Court Hearings on Fiduciary Litigation Offer Little Clarity

Erin Sweeney, of counsel with Miller & Chevalier, has an impressive background when it comes to understanding complex pieces of employee benefits law and regulation, even for an Employee Retirement Income Security Act (ERISA) attorney.

Previously in her career, Sweeney was senior benefits law specialist for the Office of Regulations and Interpretations at the U.S. Department of Labor (DOL). In the role she was a primary architect of the DOL’s default investment regulations that have dramatically reshaped the way mutual funds, investment managers, employers and plan trustees interact. In addition, she received an exceptional achievement award for her direct participation in drafting the Pension Protection Act.

Even with a background steeped in difficult regulatory processes, Sweeney counts herself among those who feel a little exasperated by the battle that has raged around the DOL fiduciary rulemaking, culminating this year in the filing of no fewer than five separate pieces of litigation. These lawsuits are playing out in several district courts across the U.S. and have already seen a number of important hearings come and go, she explains, and yet little clarity has emerged in terms of how successful plaintiffs may ultimately be in slowing or even outright stopping implementation of the fiduciary rule.

“In the most recent hearing in one of these cases, the one involving an insurance company known as Market Synergy and focused very particularly on questions about fixed-index annuities, I certainly got the sense that the judge wants to move quickly,” Sweeney says. “But even here the judge asked for supplemental briefs due towards the end of September, and then the parties will have other actions stretching out to a November timeframe at the absolute earliest.”

Sweeney suggests the litigation filed by annuity firm Market Synergy “is actually only a minor challenge that is very focused on whether fixed-index annuity providers will be able to use the so-called 84-24 exemption, rather than the best-interest contract exemption [BIC].” Specifically, plaintiffs in the Market Synergy case feel they will never be able to make the BIC workable given the distribution arrangements traditionally used underlying fixed-index annuities, Sweeney explains, and so they want the DOL to be forced to allow annuity providers to work under the 84-24 exemption, as had been initially proposed by DOL.

“The specific details of the case get fairly complicated, but I bring this up to show that even this fairly limited challenge to the DOL rulemaking is going to take real time to unfold,” she adds. “I do believe that the plaintiffs in the Market Synergy case stand the best chance at arguing the rule will cause immediate and irreparable harm, and so they stand the best chance of seeing an injunction put on the rule—even it is only limited to fixed-index annuities.”

Pressed to speculate, Sweeney said that based on what she heard directly during court proceedings, there is a “roughly 60% chance the judge could order an injunction in the fixed-index annuity matter.” She says any injunction in this case “will almost certainly be very limited in its application. In other words, it would not be likely to halt the implementation of the BIC regime or the wider rule as a whole.”

NEXT:  Far from resolution 

According to Sweeney, the cases that were consolidated in the Northern District of Texas are much more broad and they make fundamental challenges to the whole rulemaking.

“Those are the kitchen-sink cases, as we say, in which plaintiffs are going to throw anything and everything they possibly can at defendants to try to get the judge to stay large portions of the rulemaking, or even the entire rule,” she explains. “Frankly it’s a very long shot to imagine one judge agreeing to all their arguments and to put a nation-wide stay on the rulemaking, but this is what plaintiffs are after.”

Thinking ahead to the time when key decisions are actually made by the judges in these cases, Sweeney cautioned that a lengthy appeals process can be anticipated in all of these matters.

“In the Market Synergy case, for example, the judge made clear his understanding that he expected the losing party to file an immediate appeal of his decision whether the preliminary injunction is granted or denied,” Sweeney explains. “Accordingly, the judge’s focus on resolution of the entire action is an apparent effort to streamline the litigation in anticipation of appeal. Given that the parties are not required to complete coordination on the underlying lawsuit for several weeks yet, it appears unlikely that the judge will render a decision prior to the next fiduciary regulation battleground—oral argument on motions for summary judgment filed in the consolidated action in the United States District Court for the Northern District of Texas.”

Right now that hearing is slated for November 17, 2017, before Judge Barbara M.G. Lynn, Sweeney observes.

“I have no doubt that the decision in the Texas case could easily take months, so then we are looking at early next year at the absolute earliest to see a decision on the wider-ranging challenge to the fiduciary rule,” Sweeney concludes. “And then you could easily imagine additional appeals reaching all the way to the Supreme Court, I think it’s fair to say. Whatever is eventually going to happen in these cases, we are still quite far from the resolution.”