Did the Chevron ruling kill the new DOL rule? It's not that simple.

The lawsuits seeking to overturn the Department of Labor's new retirement advice rule may have gained an edge from the Supreme Court last month.

Loper Bright Enterprises v. Raimondo tossed out a 40-year old legal principle known as the Chevron doctrine that called for courts to defer to government experts' interpretation of the laws in the issuance of new rules such as the "retirement security rule." Effective this September, the Labor Department rule requires financial advisors and other industry professionals to put the interests of 401(k) plan participants and other retirement savers first in recommendations of rollovers and certain insurance sales. 

Opponents argue the agency overstepped the bounds of the Employee Retirement Income Security Act by applying the fiduciary duty to limited, often one-time advice. Backers say the agency is closing a loophole that harms retirement savers getting that advice.

The end of the Chevron doctrine dealt two industry trade groups' lawsuits a new potential tool for vacating Labor's rule in the same manner that the legal challenges were successful in doing to the agency's last attempt in 2016 to expand fiduciary protections in retirement plans. The same court that trashed the previous rule two years later, the Fifth Circuit Court of Appeals, could eventually hear cases against the new one filed by the Federation of Americans for Consumer Choice and nearly a dozen insurance and wealth management industry trade groups. 

In light of the Supreme Court decision, the question for advisors and other professionals wondering about the Labor rule's fate turns to how lower courts will interpret their new guidance.

READ MORE: The Supreme Court had an eventful term — here's what its decisions mean for financial advisors

Key looming legal questions

In the previous legal fight, the agency prevailed in four district courts and another appellate court "on the basis of mechanical Chevron deference," W. Mark Smith, who advises brokerages and registered investment advisory firms on retirement plans in his position of counsel with Eversheds Sutherland, noted in an email. However, the "government clearly anticipated the Loper Bright outcome," since its filings in the two pending lawsuits prior to the Supreme Court decision "argued the merits in both instances" rather than relying on Chevron, he said. Those factors make this round of legal maneuvering different from the last time around. 

"The only court that ruled against DOL was the Fifth Circuit, which also was the only court to undertake an actual legal analysis," Smith said. "The ultimate objective of Loper Bright is to arrive at 'the single, best reading' of a statute as fixed at enactment. Since, among other things, the avowed purpose of DOL's 2024 regulation is to re-interpret the fiduciary definition for developments since the enactment of ERISA in 1974, it seems markedly difficult for DOL to defend the rule against that standard."

Other legal experts take a different view. The fiduciary duty required by Labor's rule can prevent "a ton of abuse in the insurance industry, which makes the securities industry look like a bunch of librarians," Joe Peiffer, who represents clients in cases against wealth management firms as the founding partner of Peiffer Wolf Carr Kane Conway & Wise and current president of the Public Investors Advocate Bar Association, said at a webinar held by the Institute for the Fiduciary Standard. Regardless of the Chevron ruling, the lawsuits against the retirement advice rule "ought not to be" successful, Peiffer said.  

"The DOL went back, and they sharpened their pencils, and they looked at what the Fifth Circuit did last time in overturning the rule," he said. "And they really tailored the rule to survive a challenge in the Fifth Circuit, and it ought to survive that challenge, in my opinion."

While he said that the new retirement advice rule "does eliminate a lot of the more controversial aspects of the 2016 rule," A&O Shearman Counsel Matthew Behrens said in an interview that he would be "hesitant to predict" how courts will proceed in light of the Loper Bright decision. At the same time, the Fifth Circuit cited the end of Chevron last week when it remanded a lawsuit against another Labor rule allowing retirement plans to consider ESG factors back to a lower court. Opponents of the retirement advice rule could follow the states' tactic by deploying the Supreme Court's reasoning in arguments, motions or a letter to the court, Behrens said.

"It's certainly going to make it more difficult for the Department of Labor to defend it in the courts," he said. "I would not be surprised to see something similar at least attempted with the fiduciary rule."

READ MORE: Labor gets an earful: 25 key moments from retirement advice hearings

Latest developments in the lawsuits
The adversaries of Labor's new rule have taken that step. 

They filed at least two separate lawsuits in Texas federal courts, and each of the plaintiffs are now awaiting rulings on their motions for a preliminary injunction that would push back the implementation of the rule during the proceedings. In the one lodged by the American Council of Life Insurers, the National Association of Insurance and Financial Advisors, the Insured Retirement Institute and the National Association for Fixed Annuities and joined by the Financial Services Institute and the Securities Industry and Financial Markets Association, the plaintiffs pointed out in a filing earlier this month that the Fifth Circuit ruling in 2018 had deemed the earlier rule as too broad even under the Chevron doctrine.

