In Latest Salvo, Lawsuits Seek to Overturn Fiduciary Rule

Trade groups claim the Department of Labor exceeded its regulatory authority

By Stephen Miller, CEBS Jun 8, 2016
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A regulation intended to protect retirement plan participants from receiving conflicted investment advice is under assault from financial services firms and trade groups that view the rule as a threat to their business model.

In the latest battle against the U.S. Department of Labor’s (DOL’s) final rule on conflicts of interest in retirement advice issued in April, business groups on June 1 filed a lawsuit in federal district court seeking to have the regulation struck down, claiming that the DOL exceeded its regulatory authority granted by Congress.

Both the U.S. House, in April, and the Senate, in May, passed legislation to repeal the fiduciary rule, which the Obama then vetoed on June 8.

As SHRM Online previously reported, the rule applies the fiduciary standard under the Employee Retirement Income Security Act (ERISA) to retirement plan investment advisors, requiring that investment advice provided to plan sponsors and participants be in the recipients’ “best interest” and that advisors disclose any potential conflicts of interest. Under the rule, sponsors of 401(k) plans would become responsible for ensuring that any advice they received, or allowed participants to receive, was provided by investment advisors who were adhering to ERISA’s fiduciary standard—putting plan sponsors at a higher risk of facing participant lawsuits if they fail to do so.

Plan sponsors should review and, as needed, revise their contractual agreements with investment advisors, They should also keep in mind other oversight responsiblities under the rule, such as a requirement to monitor the asset allocation models that investment advisors provide to plan participants..

The DOL adopted a phased implementation approach to the rule, with a transition period from an April 10, 2017 through Jan. 1, 2018, when all new systems and procedures must be in place.

After the rule was issued, many financial services firms said they would no longer be able to provide investment advice to retirement plan sponsors and participants as part of bundled plan services and would, instead, be forced to charge a separate flat fee for advice.

Going to Court

The new lawsuit was filed in the district court for the northern district of Texas by eight industry and trade groups, including the U.S. Chamber of Commerce. In a joint statement, the association’s chief executive officers said that the rule “creates sweeping changes to existing regulations that will make saving for retirement more difficult for the very same hardworking American families and individuals it claims to protect. … Instead of helping savers plan for retirement, the new rule will unfortunately restrict their access to affordable retirement advice and limit their options for saving.”

Regarding plan sponsors, “Advisors servicing small business plans will similarly be left with no choice but to limit or stop servicing the retirement plans offered by those job-creators, significantly reducing the retirement savings options available to their millions of employees,” the CEOs said.

Labor Secretary Thomas Perez responded, in his own statement, that “Today, a handful of industry groups and lobbyists are suing for the right to put their own financial self-interests ahead of the best interests of their customers. Conflicted advice is eroding the savings of working Americans to the tune of $17 billion each year.”

Perez added, “The department’s conflict of interest rule is built upon solid statutory and legal foundations, and we will defend it vigorously.”

Legal Arguments

The plaintiffs “most definitely chose Texas because they thought it would be a friendly venue,” said Erin Sweeney, of counsel at Miller & Chevalier in Washington, D.C. In particular, they chose the northern district of Texas where, last year, the court issued a preliminary injunction against the Department of Labor regarding a Family and Medical Leave Act regulation.

But the venue, it turns out, may not be quite as sympathetic as the plaintiffs had hoped. On June 6, “Judge Joe Fish, a Reagan appointee slated to hear the case, recused himself, giving no explanation why. Chief District Judge Barbara Lynn, a Clinton appointee will now hear the case,” Politico reported.

Nevertheless, “The lawsuit makes some compelling arguments, and points out many of the issues with the rule that those subject to it have been speaking about since its proposal,” said Brendan McGarry, an attorney at Kaufman Dolowich & Voluck in Chicago. In addition to alleging that the DOL lacks the authority to enact the rule, he noted, the suit claims that the rule violates the Administrative Procedures Act and that:

• The Securities and Exchange Commission (SEC) should be the agency to police investment advisors.

• The rule will be too costly for those subject to its requirements.

• The DOL rushed through the rule evaluation and approval process without addressing many of these issues raised by affected parties.

Among the more interesting arguments, Sweeney agreed, are the claims that the IRS, not the Department of Labor, has jurisdiction over individual retirement accounts, and that the SEC has jurisdiction over advisors and the duty to determine what “best interest” means.

“I think it’s a strong argument,” said Sweeney. “Whether it prevails, I don’t know.”

The lawsuit also “alleges a novel theory of recovery” involving the rule’s best interest contract (BIC) exemption, McGarry said, by making a First Amendment argument that the BIC exemption improperly abridges financial advisors’ right to engage in truthful, non-misleading speech related to their products and services by prohibiting it outside of a fiduciary relationship.

“I think the First Amendment argument is an interesting one and a little bit surprising in this kind of case,” Sweeney concurred.

Additional Lawsuits

Other trade groups will file separate litigation in other jurisdictions to overturn the rule, Sweeney said, “requiring the Department of Labor to fight a multipronged battle on multiple fronts.”

And indeed, on June 2 a second lawsuit targeting the fiduciary rule was filed, this time in the U.S. district court for the District of Columbia by the National Association for Fixed Annuities. This action “seeks to ‘challenge and vacate’ the fiduciary rule, with an arguably narrower focus than the lawsuit filed the day before, but making many of the same arguments,” said Nevin E. Adams, chief of communications for the American Retirement Association in Arlington, Va.

Then, on June 8, a third legal challenge was filed, again in the district court for the Northen District of Texas, by trade groups representing insurance providers, including the American Council of Life Insurers and the National Association of Insurance and Financial Advisor.

Multiple lawsuits could eventually lead to a split among the circuits, ultimately taking the challenge up to the U.S. Supreme Court, where the selection of a new justice to replace the late Antonin Scalia could prove decisive.

Next Steps

Lawsuits are “only one approach parties can take to halt the fiduciary rule,” Sweeney said. Other possibilities, which we may yet see, include:

• Congress may use the appropriations process to deny the DOL funds to enforce the regulation.

• A new administration may undo the rule itself or select political appointees that will not expend resources to enforce the rule.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

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