Month: March 2015

Latest Developments Regarding the Proposed Fiduciary Regulation

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By Joseph A. Garofolo

March has already delivered several noteworthy developments regarding the proposed fiduciary rule.  By way of background, the Department of Labor sent a proposed rule regarding the definition of fiduciary to the Office of Management and Budget (“OMB”) on February 23, 2015.  Although the proposed rule has not been made public yet, the Department provided a glimpse of what it might look like in frequently asked questions available on the Department’s website.  For example, the Department indicates that it is seeking “a balanced approach that . . . ensures that [investment] advisers provide advice in their client’s best interest, and also minimizes any potential disruptions to all the good advice in the market.”  Further, the Department states that the proposed rule “will not prohibit common compensation practices, such as commissions and revenue sharing[,]” and will include proposed exemptions to restrictions under ERISA and the Internal Revenue Code (the “Code”).  Review by OMB is a first step and will be followed by the notice-and-comment process under the Administrative Procedure Act.

As to the new developments, first, nine Republican members of the U.S. Senate Committee on Health, Education, Labor, and Pensions signed a March 10, 2015 letter to the OMB Director generally expressing concern that the proposed rule will be similar to the 2010 proposed rule that was withdrawn by the Department in 2011.  The letter requests that OMB consider 11 specific concerns of the Senators.  Most of the concerns revolve around perceived failures of the Department to coordinate with the Securities and Exchange Commission (“SEC”) and other agencies and the possibility that the proposed rule could increase the cost of investment-related services or reduce the availability of such services to ERISA plans and individual retirement accounts (“IRAs”).  The letter is available here.

Second, Secretary of Labor Thomas Perez was questioned about the proposed fiduciary rule during a March 17, 2015 budget hearing before the U.S. House of Representatives Committee on Appropriations Subcommittee on Labor, Health and Human Services, Education and Related Agencies.  Republican Hal Rogers, the Chairman of the Committee on Appropriations, asked Secretary Perez “how ERISA gives DOL jurisdiction over an individual’s relationship with a personal investment advisor.”  In response, Secretary Perez briefly explained the roles of the Department and the SEC and referenced a letter that he had sent the previous day responding to an inquiry from the Chairman of the House Committee on Education and the Workforce.  Secretary Perez also stated that “the law gives DOL the authority to define a fiduciary under the tax laws in the same way as the ERISA definition.”  He further indicated that he has been involved in eight or nine meetings with SEC Chairwoman Mary Jo White relating to the proposed fiduciary rule.  A video of the hearing currently is available here (the dialogue between Chairman Rogers and Secretary Perez starts at approximately 1:21:52).

The discussion during the budget hearing highlights the potential scope of the proposed fiduciary rule and the impact that it could have not only on 401(k) and other employer-sponsored plans, but also IRAs.  The 2010 proposed regulation would have amended the definition of fiduciary for purposes of ERISA and the excise tax on prohibited transactions under Code § 4975.  Code § 4975 applies to IRAs and contains a definition of fiduciary parallel to the one found in ERISA § 3(21)(A).

Finally, several sources, including PLANSPONSOR and the American Retirement Association, are reporting that on March 17, 2015, Chairwoman White stated that the SEC will “implement a uniform fiduciary duty for broker-dealers and investment advisors where the standard is to act in the best interest of the investor.”

While the extent of further interaction between the Department of Labor and the SEC and the ultimate fate of the proposed fiduciary rule remain uncertain, it appears quite likely that the discourse surrounding the proposed rule will continue to be politically charged.

Is Williston on Contracts The Sacred Text for Interpretation of ERISA Plans?

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By Joseph A. Garofolo

Earlier this year, the Supreme Court emphasized that collective bargaining agreements establishing ERISA welfare plans generally must be construed in accordance with ordinary principles of contract interpretation.  See M&G Polymers USA, LLC v. Tackett, 135 S. Ct. 926 (2015).   The Court rejected the Sixth Circuit’s inferences in favor of vesting of retiree health care benefits outlined in International Union, United Auto, Aerospace, & Agricultural Implement Workers of America v. Yard-Man, Inc., 716 F.2d 1476, 1479 (6th Cir. 1983).  Counting the concurring opinion, the Court cited Williston on Contracts no less than seven times when describing ordinary principles of contract interpretation.  See Tackett, 135 S. Ct. at 933, 935-938 (citing R. Lord, Williston on Contracts (4th ed. 2008 & 2012)).  The majority also cited Williston on Contracts in US Airways, Inc. v. McCutchen, 133 S. Ct. 1537, 1549 (2013), and Justice Scalia cited the treatise in his concurrence in Cigna Corp. v. Amara, 131 S. Ct. 1866, 1884 (2011).

