In a widely anticipated development, a coalition of business groups is suing to strike down the Department of Labor’s recent “fiduciary duty” rule, calling it “over-reaching” with an end result that “will restrict hardworking Americans' access to retirement advice and planning services."

In April, the Department of Labor finalized a new rule that creates a fiduciary duty for brokers and registered investment advisers who offer retirement advice. The rule provides exemptions that, if applied for and granted, would allow these advisers to maintain fee-based arrangements.

Plaintiffs include the U.S. Chamber of Commerce, the Financial Services Institute, the Financial Services Roundtable, the Securities Industry and the Financial Markets Association. With the likely attempt to bring the case to a favorable court, several Texas-based organizations are included in the suit, among them the Texas Association of Business.

 “The rule will shackle Main Street financial advisors with extensive new requirements and constant liability, forcing them to limit the options and guidance they provide to retirement savers,” a statement by the plaintiffs says. “This lawsuit is necessary to prevent the Labor Department from exceeding the authority that was assigned to it by Congress.”

The lawsuit asserts claims under the Administrative Procedure Act and the First Amendment.

In part, the lawsuit describes the rule as a power play that undermines the authority of the Securities and Exchange Commission. “The Dodd-Frank Act directs the SEC to evaluate whether to apply a uniform ‘best interest’ standard of care to broker-dealers (who do not owe fiduciary duties to their customers under the securities laws currently) and registered investment advisers (who do) when they provide personalized investment advice to consumers,” it says. “Plaintiffs and their members support adoption and implementation of such a uniform standard of care by the SEC. The rule the Labor Department promulgated would upend a “well-developed regulatory framework, with harmful consequences.”

“The SEC has more than 80 years’ experience regulating financial markets and services, including the provision of investment advice, and has been specifically charged by Congress with studying the propriety of adopting a uniform fiduciary standard,” the lawsuit adds. “The Department of Labor’s authority, by contrast, is more narrowly prescribed and is generally restricted to employee benefit plans. It possesses neither the expertise nor the authority to regulate financial services in a manner that properly balances the needs of retirement savers and small businesses.

“Because the Department lacks affirmative authority to regulate financial services outside the context of employee benefit plans, it has sought to promulgate this new regulatory regime through its exemptive authority under ERISA. That is, the Department seeks to convert its authority to lift regulatory burdens into a means to impose them, resulting in the most sweeping change in retirement planning since the adoption of ERISA itself. By doing so, the Department has disregarded the regulatory framework established by Congress, exceeded its authority, and assumed for itself regulatory power that is vested in the SEC in ways that will harm retirement savers.”

Without exemptive relief, the new fiduciary definition would force countless financial professionals and financial firms, as well as insurance institutions, to shift from the transaction-based compensation model to the fee-based model, the plaintiffs say, adding that “the fee-based model is not feasible or appropriate at all for certain financial investment products.” An example: an insurance agent who offers a fixed annuity does not manage the assets used to purchase the annuity.

Among the arguments made in the lawsuit the Labor Department: did not conduct an adequate cost-benefit analysis; ignored the public’s comments and those of an SEC commissioner; enacted an “impermissible departure” from the historical understanding of a fiduciary; overstepped its bounds by regulating certain insurance products (including fixed-indexed annuities) that the Dodd-Frank Act expressly left to oversight by state regulators; and unlawfully created a private right of action.

 The Department’s promulgation of the rule was arbitrary, capricious, and otherwise not in accordance with law, the plaintiffs conclude. As for the Constitutional objection, they wrote: “Financial institutions and financial professionals have a First Amendment right to engage in truthful, non-misleading speech related to their products and services, including in their communications with customers and potential customers. The rule improperly abridges this speech by prohibiting it unless it occurs in the confines of a fiduciary relationship subject to definitions, limitations, and burdens created by the Department.”

Don’t expect the current lawsuit to be the end of efforts by critics of the new rule, says Erin Sweeney, of Counsel at Miller & Chevalier. Congressional critics could use their power of the purse to “starve” it by prohibiting the Labor Department from spending money on enforcement of the regulation via the appropriations process. A new presidential administration in January could undo the rule itself or select political appointees that will not expend resources to enforce the rule.

Sweeney also suspects additional lawsuits may be in the works, noting that insurance industry lobbyists, including the American Council of Life Insurers, were not among the eight plaintiffs.

 

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