Plaintiffs Challenge DOL’s ‘Regulatory Alchemy’

By Nevin Adams • July 26, 2016 • 0 Comments
The plaintiffs in the first lawsuit filed challenging the Department of Labor (DOL’s) fiduciary regulation take an aggressive stance in their motion for summary judgment.

The 52-page filing starts (once the table of contents and table of authorities are dispensed with) by calling out the DOL for its attempt “to impose the most significant changes in the financial services and insurance industries in decades.” The filing goes on to detail a litany of resulting ills: “widely-accepted methods of compensation are being prohibited, entirely new standards of conduct are being established, relationships among financial representatives and their customers and firms are being reconfigured, distinctions between salespeople and fiduciary advisers are being erased, and billions of dollars in costs are being imposed.”

All in all, the plaintiffs say the fiduciary regulation amounts to “a radical transformation of the regulatory framework developed over decades by Congress, the SEC, FINRA, and state legislatures and insurance departments.”

The plaintiffs — including 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 — go on to express a level of incredulity that “these sweeping changes are being instituted not by Congress or even by the nation’s principal financial regulatory agency, the U.S. Securities and Exchange Commission (“SEC”), but by the U.S. Department of Labor (“DOL,” or “the Department”)”… and moreover that these changes are “being instituted primarily through the market for IRAs, even though DOL has no authority to engage in regulation or enforcement with respect to IRAs.”

‘Regulatory Alchemy’

The filing goes on to expand on the “regulatory alchemy” through which it says the DOL has managed to achieve this result: adopting what it termed “an overbroad interpretation of who is a fiduciary under ERISA” that “makes virtually every person who sells a retirement-related financial product a ‘fiduciary,’” contrary to long-established law and practice. Secondly, it claims that the DOL may have “provided limited relief from the prohibitions resulting from this overbroad ‘fiduciary’ interpretation, but only if financial firms ‘agree’ to subject themselves to new standards and class action lawsuits that the Department itself has no authority to impose.”

In sum, the motion for summary judgement alleges that the DOL “exploited its limited interpretive authority to impose unworkable restrictions that necessitate exemptions, and then exploited its authority to grant exemptions by conditioning them on ‘agreement’ to an entirely new regulatory framework that the Department has no power to construct.” And then, the plaintiffs allege “precisely because the Department lacks enforcement authority in this area, it has delegated enforcement to private and class action litigation.”

Issues With Assumptions

The filing claims that the DOL “improperly used performance data on certain unrepresentative funds to draw conclusions about the entire mutual fund market,” and then compounded this error by relying on data for a period (1993-2009) that it said was “a cherry-picked sample encompassing the entire global financial crisis and nearly none of the recovery,” and then “basing its underperformance estimate not on actual holding periods, or even over a full market cycle, but rather on the single year in which funds were purchased.”

The filing claims that the benefits the DOL attributed to the new regulation were derived by manipulating the “law of large numbers” — spreading “small marginal benefits across the trillions of dollars in retirement savings.” As for the costs, the filing claims that the DOL “downplayed and outright ignored the effects its action would have across millions of retirement accounts, focusing on firms’ direct compliance costs to the exclusion of virtually all other direct and indirect consequences.”

As for those other consequences, the filing cited:

  • The costs of the class action lawsuits that will proliferate under the BIC exemption, costs that will be borne by the defendants in those actions and by consumers who pay higher prices.

  • The costs to individuals “whom the Rule will deprive of assistance in retirement saving.”

  • The costs due to the loss of advice caused by the rule during a market correction (citing a study that said it could cost savers as much as $80 billion in a single major stock market correction).

The filing also claims that the DOL “barely acknowledged the Rules’ impact on annuities, even though the costs imposed on those products will be immense.”

In closing, the plaintiffs ask that their motion for summary judgment be granted, and that “the entire Rule, BIC exemption, and other related exemptions be declared unlawful, set aside, and enjoined from enforcement, implementation, and being given effect in any manner.”
  • District Judge Barbara M.G. Lynn agreed last month to let three lawsuits filed in the Northern District of Texas to be consolidated. Oral arguments in that case have been set for Nov. 17.