Texas Judge Denies All but 2 Briefs in DOL Fiduciary Hearing

The federal judge overseeing the case in Texas against the Department of Labor's fiduciary rule on Wednesday denied considering all but two of the eight amicus briefs filed in the court, allowing only the briefs filed by the Financial Planning Coalition and the American Association for Justice.

In rendering her decision, District Judge Barbara M.G. Lynn stated that the Coalition's motion should be granted because its proposed brief "provides a unique perspective" as the only filing party "representative of financial professionals in the United States already operating under a fiduciary standard."

The Coalition is comprised of the Financial Planning Association, the Certified Financial Planner Board of Standards and the National Association of Personal Financial Advisors. The "Coalition's brief does not repeat arguments made by either party," Lynn said.

The AAJ motion should be granted, Lynn said, because AAJ's brief "focuses on a narrow legal issue related to the Federal Arbitration Act" and also "does not repeat arguments made by other parties."

Lynn has set a Nov. 17 date to hear oral arguments from both sides in the case brought in Texas by nine groups, which includes the Securities Industry and Financial Markets Association, the Financial Services Institute and the U.S. Chamber of Commerce.

The groups are represented by former DOL solicitor Eugene Scalia, who's now a partner in Gibson, Dunn & Crutcher's Washington office and the son of deceased Supreme Court Justice Antonin Scalia.

In its 22-page brief, the Coalition argues that plaintiffs' claim that DOL's fiduciary rule "will force financial professionals exclusively to use fee-based compensation models that will close off middle-income investors from obtaining professional financial guidance" is "doubly wrong."

First, "commission-based compensation will survive, and financial professionals will continue to serve middle-income investors using all types of existing compensation models and other innovative methods," the Coalition states.

Second, stated the Coalition: "the court need not wonder about the accuracy of plaintiffs' predictions, for we already know what happens when financial professionals operate under a fiduciary standard of conduct: They continue providing financial advice to U.S. investors of all income levels, but now do so in those investors' best interests."

The Coalition also argued that "the experiences of its professionals and their clients show that a broadly applicable fiduciary standard represents a win-win for both industry and the public," and that "the current regulatory framework … fails to align advisors' interests with investors' by leaving open significant loopholes that allow for the sale of a financial product that may not be in the best interests of the investor."

DOL, via its fiduciary rule, has "created a regulatory framework that both protects consumers and gives financial advisors the flexibility to provide much-needed financial advice consistent with a wide range of business models," the Coalition said. "Plaintiffs cannot credibly insist that they support a 'best interest' standard while challenging a reasonable implementation of that very standard."

Julie Braman Kane, AAJ's president, told ThinkAdvisor in a Wednesday email message that AAJ's brief "makes clear that the Federal Arbitration Act should not stand in the way of the Department of Labor's ability to regulate forced arbitration to protect investors." The FAA, Braman Kane continued, "does not grant financial advisors a right to force arbitration on investors in all circumstances. Instead, the Supreme Court has made clear that federal agencies, acting under the authority granted to them by Congress, can regulate arbitration procedures to protect statutory rights. When it comes to protections guaranteed by Congress, arbitration is not supposed to be a get-out-of-jail-free card."

The first oral arguments in the string of lawsuits filed against DOL's fiduciary rule were heard on Aug. 25 by Judge Randolph Moss, U.S. District judge for the District of Columbia, in the case brought by the National Association for Fixed Annuities.

NAFA lawyers told Moss that individual insurance agents would be forced to become registered investment advisors under DOL's fiduciary rule and that the current distribution system for fixed indexed annuities would have to be reworked.

Judge Moss didn't immediately render a decision, but Erin Sweeney, counsel at Miller & Chevalier, who has also served as senior benefit law specialist at DOL, predicted that Moss would render a quick decision — within the next 30 days — denying NAFA's request for a preliminary injunction.

The insurer Market Synergy, which has also filed a preliminary injunction against DOL's rule, will on Sept. 21 go before Judge Daniel D. Crabtree in the District of Kansas, a venue that Sweeney said is "historically a more hostile" one for DOL.

"If Judge Moss denies the injunction and Judge Crabtree grants an injunction, expect the battle to move quickly to the circuit courts, and a likely march to the Supreme Court," Sweeney said.

— Check out Insurers to 'Have Their Butts Sued Off' Under DOL Fiduciary Rule: NAFA Lawyer on ThinkAdvisor.

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