"The Supreme Court's recent decision in Loper Bright eliminates deference to administrative agencies even with respect to ambiguous statutes, making clear that, 'Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority,'" a footnote in the filing said. "That decision teaches that executive branch interpretations of statutes may be due some measure of respect when made contemporaneously with statutory enactment, such as the 1975 test that the rule seeks to supplant, as opposed to revolutionary reinterpretations like the rule, posited by an
agency nearly five decades later."

Instead, judges should use the standard that many legal experts say could effectively replace the Chevron deference, the "major questions" doctrine, to evaluate the rule, the plaintiffs argued. The other plaintiffs that have filed a case against Labor's new rule, the Federation of Americans for Consumer Choice, cited that doctrine as well in calling for a stay. 

The Supreme Court elevated the major questions doctrine two years ago in a decision that stated that judges should "hesitate before concluding that Congress meant to confer such authority" when the "history and breadth of the authority" of the agency's rule takes on added "economic and political significance" beyond the laws, according to an analysis by the nonpartisan Congressional Research Service.

"The precise scope of the doctrine is unknown," the report said. "The Court has not clearly explained when an agency's regulatory action will raise a question so significant that the doctrine applies, nor has it specified what legislative acts could constitute clear congressional authorization."     

For its part, the government is saying that doctrine "is inapplicable, and even if [it] did apply, Congress's clear grant of authority to DOL is sufficient to satisfy that standard," according to Labor's filing last month against the Federation for Consumer Choice's motion for an injunction.

"Here, the Department relies on no 'newfound power' in an 'ancillary provision' of ERISA," the filing said. "To the contrary, Congress expressly granted the Department of Labor the authority to grant exemptions and to interpret the term 'fiduciary' in ERISA and the code."

READ MORE: Rule check: All you need to know about DOL's retirement regulation

The stakes of the election

The architect of the last Labor fiduciary rule, former Assistant Secretary of Labor for the Employee Benefits Security Administration Phyllis Borzi, listened to the arguments on that motion this week in Texas federal court, she said at the Institute for the Fiduciary Standard's webinar. It's "hard to predict what the courts are going to do, particularly in the Fifth Circuit," Borzi said, noting that the ultimate fate of the rule could depend on the election and whether any appeals court decisions reach the Supreme Court one day. She praised Labor's staff, who "are very smart, and who work very hard and who listened to all the comments and took them to heart and who studied that Fifth Circuit decision" in the writing of the rule, she said.  

"I am willing to say publicly that the 2024 regulation is much more narrowly tailored, much better written, much more focused than what we did in 2016," Borzi said. "I will say that I was in a rehab facility in Ann Arbor, Michigan, recovering from a broken pelvis on the day that the Fifth Circuit decided that case, and I got calls in that rehab place from my former colleagues at DOL. They had already started reading and analyzing and trying to figure out how to restructure the rule in a way that would address the concerns. And I think they've done an excellent job, a far better job than we did in 2016 in targeting the problem."

The legal questions and implications to wealth management are playing out in a contentious election year that may decide the answer, according to an analysis of the Loper Bright decision's ramifications to the Labor rule by regulatory consultant Duane Thompson of the Potomac Group for the Investments & Wealth Institute's "Washington Insights" column.

"Although the litigation process challenging the DOL fiduciary rule could take a year or longer to resolve, if a Republican administration takes over in 2025 and the litigation is still pending, industry participants could see the new political leadership drop its defense of the rule, as it did in 2017, and renew previous efforts to withdraw or amend it, as also occurred," Thompson wrote. "If Democrats retain power and the administration continues to defend the rule in court, appeals are likely, including to the Supreme Court — where the conservative court, fresh from overturning Chevron, might look at any appeal as another opportunity to further clarify the boundaries of the Department's authority under the major questions doctrine."

The makeup of the next White House will "have a very big impact on how this rule is enforced and how the Department of Labor treats it," Behrens said. 

In addition to monitoring the progress of the cases, advisors and wealth management firms should "stay in touch with your outside counsel and your attorneys" and, "at the very least, take some type of inventory of your offerings" to see how Labor's rule may affect them, he said.

"The rule is targeted at one-time advice," he said. "It's those financial institutions that provide that type of service — they really need to be the ones who need to be monitoring and seeing how this is going to impact them if it remains on the books."