Case: 17-10238 Document: 00514003289 Page: 1 Date Filed: 05/23/2017 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA, et al., Plaintiffs-Appellants, v. No. 17-10238 UNITED STATES DEPARTMENT OF LABOR, et al., Defendants-Appellees. MOTION FOR A 30-DAY EXTENSION OF TIME TO FILE BRIEF FOR APPELLEES The government respectfully requests a 30-day extension of time, to and including July 3, 2017, in which to file the response brief in this appeal. This extension is necessary in light of the number and length of plaintiffs opening briefs, the complexity of the issues involved and the need to allow new leadership personnel adequate time to consider them, and other pressing appellate matters for which government counsel is responsible. In support of its motion, counsel for the government states as follows: 1. This appeal concerns a package of final agency actions, known as the fiduciary rule, undertaken by the Labor Department to address conflicts of interest in the market for retirement-investment advice. The fiduciary rule modifies regulations implementing the Employee Retirement Income Security Act ( ERISA )
Case: 17-10238 Document: 00514003289 Page: 2 Date Filed: 05/23/2017 and the Internal Revenue Code ( Code ) by updating the regulatory definition of fiduciary investment advice to include individuals not covered by the previous definition. ERISA and the Code contain identical definitions of fiduciary. A fiduciary with respect to a plan includes a person who 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); see 26 U.S.C. 4975(e)(3). Individuals who qualify as fiduciaries under this definition must comply with provisions of ERISA and the Code prohibiting fiduciaries from engaging in certain conflicted transactions. 29 U.S.C. 1106(b)(1); see 26 U.S.C. 4975(c)(1)(E). The Labor Department has discretion to issue exemptions from these prohibited-transaction provisions. 29 U.S.C. 1108(a); see 26 U.S.C. 4975(c)(2); Reorg. Plan No. 4 of 1978 102(a) (codified at 5 U.S.C. App. 1) (transferring authority to issue exemptions under 26 U.S.C. 4975 to the Secretary of Labor). The fiduciary rule has two principal components. First, the rule revises the Labor Department s interpretation of fiduciary to include any individual who is compensated in connection with a recommendation as to the advisability of buying, selling, or managing investment property. 29 C.F.R. 2510.3-21(a). A recommendation is a communication that... would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular 2
Case: 17-10238 Document: 00514003289 Page: 3 Date Filed: 05/23/2017 course of action. Id. 2510.3-21(b)(1). This recommendation must be made under at least one of three circumstances: when the recommender represents himself as a fiduciary, when his advice is specifically directed at the recipient, or when there exists an understanding that the advice is based on the recipient s particular investment needs. Id. 2510.3-21(a). To provide relief from prohibited-transaction provisions to this expanded universe of fiduciaries, the Labor Department amended existing administrative exemptions relating to investment advice and created new ones. For example, the Department created the Best Interest Contract Exemption, which permits fiduciary investment advisers to continue receiving commissions and other forms of compensation that would otherwise be prohibited so long as they comply with the exemption s conditions. One condition is the requirement that a regulated entity follow Impartial Conduct Standards that instantiate fundamental obligations of fair dealing and fiduciary conduct. 81 Fed. Reg. 21002, 21007 (Apr. 8, 2016). Under these standards, regulated entities must give prudent advice that is in the customer s best interest, avoid misleading statements, and receive no more than reasonable compensation. Id. at 21003. Another condition is the requirement that regulated entities disclose basic information about their conflicts of interest and the cost of their advice. Id. Finally, fiduciaries to individual retirement accounts must comply with an additional condition: They must conclude a written contract the bestinterest contract for which the exemption was named with their customers that 3
