quotations omitted).
American Health Care is distinguishable from the DOL's rules. The DOL's rules do not implicate the power and potentially coercive nature of the spending clause, which was the central reason for concluding the agency had instituted a de facto ban in American Health Care. The conditions of BICE and PTE 84-24 do not constitute a de facto ban; any arbitration provision without the class action provision would remain valid, irrevocable, and enforceable, but the financial institution or
The "FAA's pro-arbitration policy goals do not require [the DOL] to relinquish its statutory authority." EEOC v. Waffle House, Inc., 534 U.S. 279, 294, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002). The relevant text of ERISA and the FAA "do not authorize the courts to balance the competing policies of [ERISA] and the FAA or to second-guess [the DOL's] judgment concerning which of the [exemptions] authorized by law that it shall seek in any given case ... to hold otherwise would ... undermine [the DOL's] independent statutory responsibility." Id. at 288, 297, 122 S.Ct. 754. The DOL has properly used its exemptive authority under ERISA for BICE and PTE 84-24, and its new rules do not violate the FAA.
For the reasons stated above, Plaintiffs' Motions for Summary Judgment are
