Insights from the experts in investment fiduciary responsibility.

Fiduciary Links: DC Court Makeover May Bode Well for Fiduciary Rules in 2014

Posted by Duane Thompson on December 30, 2013

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>>>>Lost in the shuffle earlier this month when Senate Democrats employed the so-called ‘nuclear option’ to eliminate filibusters was a significant political ‘makeover’ of the U.S. Court of Appeals for the District of Columbia Circuit. With Republicans no longer able to block nominations for the three vacant seats there, the Obama Administration has increased the number of Democrat-appointed judges from four to six, and will likely add a seventh early next year, bringing the 11-member court to full strength.

At the same time, the DC Circuit’s new makeup may reduce chances that future SEC and DoL rules will be thrown out based on flawed economic studies.

Often called the second highest court in the nation, the DC Circuit typically reviews legal challenges to new federal regulations and serves as the main recruiting bench for Supreme Court nominees. The DC Circuit also has been pivotal in recent years, throwing out SEC rules based on faulty cost-benefits analyses. Cases are typically heard by a three-judge panel randomly selected; rarely are cases heard en banc, meaning by the entire court. Just last week the American Bankers Association sued the Federal Reserve and other agencies over the controversial Volcker Rule restricting principal transactions.

The most recent DC Circuit opinion against SEC rulemakings came in July 2011 when a three-judge panel consisting of three Republican-appointed judges threw out the agency’s proxy access rule. In essence, they agreed with the Business Roundtable and U.S. Chamber of Commerce – and the SEC’s Republican commissioners who voted against the rule – that the SEC failed to adequately consider the rule’s impact on capital formation

Some observers consider Business Roundtable a watershed decision that slowed down not only a potential SEC rule imposing a fiduciary standard on stockbrokers, but a whole host of federal agency rules mandated under Dodd-Frank reform. Additionally, the Department of Labor’s plans to expand its own fiduciary rule under ERISA to other service providers is also expected to undergo extensive economic analysis.  If adopted, both rules are expected to face legal challenges over cost-benefits data.

The other two SEC rules rejected by the DC Circuit involved regulation of equity-indexed annuities and increasing the number of independent mutual fund directors. The three-judge panels did not disagree with the SEC’s legal authority in shaping the rules, but rather held that the agency acted in an arbitrary and capricious manner by failing to undertake appropriate economic analyses. In all three cases, six of the nine votes against the SEC rules came from Republican-appointed judges.

With the DC Circuit expected to be at full-strength soon, the odds of having more Democrats hearing administrative law challenges is higher than it has ever been in recent years. Of course, this does not mean a liberal-leaning Court will automatically support agency rules; however, it may increase the chances that the Circuit will agree with the economic analyses. At the SEC, at least, only the Republican commissioners complained about the economic studies. Federal judges, no matter their political stripe, are obligated to look at statutory construction of the law in administrative law cases and whether the agencies correctly interpreted legislative guidance, including the cost of new regulation.

One veteran attorney who practices before the DC Circuit discounted the new makeup of the Court having a significant impact on new SEC rules.

“I think of judges as human beings,” he told this blog. “Some are better at separating their politics from decisions than others. But the vast majority of them try.”

Still, it’s hard to ignore the partisan effect of new judicial appointments on federal regulation; otherwise the party out of power would have little reason to place holds on their nominations. Both parties have done so for years, the most flagrant example of partisanship being President Franklin Roosevelt’s highly controversial attempt in 1937 to pack the Supreme Court with six additional Justices.

There is one other wild card to consider in projecting the political impact of new judiciary appointments on the DC Circuit. Although the number of active judges is nearing full strength for the first time in years, there are an additional six senior judges to consider in the mix. While technically in semi-retirement, Republican senior judges on the DC Circuit outnumber the sole Democrat five to one. Due to the shortage of active judges until recently, it wasn’t uncommon for senor judges to be called up to hear cases, giving Republicans a decided edge in that category.

Still, the future looks to be a bit brighter for the SEC and DoL if their economic studies are challenged in court. No doubt they hope that the new DC Circuit will treat them better in the New Year than it has in the past.

Now on to the rest of week’s best links:

News and columns from the leading trade, consumer, and mainstream media:

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