Case: 17-10238 Document: 00514003289 Page: 4 Date Filed: 05/23/2017 commits them to adhering to these standards and that must contain certain other terms. Id. at 21022. The Labor Department published the fiduciary rule on April 8, 2016, and the rule became effective on June 7, 2016. As originally envisioned, the rule would not impose any of its requirements on regulated entities until April 10, 2017. The rule also delayed the applicability of certain conditions to the Best Interest Contract Exemption including the best-interest-contract requirement until January 1, 2018. 81 Fed. Reg. at 21069-70, 21084-85. 2. In February 2017, the President directed the Secretary of Labor to examine the fiduciary rule and to prepare an updated economic and legal analysis of its impact. 82 Fed. Reg. 9675 (Feb. 7, 2017). The results of this updated analysis could, depending on the outcome, lead the Labor Department to revise or rescind the rule. Consistent with the Administrative Procedure Act, the Department began implementing the President s directive by soliciting public comment on elements of that analysis using a notice of proposed rulemaking. The Department also proposed extending the April 10 applicability date by sixty days and asked for comment on whether the extension should be longer. On April 7, 2017, the Labor Department promulgated a final rule extending the applicability date of the fiduciary rule. 82 Fed. Reg. 16902 (Apr. 7, 2017). This final rule extended the applicability date of the Department s revised definition of fiduciary by 60 days from April 10, 2017, to June 9, 2017. Id. at 16902. The rule also 4
Case: 17-10238 Document: 00514003289 Page: 5 Date Filed: 05/23/2017 extended by 60 days the applicability date of the new Best Interest Contract Exemption. Id. And the rule specified that fiduciaries relying on that exemption need adhere only to the Impartial Conduct Standards... as [a] condition[] of the exemption[]... through January 1, 2018. Id. To that end, the rule delayed the applicability date of the remaining conditions in the[] exemption[], such as requirements to make specific written disclosures, to January 1, 2018. Id. 1 In this manner, the final rule established a phased-implementation period beginning on June 9, 2017, and ending on January 1, 2018 (absent further action from the Department). During this time, the updated fiduciary definition will be applicable. Various exemptions from the prohibited-transaction provisions of ERISA and the Code will be available to regulated entities, contingent on compliance with the Impartial Conduct Standards. The Labor Department determined that this phased-implementation approach strikes an appropriate balance between the competing interests at stake. The 1 The final rule also extended until June 9, 2017, the applicability date of the new Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs, and requires fiduciaries relying on that exemption to comply with the Impartial Conduct Standards only, through January 1, 2018. 82 Fed. Reg. at 16902. The rule similarly delayed the applicability date of all but one revision to an existing exemption, called Prohibited Transaction Exemption 84-24, until January 1, 2018. Id. The remaining revision which added, as a condition of qualification for that exemption, compliance with Impartial Conduct Standards is scheduled to become applicable on June 9, 2017. Id. Finally, the rule extended until June 9, 2017, the applicability dates of amendments to other previously granted exemptions. Id. 5
Case: 17-10238 Document: 00514003289 Page: 6 Date Filed: 05/23/2017 Department recognized that many firms may have reasonably slowed their compliance efforts after the Presidential Memorandum. 82 Fed. Reg. at 16905. A decision not to delay any aspect of the rule could result in an unduly chaotic transition... as firms rush to... finalize compliance structures... resulting in investor confusion, excessive costs, and needlessly restricted or reduced advisory services. Id. However, the Department also recognized building on its prior empirical analyses, id. at 16908-11 that retirement investors are likely to continue incurring new losses from advisory conflicts, and [l]osses arising from a delay of longer than 60 days would quickly overshadow any additional compliance cost savings. Id. at 16905-06. In the Department s judgment, a phased-implementation period as opposed to a delay of the entire fiduciary rule best protect[s] the interests of retirement investors in receiving sound advice, provide[s] greater certainty to the public and regulated parties, and minimize[s] the risk of unnecessary disruption. Id. at 16905. On May 22, 2017, the Labor Department issued a Field Assistance Bulletin setting forth a temporary enforcement policy for regulated entities during the phased-implementation period. 2 Under this policy, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply 2 This policy has been posted on the Labor Department s website and is available at https://go.usa.gov/xn8pp. For the Court s convenience, a copy of the policy is included in the addendum to this motion. See Add. 1-3. 6
