It’s On! Litigation Filed Challenging DOL Fiduciary Regulation

By Nevin Adams • June 02, 2016 • 0 Comments
As anticipated, a number of retirement industry trade groups and the U.S. Chamber of Commerce have taken their case against the Department of Labor’s (DOL) fiduciary regulation to the courts.

Filed on June 1 in the U.S. District Court for the Northern District of Texas, the 74-page suit claims that the consequences of the regulation “for savers, for small U.S. businesses, for financial professionals, and for the financial services firms and insurance institutions — will be extensive and severe.” And in a novel twist, the plaintiffs invoke the First Amendment.

The suit was brought by the Chamber of Commerce of the United States of America, the Financial Services Institute, Inc., the Financial Services Roundtable, the Greater Irving-Las Colinas Chamber of Commerce, the Humble Area Chamber of Commerce DBA Lake Houston Area Chamber of Commerce, the Insured Retirement Institute, the Lubbock Chamber of Commerce, the Securities Industry and Financial Markets Association, and the Texas Association of Business.

The plaintiffs argue that the fiduciary rule, the best interest contract (BIC) exemption and the other related prohibited transaction exemptions (PTEs) are “arbitrary, capricious, and violate the Administrative Procedure Act (APA) and First Amendment.” They argue that the provisions should be vacated, and that the DOL should be enjoined “from implementing or enforcing them in any manner.”

Claims and Charges

Most of the arguments presented have been made before, during and even after the final regulation was published April 7, including:

  • The fiduciary regulation would “limit consumer choice by forcing those who need retirement investment assistance to obtain it only by entering a fiduciary relationship, and bearing the accompanying costs, or to forgo it entirely.”

  • Small businesses in the United States “will be hampered in their ability to maintain retirement plans for their workers.”

  • The DOL “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,” particularly since “the SEC has more than eighty 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 DOL “regulated IRAs through the back-door,” overstepping the statutory constraints on its authority by “combining its overbroad definition of fiduciary with exemptions conditioned on submitting to requirements that the Department cannot impose directly.”

  • The DOL overstated the benefits of the regulation, “failed to consider substantial and obvious costs, and relied upon contradictory claims and assertions in justifying the Rule.”

  • The DOL knew and intended that banning all transaction-based compensation would force financial services providers to accept the terms of the BIC exemption and to agree, among other things, to be sued in class action litigation under the “vague new standards devised by the Department.”

  • The DOL “repeatedly questioned the effectiveness of disclosures to customers, but its Rule will impose billions of dollars in costs through new disclosure requirements, for which the Department claims immense benefits.”

  • The DOL “lacks affirmative authority to regulate financial services outside the context of employee benefit plans.”

Exceeding Authority

The suit claims that, lacking this “affirmative” authority, the DOL “has sought to promulgate this new regulatory regime through its exemptive authority under ERISA,” going on in plainer terms to charge that “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.”

The suit takes issue with the redefinition of a fiduciary “inconsistent with the statutory text and the ordinary and historical understanding of what constitutes a fiduciary relationship” that “bans common and long-accepted forms of compensation for financial services and insurance professionals” outside of the BIC exemption conditioned on “fiduciary standards of conduct in contracts that they must enter into with their customers, as well as a range of other restrictions and requirements” — that, in turn, “because the Department itself lacks authority to enforce these new fiduciary standards of conduct, it requires that the new contracts expose financial services firms and insurance institutions to liability in class action lawsuits.”

Claiming that the DOL intends to “subcontract to the class action bar enforcement of the new regulatory scheme,” the suit references comments made by DOL Assistant Secretary of Labor Phyllis Borzi in 2014: “Back in the day, when people wanted to make changes, they passed legislation,” but what we’ve done with the new DOL regulations is we’ve shifted from the way that social change and legal change and financial change is accomplished through congressional action to two different avenues for making changes: The main one being regulation and the second one being litigation.”

The suit also cites as an acknowledgement by the DOL that it lacked direct statutory authority over IRAs Borzi’s comments earlier this month that, “We had to be creative to try to find a way” to create enforceable rights under the rule and “that’s how we came up with the best interest contract exemption,” which “deputiz[es]” consumers to bring “state contract actions.”

‘Free’ Speech?

Perhaps the most novel argument presented in the suit is that since the fiduciary regulation “forbids certain speech unless it occurs in a context that the Department defines to be a fiduciary relationship, subject to limitations and burdens created by the Department” — and that since the BIC’s onerous provisions “unduly restrict financial institutions’ and professionals’ ability to engage in truthful, commercial speech,” both “unreasonably and unnecessarily restrict and burden the speech of financial institutions and financial professionals,” and thus violate the First Amendment.

Will plaintiffs be successful? If so, will that result be known in time to “matter”? An industry already in the process of ramping up to comply needs — and deserves — to know. Soon.