Chamber of Commerce of the U.S. v. U.S. Dep't of Labor

885 F.3d 360

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

No. 17-10238

United States Court of Appeals, Fifth Circuit.

FILED March 15, 2018

Eugene Scalia, Attorney, Paul Blankenstein, Jason J. Mendro, Gibson, Dunn & Crutcher, L.L.P., Washington, DC, Russell Harris Falconer, Attorney, Gibson, Dunn & Crutcher, L.L.P., Dallas, TX, for Plaintiffs–Appellants 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, and Texas Association of Business.

David W. Ogden, Esq., Kelly Patrick Dunbar, Kevin Lamb, WilmerHale, L.L.P., Washington, DC, Andrea J. Robinson, WilmerHale, Boston, MA, for Plaintiffs–Appellants 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.

Joseph Robert Guerra, Jennifer Jo Clark, Peter D. Keisler, Esq., Sidley Austin, L.L.P., Washington, DC, for Plaintiffs–Appellants Indexed Annuity Leadership Council, Life Insurance Company of the Southwest, American Equity Investment Life Insurance Company, Midland National Life Insurance Company, Midland National Life Insurance Company, and North American Company for Life and Health Insurance.

Michael Shih, Michael S. Raab, U.S. Department of Justice, Civil Division, Appellate Section, Washington, DC, for Defendants–Appellees United States Department of Labor and R. Alexander Acosta, Secretary, Department of Labor.

Cory L. Andrews, Senior Litigation Counsel, Washington Legal Foundation, Washington, DC, for Amicus Curiae Washington Legal Foundation.

Mary Ellen E. Signorille, Senior Attorney, AARP Foundation Litigation, Washington, DC, for Amicus Curiae American Association of Retired Persons, American Association of Retired Persons Foundation, Americans for Financial Reform, Better Markets, Consumer Federation of America, and National Employment Law Project.

Andrew B. Kay, Cozen O'Connor, P.C., Washington, DC, for Amicus Curiae Thrivent Financial for Lutherans.

Brendan Stephen Maher, Douglas D. Geyser, Esq., Stris & Maher, L.L.P., Dallas, TX, for Amicus Curiae Financial Planning Coalition.

Scott Lawrence Nelson, Allison M. Zieve, Public Citizen Litigation Group, Washington, DC, for Amicus Curiae Public Citizen, Incorporated.

Deepak Gupta, Gupta Wessler, P.L.L.C., Washington, DC, for Amicus Curiae American Association for Justice.

Before STEWART, Chief Judge, and JONES and CLEMENT, Circuit Judges.

EDITH H. JONES, Circuit Judge:

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 29 U.S.C. § 1001 et seq, and the Internal Revenue Code, 26 U.S.C. § 4975. The stated purpose of the new rules is to regulate in an entirely new way hundreds of thousands of financial service providers and insurance companies in the trillion dollar markets for ERISA plans and individual retirement accounts (IRAs). The business groups’ challenge proceeds on multiple grounds, including (a) the Rule’s inconsistency with the governing statutes, (b) DOL’s overreaching to regulate services and providers beyond its authority, (c) DOL’s imposition of legally unauthorized contract terms to enforce the new regulations, (d) First Amendment violations, and (e) the Rule’s arbitrary and capricious treatment of variable and fixed indexed annuities.

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 the interests of employees and their beneficiaries in employee benefit plans." Shaw v. Delta Air Lines, Inc. , 463 U.S. 85, 90, 103 S.Ct. 2890, 77 L.Ed.2d 490 (1983). Title I of ERISA confers on the DOL far-reaching regulatory authority over employer- or union-sponsored retirement and welfare benefit plans. 29 U.S.C. §§ 1108(a) - (b), 1135. A "fiduciary" to a Title I plan is subject to duties of loyalty and prudence. 29 U.S.C. § 1104(a)(1)(A)-(B). Fiduciaries may not engage in several "prohibited transactions," including transactions in which the fiduciary receives a commission paid by a third party or compensation that varies based on the advice provided. 29 U.S.C. § 1106(b)(3). ERISA authorizes lawsuits by the DOL, plan participants or beneficiaries against fiduciaries to enforce these duties. 29 U.S.C. § 1132(a).

ERISA Title II created tax-deferred personal IRAs and similar accounts within the Internal Revenue Code. 26 U.S.C. § 4975(e)(1)(B).² Title II did not authorize DOL to supervise financial service providers to IRAs in parallel with its power over ERISA plans. Moreover, fiduciaries to IRAs are not, unlike ERISA plan fiduciaries, subject to statutory duties of loyalty and prudence. Instead, Title II authorized the Treasury Department, through the IRS, to impose an excise tax on "prohibited [i.e. conflicted] transactions" involving fiduciaries of both ERISA retirement plans and IRAs. 26 U.S.C. § 4975 (a), (b), (f)(8)(E). DOL was authorized only to grant exemptions from the prohibited transactions provision, 29 U.S.C. § 1108(a), 26 U.S.C. § 4975(c)(2), and to "define accounting, technical and trade terms" that appear in both laws, 29 U.S.C. § 1135. Title II did not create a federal right of action for IRA owners, but state law and other remedies remain available to those investors.

The critical term "fiduciary" is defined alike in both Title I, 29 U.S.C. § 1002(21)(A), and Title II, 26 U.S.C. § 4975(e)(3). In Title I, fiduciaries are subject to comprehensive DOL regulation, while in Title II individual plans, they are subject to the prohibited transactions provisions. The provision states that "a person is a fiduciary with respect to a plan to the extent he

• 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 advice (4) "serve[s] as a primary basis for investment decisions with respect to plan assets;" and (5) is "individualized ... based on the particular needs of the plan." 29 C.F.R. § 2510.3-21(c)(1) (2015).

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)....