Three states seek intervention and review to preserve fiduciary rule

By Jay Fishman, J.D.

California, New York, and Oregon petitioned to intervene and have an en banc review of a March 15, 2018 Fifth Circuit Court of Appeals split panel decision prohibiting the Department of Labor (DOL) from implementing the fiduciary rule for investment advisers and their retired investor clients. The states filed the petitions after various federal and Texas Chambers of Commerce won an appeal reversing the Texas Northern District Court’s decision which allowed the DOL to implement the fiduciary rule (U.S. Chamber of Commerce v. U.S. Department of Labor, April 26, 2018).

Petition to intervene. The states claimed “invention entitlement” by alleging that they satisfied the following four “intervention-allowing” prongs of precedent case law:

1. Timely filed petition: the states filed the petition immediately upon learning that the DOL would not seek further review of the split panel’s decision, resulting in the states’ interests no longer being protected by the existing parties (i.e., the DOL); 
2. Legally protected interest in the action: the states’ calculations revealed that implementing the fiduciary rule would not only increase retirement investors’ returns by at least $33 billion over the next ten years but would also increase the respective states’ tax revenues by millions of dollars over that same period;
3. Case outcome may impair interest: prohibiting fiduciary rule implementation would cause the investors’ returns and states’ tax revenues to drop by the enormous amounts mentioned above; and 
4. Existing parties do not adequately represent interest: the states’ interests would no longer be protected now that the existing party (the DOL) has withdrawn from the case (following the split panel decision). 

Rehearing en banc. The petition for rehearing en banc was premised on the states’ belief that the Fifth Circuit split panel decision invalidating the fiduciary rule is flawed. The states principally contended that the decision did not take into account either the evolution of the retirement investor market over the past 40 years or the DOL’s having successfully crafted a fiduciary rule that broadly protects those investors in the current market. Retirement investments in the current market, said the states, are comprised of individual retirement accounts (IRAs) and 401(k)s, which unlike the pension plans of yesterday, require the employee-investors rather than their employers to manage and protect. And, moreover, the often financially unsophisticated employees in the current market are unaware of the conflicts of interest that investment advisers have in managing the employees’ retirement accounts for the employees’ best interests or adversely to benefit the advisers themselves.

The split panel decision prohibiting the DOL from implementing the fiduciary duty was flawed, argued the states, because it was based on the court’s misunderstanding of the Employee Retirement Income Security Act of 1974 (ERISA) from which came to the fiduciary duty designed to protect retirement investors from investment adviser conflict of interests. The states specifically proclaimed that the Fifth Circuit incorrectly cast aside the plain meaning of a “fiduciary” in ERISA’s text, opting instead to apply an elevated, limited meaning of the term recognized by the law of trusts but which conflicts with U.S. Supreme Court decisions in the 1993 Mertens v. Hewitt Associates and the 1996 Varity Corp. v. Howe cases.

In applying that limited meaning of a fiduciary in ERISA, declared the states, the Fifth Circuit was able to characterize the DOL’s interpretation of an “investment advice” fiduciary as unreasonable. The states concluded that they need the en banc review because the DOL has abandoned the case and, hence, the protection of retirement investors from investment adviser conflicts of interest following the Fifth Circuit’s mischaracterization of the DOL’s interpretation of an investment advice fiduciary.

With the DOL no longer protecting retirement investor interests, the states contended that they must have the en banc rehearing to show: (1) that the DOL’s fiduciary rule correctly interprets ERISA’s plain meaning of the term “fiduciary,” to protect retirement investors in today’s market; and (2) that the fiduciary rule is needed in the current market to stem investment adviser conflicts of interest which cost employee-investors and the states billions of dollars each year in lost retirement investment returns and tax revenues, respectively.

The case is No. 17-10238 (petition for rehearing en banc), (motion to intervene).