DOL Fiduciary Rule Infringes on Advisors’ Freedom of Speech, Lawsuit Claims

In what is considered the most wide-ranging of the lawsuits brought against the Department of Labor's fiduciary rule, Judge Barbara Lynn, the chief U.S. district judge for the Northern District of Texas, heard four hours of arguments, including a constitutional one, in front of a standing room-only crowd in her court room in Dallas.

The case, Chamber of Commerce of the United States et al v. U.S. Department of Labor, consolidated three claims challenging the legality of the Labor Department's rule, and includes the Securities Industry and Financial Markets Association, the Financial Services Institute, the Financial Services Roundtable, the Insured Retirement Institute, and Texas Chamber of Commerce affiliates as plaintiffs.

Like the lawsuits challenging the rule in federal courts in the District of Columbia and Kansas, the suit in Texas is seeking to stay the rule under the Administrative Procedure Act, which governs the rule-making process for regulatory agencies.

But unlike the other cases, the U.S. Chamber of Commerce's challenge in the Dallas court claims the Labor Department's fiduciary rule breaches financial advisors' right to freedom of speech under the First Amendment of the United States Constitution.

When the suit was first filed in June of this year, the novel First Amendment claim was a surprise to many Employee Retirement Income Security Act legal specialists.

It also drew the ridicule of proponents of the rule, namely Labor Secretary Thomas Perez.

In defending the rule throughout the rulemaking process and since its finalization, Perez has often argued that investment advisors should be held to the same ethical standards of doctors and lawyers.

During an April 29th press conference, before legal challenges to the rule had been filed, Perez said industry opponents "don't have a legal leg to stand on." And in a June address before the National Press Club after the Chamber's suit was filed in Texas, Perez said the claim that the rule infringes on advisors' First Amendment freedom of speech protections was his "favorite," according to a transcript of the event.

"I have four siblings, they're all doctors," said Perez. "I called them up and said, 'If you ever get sued for malpractice, assert a First Amendment right to give crappy advice to your patient. See how far that gets you.'"

Perez reiterated his incredulity for the First Amendment claim in an August 25th press call announcing the new safe harbor for state-run retirement plans.

Judge May Disagree

The Chamber of Commerce's suit brings eight counts challenging the Labor Department's statutory authority to promulgate the rule and its adherence to the Administrative Procedure Act during the rulemaking process. The claim that the rule's Best Interest Contract Exemption burdens advisors' freedom of speech is the last on the list. But in arguments made before Judge Lynn, the plaintiffs committed considerable time to the First Amendment claim.

Of the 110 minutes the court allocated to plaintiffs' council, 45 were committed to the broader arguments under the APA, and 35 minutes were committed to the First Amendment claim. The remaining time was spent arguing the rule's alleged irreparable impact on fixed indexed annuities, according to Erin Sweeney, an attorney with Miller & Chevalier who specializes in the Employee Retirement Income Security Act.

Sweeney said the plaintiffs' First Amendment arguments were persuasive. "The APA gives incredible deference to rulemaking agencies, but with the First Amendment, there is no deference to the agencies," said Sweeney in an interview.

At several points in the hearing, Sweeney, who was in attendance, said Judge Lynn appeared to be conscious of the decision U.S. District Judge Randolph Moss arrived at in National Association for Fixed Annuities v. Perez on Nov. 4.

Moss ruled in favor of the Labor Department. NAFA did not bring a First Amendment claim.

In short, the plaintiffs in the Chamber suit argued that the rule's Best Interest Contract Exemption, which bars investment advisors to IRAs and 401(k) plans with less than $50 million in assets from giving conflicted advice, prohibits advisors' freedom of speech by limiting how they can discuss investment options not favored by the rule.

The rule's "web of distinctions among products and practices imposes an array of content discrimination," according to plaintiffs' arguments in court papers.

The plaintiffs use precedent established by the Supreme Court that says so-called commercial speech enjoys speech protections under the First Amendment.

Attorneys for the U.S. Department of Justice and the Labor Department countered that the rule does not restrict or regulate speech, but rather, it restricts misleading speech that would result in conflicted advice that is not in an investor's best interest.

Judge Lynn appeared to be skeptical of Labor Department's defense, said Sweeney. "She keyed on the question of whether any advice that is given that does not comply with the BIC Exemption is inherently misleading. That raises the question of whether speech itself is being regulated by the BIC Exemption," said Sweeney.

"She seemed to be receptive to the merit of the First Amendment argument," she added.

Attorneys for the Labor Department were dismissive of the claim, but Sweeney suggested they appeared "flatfooted" in their defense. At one point attorneys for the Labor Department suggested the First Amendment issue was not raised in the comment period before the rule was finalized.

"They didn't provide a lot of satisfying answers to Judge Lynn's questions," she said. "They didn't seem to devote a lot of resources or preparation for the argument, and that may be because they didn't expect it to be showcased during the hearing."

First Amendment Wild Card

At one point in the hearing, Lynn rhetorically raised the question as to whether a decision in her court, and an ultimate appeal, could move the case to the Supreme Court before next April 10th, the first scheduled implementation date of the rule.

Sweeney said Lynn answered her own question — "No."

She also raised the reality that if she were to rule that regulators failed procedural requirements under the APA, she would have to stay the entire rule, and not just portions of it.

But before the hearing ended, Lynn cautioned the courtroom, saying any predetermination of her thinking should not be read into her line of questions.

Nonetheless, the plaintiffs' First Amendment argument does present a wild card for the ultimate fate of the rule, said Sweeney.

"Judge Lynn gave DOL's arguments much more scrutiny throughout the hearing," she said. "The First Amendment claim could be a significant factor in her ruling. With the APA, the plaintiffs have a significant mountain to climb. The plaintiffs might have an easier time persuading the court on the First Amendment issue."

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