Fiduciary rule dies: 5th Circuit denies AARP, States’ bid to defend DOL rule

The United States Court of Appeals for the Fifth Circuit has denied two motions from AARP and three state Attorneys General to intervene to defend the Labor Department’s fiduciary rule.

Last week, AARP and the attorneys general from California, Oregon, and New York filed motions to intervene, requesting an en banc rehearing of the 5th Circuit’s March decision that vacated the fiduciary rule.

The Trump administration’s Labor Department had a Monday deadline to petition the court for a rehearing, but opted not to.

The decision denying AARP’s and the states’ request to step in effectively puts the fiduciary rule on life support.

“AARP is disappointed in today’s court decision denying AARP the right to intervene in the Fifth Circuit case to protect the retirement advice provided to our members and other Americans saving for retirement,” the organization said in a statement to BenefitsPRO.

“AARP will continue its efforts to fight on behalf of consumers who want financial advice in their best interest.  It is hard enough to save for retirement – we should do all we can to make sure retirement savers are getting the help they need,” AARP said.

The 5th Circuit’s decision to vacate the rule will take effect on Monday, May 7.

“At this point, that’s when the fiduciary rule will die,” said Kevin Walsh, an attorney with The Groom Law Group.

AARP argued it had standing to intervene because its members will be adversely impacted by the 5th Circuit’s March decision. The advocacy group for retirees has been one of the most prominent backers of the fiduciary rule.

But even before today’s order denying the motions to intervene, the consensus among attorneys was that AARP and the Attorneys General were facing long odds in convincing the 5th Circuit to rehear the case, as en banc rehearing requests are rarely granted.

“A petition for rehearing en banc is an extraordinary procedure intended to bring to the entire court’s attention an error of exceptional public importance or an opinion which directly conflicts with prior Supreme Court, Fifth Circuit or state law precedent. Rehearing en banc petitions take an inordinate amount of the judges’ scarce resources,” according to a guide issued by the 5th Circuit.

Fewer than 3 percent of en banc rehearing petitions are granted in the 5th Circuit.

That reality likely influenced Labor’s decision to not request a rehearing, says Mark Smith, a partner at Eversheds Sutherland.

“The vigor with which DOL defended the rule in court, notwithstanding the change in Administrations, has been exemplary,” said Mr. Smith.

Labor’s decision to not request a rehearing “reflects the usual calculus that rehearing is disfavored and rarely granted,” he added.

“Add in the quality of both the advocacy of the parties and the opinions of the panel, including the dissenting opinion of the Chief Judge, and this was not a compelling case for rehearing, even in light of its importance,” said Mr. Smith.

Because their motions were denied, AARP and the states are not parties to the lawsuit in the 5th Circuit. That means they will not be able to petition the Supreme Court to review the decision to vacate the rule.

But the Labor Department still can—it has until June 13 to do so. Mr. Walsh said he would be surprised if the Trump administration petitioned the Supreme Court.

The order denying intervention was issued by the same three-judge panel that issued the 2-to-1 decision vacating the fiduciary rule in March.

AARP and the states may have one last long-shot hand to play, said Mr. Walsh. They could petition the 5th Circuit to overturn the panel’s denial for intervention. But that move could be seen as frivolous by the Circuit Court, which could sanction the petitioning parties.

Labor’s fiduciary rule, finalized in April of 2016, was the culmination of a more than five-year effort to regulate a fiduciary standard of care for broker-dealer recommendations on 401(k) rollovers and all recommendations to qualified retirement accounts.

The rule survived lawsuits from the U.S. Chamber of Commerce and financial services and insurance industry lobby groups in three district courts, including the Northern District of Texas, which is in the 5th Circuit.

In spite of what appears to be the imminent death of the fiduciary rule, the effort by the Obama administration to address conflicts of interest on investment recommendations has heightened awareness of broker-dealer and insurance company standards among federal and state regulators, as well as with the investing public.

The Securities and Exchange Commission, state insurance commissioners, and several states are in the process of crafting higher standards on investment recommendations in the effort to protect consumers.

In February of 2017, President Trump ordered the Labor Department to review the Obama-era fiduciary rule, which was partially implemented in June of last year.

That review was scheduled for completion by July 2019. Now, it is unclear if the Labor Department will continue its review.

In the meantime, Mr. Walsh expects the Labor Department to issue transitional guidance in light of the rule being vacated.

Efforts at the state level to regulate a higher standard of care on investment recommendations may be galvanized, putting pressure on the SEC to follow through on its proposal to enhance broker-dealer requirements, said Mr. Walsh.

“The fiduciary rule is like the Hydra,” he added. “You cut off one head and two more pop up.”