Case: 17-10238 Document: 00514003289 Page: 7 Date Filed: 05/23/2017 with the fiduciary rule. Add. 2. Nor will the Department treat [such] fiduciaries as being in violation of the rule and exemptions. Id. To the extent that circumstances surrounding the applicability date of the fiduciary rule give rise to the need for other temporary relief, the Department will consider taking such additional steps as necessary. Id. The Treasury Department and Internal Revenue Service have committed to a similar approach to enforcement. Add. 2 n.1. 3. In 2016, three groups of plaintiffs challenged the fiduciary rule on statutory and constitutional grounds in federal district court. On February 8, 2017, the district court granted summary judgment for the government, and all three groups appealed. Two of the three groups the Chamber of Commerce plaintiffs and the American Council of Life Insurers plaintiffs filed emergency motions asking this Court to enjoin the entire fiduciary rule pending appeal. The Chamber of Commerce plaintiffs moved, in the alternative, for expedition of the briefing schedule. On April 5, 2017, this Court declined to enjoin the rule pending appeal and declined to expedite briefing. Plaintiffs filed their three opening briefs on May 2, 2017. Two amicus briefs were filed in support of plaintiffs on May 9, 2017. The government s response brief is currently due on June 1, 2017. 4. A 30-day extension of the deadline for filing the government s response brief is necessary in light of the complexity of this appeal. Plaintiffs and their amici have mounted a wide-ranging constitutional and statutory challenge to the fiduciary 7
Case: 17-10238 Document: 00514003289 Page: 8 Date Filed: 05/23/2017 rule. They allege that the rule violates (1) the First Amendment, (2) the Administrative Procedure Act, 5 U.S.C. 701 et seq., (3) the Federal Arbitration Act, 9 U.S.C. 2, and (4) the Supreme Court s private-right-of-action jurisprudence, see Alexander v. Sandoval, 532 U.S. 275 (2001). Their arguments span three separate opening briefs totaling more than 35,000 words and two amicus briefs totaling more than 11,500 words. The recent leadership transition within the Department of Labor underscores the government s need for an extension. The United States Senate confirmed R. Alexander Acosta as the new Secretary of Labor on April 27, 2017, and Secretary Acosta has since taken office. The requested extension is necessary to ensure that the Department s new leadership will have an adequate opportunity to consider the many specific questions presented by this litigation and their effect on the agency s regulatory responsibilities. 5. A 30-day extension is also necessary to ensure adequate time to prepare and review the government s brief. The attorney with principal responsibility for that brief is Michael Shih. Mr. Shih is counsel of record for the government in a number of other cases. See Bonacci v. Transportation Security Administration, No. 17-1116 (D.C. Cir.) (opposition to petitioner s motion for injunction pending review filed on May 11, 2017); Paracha v. Trump, No. 16-5248 (D.C. Cir.) (response to petition for rehearing and rehearing en banc due on June 13, 2017, as extended). Mr. Shih is also assisting in 8
Case: 17-10238 Document: 00514003289 Page: 9 Date Filed: 05/23/2017 drafting a brief in response to the petition for certiorari filed in Al-Nashiri v. Trump, No. 16-8966 (S. Ct.). The attorney with supervisory responsibility for this case is Michael S. Raab. Mr. Raab also has supervisory responsibility for numerous other appellate matters, including United States Postal Service v. Postal Regulatory Commission, No. 16-1412 (D.C. Cir.) (response brief filed May 15, 2017); American Small Business League v. Contreras- Sweet, No. 16-17096 (9th Cir.) (response brief due May 24, as extended); Segovia v. Board of Election Commissioners, No. 16-4240 (7th Cir.) (response brief due June 9, as extended); Clarian Health West, LLC v. Price, No. 16-5307 (D.C. Cir.) (reply brief due June 16, as extended); Kearney Regional Medical Center v. HHS, No. 17-1207 (8th Cir.) (response brief due June 19, as extended); and Canatella v. Reverse Mortgage Solutions, Inc., No. 16-17281 (9th Cir.) (response brief due June 21, as extended);. In addition, Mr. Raab is scheduled to be out of the office from May 26, 2017, through June 5, 2017. 6. This Court has already denied two motions for injunctive relief and a request from one group of plaintiffs for expedited briefing. Both forms of relief requested were premised on assertions of irreparable injury. Subsequent developments have not transformed this appeal into one requiring immediate resolution. Indeed, the delayed application of many exemption conditions until January 1, 2018, has only lessened the need for immediate resolution. As modified by the Department of Labor s recent final rule, the fiduciary rule will currently apply to regulated entities beginning on June 9, 2017. But many 9