ERISA practitioners familiar with the Supreme Court’s interpretive history of the phrase “other appropriate equitable relief,” as used in ERISA § 502(a)(3), will recall the Court’s frequent references to the Restatement of Trusts, Bogert & Bogert’s Law of Trusts and Trustees, and Scott & Fratcher’s Law of Trusts (now Scott & Ascher on Trusts), sometimes referred to as The Sacred Texts.  See Jacklyn Willie, Attorneys Reflect on 40 Years of ERISA’s Biggest Rulings, Bloomberg BNA Pension & Benefits Daily, Sept. 9, 2014, at 2.

In light of the Court’s recent decisions, Williston on Contracts might be viewed as The Sacred Text when it comes to benefit plan interpretation.  But this is by no means a foregone conclusion.  The Supreme Court has characterized Corbin on Contracts as a “standard current work[].”  Great-West Life Annuity Ins. Co. v. Knudson, 534 U.S. 204, 217 (2002).  Indeed, in Tackett, 135 S. Ct. at 936, the Court also cited Corbin on Contracts.  Of course, Arthur Corbin and Samuel Williston famously disagreed on a number of fundamental principles relating to contractual interpretation, such as the proper application of the parol evidence rule.  See Eric A. Posner, The Parol Evidence Rule, the Plain Meaning Rule, and the Principles of Contractual Interpretation, 146 U. Pa. L. Rev. 533, 568-69 (1998).  

Moreover, “for the last few decades the academic literature has not taken Williston’s jurisprudence all that seriously.”  Mark L. Movsesian, Rediscovering Williston, 62 Wash. & Lee L. Rev. 207, 209 (2005).  While Mark Movsesian, a contracts professor at St. John’s University School of Law, concluded in 2005—perhaps presciently in the case of the Supreme Court’s recent ERISA jurisprudence—that there had been a resurgence of interest in Williston’s work, he also explained the following:

The cite count is high, but scholars have tended to look to Williston only in passing, referencing him when they have needed a source for some black-letter proposition or some point of legal history.  In part, this indifference stems from the fact that most of Williston’s work is of a doctrinal and case-oriented style that has fallen out of vogue. . . . Over time, the conventional wisdom has lumped Williston together with the great villains of contemporary jurisprudence, the classical formalists, portraying him as a mindless reactionary obsessed with logic and conceptual abstraction.

Id. at 209-210.

Elaborating upon what some perceive to be failings of Williston’s work, Professor Movsesian pointed out that Harvard Law Professor Morton Horwitz has asserted that “Williston’s objective theory of contract acts to ‘disguise gross disparities of bargaining power under a facade of neutral and formal rules.'”  Id. at 226 (citation omitted).

Back to the realm of ERISA, in Tackett, the Supreme Court suggested that it would not be appropriate to apply ordinary contract law principles when such principles are “inconsistent with federal labor policy.”  135 S. Ct. at 933.  And, in addition to the fact that ERISA expressly states that one of its purposes is to protect the interests of participants and beneficiaries, some commentators have contended that ERISA plans are adhesion contracts.  See, e.g., John H. Langbein, Trust Law as Regulatory Law: The Unum/Provident Scandal and Judicial Review of Benefit Denials Under ERISA, 101 Nw. U. L. Rev. 1315, 1323 (2007) (“ERISA benefit plans are characteristic contracts of adhesion, offered on a take-the-plan-or-leave-the-job basis.”).

Thus, it is unclear whether all of the principles of contractual interpretation associated with Samuel Williston are consistent with the “special nature and purpose of employee benefit plans.”  Varity Corp. v. Howe, 516 U.S. 489, 497 (1997).

Because ERISA cases frequently involve disputes over benefit plan interpretation, we will likely have the opportunity to observe whether the Court will continue to rely upon Williston on Contracts to articulate ordinary principles of contract interpretation.  If this turns out to be the case, considering the fact that the treatise currently consists of 31 volumes, there is certainly plenty of material for the Court to draw from in framing the “ordinary contract principles” that must be applied to employee benefit plans.