In the waning days of the Obama administration, the Labor Department handed down its “fiduciary rule,” which was intended to modernize regulation of investment advisers and protect workers’ retirement savings. Last week, however, a divided panel of a conservative federal appeals court struck down this rule. Both of the judges in the majority are Republicans.
The purpose of the Obama administration’s rule was to prevent widespread self-dealing by the financial industry. When President Obama and Sen. Elizabeth Warren (D-MA) touted the fiduciary rule in February of 2015, they noted that Americans lose “a combined $17 billion each year through hidden fees and conflicted financial advice,” including advice that steered “investors into financial products that maximize benefits to the advisers or their companies, instead of their clients.” Warren made particular note of the “vacations, cruises, and other perks that retirement professionals…receive for steering their clients into” such investments, creating an incentive to engage in double-dealing with retirees.
Judge Edith Jones’ opinion in Chamber of Commerce v. US Department of Labor rests on an aggressive reading of Supreme Court decisions favoring business groups’ position in this case, and an unusually narrow reading of Supreme Court decisions calling for courts to defer to federal agencies, in order to strike down this fiduciary rule. It also rests on a rather creative reading of a federal law.
Under a federal law known as the Employee Retirement Income Security Act (ERISA), certain investment advisers are deemed “fiduciaries,” meaning that they have an unusually strong obligation to act in the best interests of their clients. Though the law in this area is complex, fiduciaries typically face legal sanctions or higher taxes if they steer their clients into investments that benefit the fiduciary. Again, a fiduciary’s duty must be to their client, not to their own bottom line.
ERISA provides that someone qualifies as a fiduciary if they render “investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of” certain investment plans, “or has any authority or responsibility to do so.” Nevertheless, a Labor Department rule promulgated during the Ford administration limits this definition of which advisers qualify as fiduciaries. Specifically, the Ford administration rule provides that an adviser may not count as a fiduciary unless they provide advice “on a regular basis . . . pursuant to a mutual agreement . . . between such person and the plan.”
One problem with this older rule, as Chief Judge Carl Stewart explains in dissent, is it made far more sense in a world where workers typically relied on “pension plans controlled by large employers and professional money managers” to plan for retirement, rather than a modern world of “individual retirement accounts (“IRAs”) and participant-directed plans, such as 401(k)s.” Most workers rarely confer with a financial adviser about their IRA or 401(k)s — indeed, some may only speak to such an adviser at the time of their retirement, when they may make a single financial decision with enormous consequences. These occasionally consulted advisers do not count as fiduciaries under the Ford administration rule, because they do not provide advice “on a regular basis.”
The Obama administration’s rule sought to eliminate this exemption. Under the Obama-era rule, an individual is deemed to be a fiduciary if they are “compensated in connection with a ‘recommendation as to the advisability of’ buying, selling, or managing ‘investment property,’” and their investment advice “is directed ‘to a specific advice recipient . . . regarding the advisability of a particular investment or management decision with respect to’ the recipient’s investment property.” Thus, anyone in the business of giving occasional — or even one-time — financial advice to retiring workers may still count as a fiduciary.
As a legal matter, the Obama Era rule seems to do little more than bring the Labor Department’s regulations in line with the text of ERISA itself. Recall that ERISA provides that someone may qualify as a fiduciary if they offer “investment advice for a fee or other compensation.” Nothing in that statutory text suggests that a fiduciary duty only kicks in after the adviser spends enough time on the phone with a particular client.
Judge Jones’ opinion, for what its worth, does offer a plausible explanation for why the Ford Era rule appears to be at odds with the text of ERISA. Under the common law of trusts, a web of judge-made law that ERISA built upon, fiduciaries were people who had “intimate relationships” with the people whose assets they managed — the sort of relationship where “there was an underlying confidence involved that required scrupulous fidelity and honesty.” This venerable understanding of the word “fiduciary,” according to Judge Jones, is more consistent with a relationship that involves communication “on a regular basis.”
Jones also cites Supreme Court opinions establishing the “settled principle of interpretation that, absent other indication, ‘Congress intends to incorporate the well-settled meaning of the common-law terms it uses.’” Thus, she argues, her court is obligated to apply the common law definition of the word “fiduciary” to ERISA.
It’s a clever argument, but it runs aground against a serious problem — the word “fiduciary” is defined by the ERISA statute, and it is defined to broadly include an individual who “renders investment advice for a fee or other compensation.” The Supreme Court’s decisions do not lock Congress into following the common law, they simply require the common law to be followed “absent other indication” that Congress intended to depart from it. Here, Congress signaled its intention by defining the word “fiduciary” more expansively than the common law’s definition.
Moreover, to the extent that there is any ambiguity in how ERISA defines the word “fiduciary,” the Supreme Court’s decision in Chevron v. Natural Resources Defense Council requires courts to defer to an agency’s interpretation of the law.
It should be noted that Judge Jones is a rather notorious figure within the federal judiciary. In one dissenting opinion, Jones claimed that a woman did not experience sexual harassment after she was groped by a supervisor, had co-workers hang used tampons in their lockers, had a co-worker stick his tongue in her ear, and had a co-worker tell her “he would cut off her breast and shove it down her throat.” In another case, Jones joined an opinion holding that a man should be executed despite the fact that his lawyer slept through much of his trial. In a 2001 speech at the University of Texas, Jones claimed that employees claiming employment discrimination should “take a better second job instead of bringing suit.”
It’s also worth noting that, two days before Jones’ opinion came down, a panel of the United States Court of Appeals for the Tenth Circuit upheld part of the fiduciary rule. That makes it likely that the Supreme Court will weigh in on this case.
Edith Jones, in other words, is a bit of out an outlier, even in a federal judiciary dominated by conservatives. And it is likely that her court will not be the last one to consider the fiduciary rule. Nevertheless, this case’s next stop is likely to be a Supreme Court that is quite friendly to business interests. There is no guarantee that the fiduciary rule will survive further review, regardless of what ERISA has to say about it.