Fifth Circuit rejects reconsideration and review of rebuff of fiduciary rule

The states of California, New York, and Oregon have been rebuffed for the second time in their continuing effort to secure a full Fifth Circuit review of a panel decision in March overturning the fiduciary conflict of interest rules. The states had requested reconsideration by the panel of the rejection of a prior motion to intervene in the case. In the event the motion was denied, the states further requested full court review of the order denying intervention. In a not totally unexpected decision, the panel has summarily rejected both motions.

Fifth Circuit panel vacates fiduciary rule

On March 15, 2018, a divided panel of the Fifth Circuit vacated the fiduciary conflict of interest rules, the Best Interest Contract Exemption and revised PTE 84-24, as an invalid exercise of regulatory authority by the Department of Labor. The fiduciary rule, in expanding the parties subject to ERISA’s duty of loyalty and prudence as investment advice fiduciaries, the panel opined, conflicts with the traditional common law understanding of fiduciary responsibility expressed in ERISA and was an unreasonable, arbitrary and capricious exercise of regulatory authority in an area best left to Congress (Chamber of Commerce of the United States of America v. United States Department of Labor).
In response to the ruling and the failure of the Labor Department to pursue an appeal, California, New York, and Oregon filed a motion to intervene on April 26, 2018, seeking a rehearing of the panel’s decision before the full Fifth Circuit (i.e., en banc review). The panel, following, the familiar 2-1 alignment of the judges, denied the motion.
Citing the “grave harm” of lost retirement income and tax revenues stemming from the invalidation of the fiduciary rule, the states subsequently, on May 16, 2018, filed a motion with the panel for reconsideration of the denial of the request to intervene. Alternatively, in the event the panel declined reconsideration of the order, the states requested that the court authorize the filing of a petition seeking review of that order by the full court.

Legally protected interest warrants intervention

In the motion for reconsideration, the states argued that their intervention request satisfied the applicable four-prong test under Rule 25 of the Federal Rules of Civil Procedure.

  1. Motion was timely. The states’ motion was filed as soon as it became clear that the DOL was unlikely to seek rehearing and, thus, was timely.
  2. Legally protected interest. Citing the declarations of economists and the DOL’s economic data, the states averred that they would lose more than $58 million in a specific category of state income tax (withdrawals from individual retirement accounts) directly attributable to the elimination of the fiduciary rules.
  3. Panel’s decision impairs state interest. The panel’s decision vacating the fiduciary rule clearly impacts the states’ interests in protecting the cited tax revenue.
  4. Existing parties do not adequately represent states’ interest. The DOL has taken no position on the motion to intervene and no longer adequately represents the states’ interests.

Full court review of order denying intervention

In the event the panel denied the motion to reconsider the order denying intervention, the states requested review of that order by the full Fifth Circuit. The states had sought to file a petition for review of the order denying intervention by the full court, but the filing was rejected by the court’s attorney adviser. According to the advisor, the Fifth Circuit does not permit review of “administrative matters,” such as motions to intervene. Accordingly, the states filed the motion for reconsideration as the only available option.
In the motion for reconsideration, the states initially stressed the absence of clear Fifth Circuit authority prohibiting a prospective intervenor from seeking en banc review of the denial of a motion to intervene. In addition, the states cited Fifth Circuit precedent, in which a petition for en banc rehearing was granted after the denial of a motion to intervene.
Maintaining that an order denying intervention was a “matter of great substance,” and not merely one of administration, the states argued that an important interpretation of applicable rules or court procedures should be made expressly by the court. Thus, the states requested an express ruling on the issue of whether a party denied intervention by a panel is prohibited from seeking review of the denial by the full court.

Denial of motion would insulate panel’s decision from review

In closing, the states cautioned that denial of the motion to intervene would effectively insulate the panel’s decision vacating the fiduciary rule from appellate review. According to the states, such a review was necessary because the panel’s decision (in addition to endangering retirement income and tax revenues) conflicts with the decisions of three other federal courts, including the Tenth Circuit. Moreover, the panel’s constricted view that the only permissible interpretation of the term “fiduciary” is that provided under the common law of trust, is contrary to Supreme Court precedent recognizing that ERISA expanded the universe of persons subject to fiduciary duties (Mertens v. Hewitt Associates, 508 U.S. 248 (1993)).

Chamber of Commerce opposed to motion

The Chamber of Commerce and the other principal parties behind the lawsuit challenging the fiduciary rule noted that the motion for leave to intervene has been denied and, accordingly, dismissed any request for rehearing as “without merit.”

Motions denied

On May 22, 2018, the panel denied the motion for reconsideration. In addition, the panel denied the alternative motion to permit the filing of a petition for en banc review of the order denying the motion to intervene by the full court. No reasons for the panel’s determinations were provided.

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