Case: 17-10238 Document: 00514003289 Page: 10 Date Filed: 05/23/2017 conditions in the new exemptions, including the best-interest-contract requirement, will not become applicable until January 1, 2018 more than six months after the filing of this motion. As of June 9, regulated entities will be chiefly responsible for giv[ing] prudent advice that is in the customer s best interest, avoid[ing] misleading statements, and receiv[ing] no more than reasonable compensation. See 82 Fed. Reg. at 16905. Many investment advisers already hold themselves out as providing advice that is in the retirement investor s best interest and free from misrepresentations in exchange for reasonable compensation. Id. And the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary rule s requirements, or treat those fiduciaries as being in violation of the rule and exemptions. Add. 2. Because this Court denied plaintiffs motions for an injunction pending appeal, the pendency of this litigation has not relieved plaintiffs from their obligation to comply with the fiduciary rule when its provisions become applicable to them. As such, the only effect of the government s request on plaintiffs is to delay resolution of the appeal by 30 days. The requested 30-day extension will itself not cause any regulatory requirement to be imposed upon plaintiffs with which they did not already have to comply. 7. The government has conferred with counsel for all three groups of plaintiffs. Plaintiffs have indicated that they oppose the government s request. 10
Case: 17-10238 Document: 00514003289 Page: 11 Date Filed: 05/23/2017 CONCLUSION For the foregoing reasons, the government respectfully requests a 30-day extension, to and including July 3, 2017, of the time for filing its brief. /s/ Michael Shih MICHAEL SHIH Counsel for Defendants-Appellees 11
Case: 17-10238 Document: 00514003289 Page: 12 Date Filed: 05/23/2017 CERTIFICATE OF SERVICE I hereby certify that on May 23, 2017, I electronically filed the foregoing document with the Clerk of this Court by using the appellate CM/ECF system. The participants in the case are registered CM/ECF users and service will be accomplished by the appellate CM/ECF system. /s/ Michael Shih MICHAEL SHIH Counsel for Defendants-Appellees
Case: 17-10238 Document: 00514003289 Page: 13 Date Filed: 05/23/2017 CERTIFICATE OF COMPLIANCE I hereby certify that the foregoing motion complies with the requirements of Fed. R. App. P. 27(d) because it has been prepared in 14-point Garamond, a proportionally spaced font. I further certify that this motion complies with the typevolume limitation of Fed. R. App. P. 27(d)(2) because it contains 2,391 words according to the count of Microsoft Word. /s/ Michael Shih MICHAEL SHIH Counsel for Defendants-Appellees
Case: 17-10238 Document: 00514003289 Page: 14 Date Filed: 05/23/2017 ADDENDUM
Case: 17-10238 Document: 00514003289 Page: 15 Date Filed: 05/23/2017 U.S. Department of Labor Employee Benefits Security Administration Washington, D.C. 20210 FIELD ASSISTANCE BULLETIN NO. 2017-02 DATE: MAY 22, 2017 MEMORANDUM FOR: MABEL CAPOLONGO, DIRECTOR OF ENFORCEMENT REGIONAL DIRECTORS FROM: JOHN J. CANARY DIRECTOR OF REGULATIONS AND INTERPRETATIONS SUBJECT: TEMPORARY ENFORCEMENT POLICY ON FIDUCIARY DUTY RULE Background This document announces a temporary enforcement policy related to the Department of Labor s final rule defining who is a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code), and the related prohibited transaction exemptions, including the Best Interest Contract Exemption (BIC Exemption), the Class Exemption for Principal Transactions In Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Principal Transactions Exemption), and certain amended prohibited transaction exemptions (collectively PTEs). The final rule, entitled Definition of the Term Fiduciary ; Conflict of Interest Rule -- Retirement Investment Advice, was published in the Federal Register on April 8, 2016, became effective on June 7, 2016, and had an original applicability date of April 10, 2017. The PTEs also had an original applicability date of April 10, 2017, with a phased implementation period ending on January 1, 2018, for the BIC Exemption and the Principal Transactions Exemption. The President, by Memorandum to the Secretary of Labor dated February 3, 2017, directed the Department to examine whether the fiduciary duty rule may adversely affect the ability of Americans to gain access to retirement information and financial advice and to prepare an updated economic and legal analysis concerning the likely impact of the rule as part of that examination. On March 2, 2017, the Department published a notice proposing a 60-day delay in the applicability date of the fiduciary duty rule and the related PTEs and seeking public comments on the questions raised in the Presidential Memorandum, and generally on questions of law and policy concerning the fiduciary duty rule and PTEs. On March 10, 2017, the Department issued FAB 2017-01 to announce a temporary enforcement policy related to its proposal to extend for 60 days the applicability date of the fiduciary duty rule and the related PTEs. On April 7, 2017, the Labor Department promulgated a final rule extending the applicability date of the fiduciary duty rule by 60 days from April 10, 2017, to June 9, 2017. 82 Fed. Reg. 16902. It also extended to June 9 the applicability dates of the BIC Exemption and the related Principal Transactions Exemption, and required fiduciaries relying on these exemptions to adhere to the impartial conduct standards set forth in the exemptions only as conditions of the exemptions during a transition period through January 1, 2018. Id. In this manner, the Department established a phased Add. 1
Case: 17-10238 Document: 00514003289 Page: 16 Date Filed: 05/23/2017 implementation period from June 9, 2017, until January 1, 2018, during which time the fiduciary duty rule will be applicable and these new exemptions will be available, subject to the impartial conduct standards only. The final rule further delayed the applicability of amendments to an existing exemption, Prohibited Transaction Exemption 84 24, until January 1, 2018, other than the impartial conduct standards, which will become applicable on June 9, 2017. Finally, the final rule extended for 60 days the applicability dates of amendments to other previously granted exemptions. Id. The public comment period on questions raised in the Presidential Memorandum, and generally on questions of law and policy concerning the fiduciary duty rule and PTEs, closed on April 17, 2017. The Department is actively engaging in a careful analysis of the issues raised in the President s Memorandum. It is possible, based on the results of the examination, that additional changes will be proposed to the fiduciary duty rule and PTEs. The Department also intends to issue a Request for Information (RFI) in the near future seeking additional public input on specific ideas for possible new exemptions or regulatory changes based on recent public comments and market developments. The Department is also aware that after the fiduciary duty rule and PTEs were issued firms have begun to develop new business models and innovative market products to mitigate conflicts of interest. The RFI will specifically ask for public comment on whether it is likely to take more time to implement these new approaches than what the Department envisioned when it set January 1, 2018, as the applicability date for full compliance with all of the exemptions conditions, and, if so, whether an additional delay in the January 1, 2018 applicability date would reduce burdens on financial services providers and benefit retirement investors by allowing for a smoother implementation of those market changes. Although the Department has a statutory responsibility and broad authority to investigate or audit employee benefit plans and plan fiduciaries to ensure compliance with the law, compliance assistance for plan fiduciaries and other service providers is also a high priority for the Department. The Department has repeatedly said that its general approach to implementation will be marked by an emphasis on assisting (rather than citing violations and imposing penalties on) plans, plan fiduciaries, financial institutions, and others who are working diligently and in good faith to understand and come into compliance with the fiduciary duty rule and exemptions. Consistent with that approach, the Department has determined that temporary enforcement relief is appropriate and in the interest of plans, plan fiduciaries, plan participants and beneficiaries, IRAs, and IRA owners. Temporary Enforcement Policy Accordingly, during the phased implementation period ending on January 1, 2018, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions. 1 1 On March 28, 2017, the Treasury Department and the IRS issued IRS Announcement 2017-4 stating that the IRS will not apply 4975 (which provides excise taxes relating to prohibited transactions) and related reporting obligations with respect to any transaction or agreement to which the Labor Department s temporary enforcement policy described in FAB 2017-01, or other subsequent related enforcement guidance, would apply. The Treasury Department and the IRS have confirmed that, for purposes of applying IRS Announcement 2017-4, this FAB 2017-02 constitutes other subsequent related enforcement guidance. Add. 2
Case: 17-10238 Document: 00514003289 Page: 17 Date Filed: 05/23/2017 To the extent that circumstances surrounding the applicability date of the fiduciary duty rule and exemptions give rise to the need for other temporary relief, EBSA will consider taking such additional steps as necessary. This Bulletin is an expression of EBSA s temporary enforcement policy; and it does not address the rights or obligations of other parties. Add. 3