DOL Fiduciary Rule Is on the Docket

Editor's Note: After press time, Thrivent Financial for Lutherans issued its own challenge to the Department of Labor's fiduciary rule by filing suit in the U.S. District Court in Minnesota for the DOL's attempt to block alternative dispute resolution methods, Bloomberg reported on Sept. 30.

The industry was bracing itself at press time in mid-September for Judge Randolph Moss, U.S. district judge for the District of Columbia, to hand down the first decision in the string of lawsuits against the Department of Labor's fiduciary rule under the Employee Retirement Income Security Act, or ERISA.

Moss heard oral arguments in the Washington courtroom for nearly three hours in late August in the case brought by the National Association for Fixed Annuities. While Moss did not immediately render a decision, he promised to do so fairly quickly. At least one legal observer anticipated a ruling by the end of September.

Oral arguments in the case brought in Kansas against DOL by the insurer Market Synergy — which asked the court for a preliminary injunction of the rule — took place on Sept. 21. On Nov. 17, oral arguments will be heard from both the DOL and lawyers representing plaintiffs in the three consolidated lawsuits filed in Texas against DOL's rule.

Micah Hauptman, financial services counsel at the Consumer Federation of America, said it remains unclear whether one judge's decision could influence another in the cases. "There is reason to believe that each judge is not viewing the case before him or her in total isolation," he said, but "I assume each judge will make a decision on the case before him or her on its own merits."

As the DOL lawsuits marched ahead, House Financial Services Committee Chairman Jeb Hensarling's Financial CHOICE Act — the sweeping financial reform bill that seeks to replace the Dodd-Frank Act and kill DOL's fiduciary rule — passed out of committee in mid-September by a 30-26 vote.

During the contentious markup of the bill, Hensarling, R-Texas, repeatedly stated that his Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs (CHOICE) bill offers a "better way" to economic growth and protecting investors than Dodd-Frank.

The Act would block the Labor Department from implementing its new fiduciary rule by incorporating into the bill Rep. Ann Wagner's Retail Investor Protection Act, H.R. 1090. The bill sponsored by the Missouri Republican, which passed the House last year, would require the Securities and Exchange Commission to move first on a fiduciary rulemaking before DOL can implement its fiduciary rule.

The Court Cases

NAFA's suit in Washington, along with the one brought against DOL in Topeka, Kansas, by Market Synergy, asks the courts to stay the rule. The first compliance deadline for the DOL rule is April 2017, but the SEC isn't likely to pass its own fiduciary rule for years.

Lawyers representing NAFA told Judge Moss during oral arguments that 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.

Philip Bartz, a partner at Bryan Cave and a former U.S. Justice Department lawyer representing NAFA, said during his arguments that DOL's rule embodies "overreach" to "do things that Congress never intended" and that it's "at odds" with state insurance law.

Bartz further maintained that DOL's "new" fiduciary definition is "overbroad" and that DOL "threw" fixed indexed annuities into the fiduciary rule's best interest contract exemption "at the last minute."

The rule would cause "extraordinary" harm to the $50 billion industry, Bartz argued, noting that 60% of fixed indexed annuity sales are made through individual insurance agents.

Bartz told the judge that the fixed indexed annuity industry must "change its entire distribution model in 10 months. It's clear there's irreparable harm here." He suggested the industry needed at least another 10 months to comply after the April 2017 effective date.

Bartz also argued that ERISA would now preempt state law under the rule and that the rule improperly created a private right of action that could set up class-action lawsuits against insurance companies and agents. "They are going to have their butts sued off," Bartz told the judge.

A former lawyer for the DOL who was observing the hearing, Erin Sweeney, said DOL disagreed with Bartz's contention, saying that "the applicable cause of action is breach of contract, which already exists under state law."

Sweeney, now counsel at Miller & Chevalier, said that under ERISA, a fiduciary investment advisor is defined as one who "renders investment advice for a fee or other compensation."

"NAFA contended the DOL exceeded its authority because neither the statute nor its legislative history indicates that Congress meant to conflate 'advice' with 'sales'," said Sweeney.

NAFA argued in its brief that as "has been recognized forever until now, the investor who buys the annuity is paying for a product, not investment advice, and the salesperson is not a fiduciary," Miller added.

Sweeney believes the likely outcome is a quick decision by Moss denying NAFA's request for an injunction.

"Although the FIA providers have the strongest irreparable harm argument of all providers impacted by the fiduciary rule, Judge Moss' questioning in the grueling three-hour-long hearing suggested that he is likely to deny the injunction and uphold the fiduciary rule on the grounds that NAFA was unable to make the required irreparable harm showing," she said.

Labor's — and the Financial Planning Coalition's — POV

In addressing the lawsuits currently pending in Texas, Kansas and Washington against DOL's fiduciary rule, Labor Secretary Thomas Perez said on a call with reporters a day before the NAFA hearing (in which he announced a final rule on state-run retirement plans), that "the status quo has worked well" for these groups that are suing. "Read the lawsuits; the claim that's most remarkable is that they have a First Amendment right to give conflicted advice to people. I'd love to see that rule applied to doctors and lawyers."

The federal judge overseeing the case in Texas against the DOL's fiduciary rule denied in late August 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 comprises the Financial Planning Association, the CFP Board of Standards and NAPFA, the National Association of Personal Financial Advisors. The "coalition's brief does not repeat arguments made by either party," Lynn said.

The nine groups in the Texas case — which includes SIFMA, the Financial Services Institute and the U.S. Chamber of Commerce — are represented by former DOL solicitor Eugene Scalia, who's now a partner in Gibson, Dunn & Crutcher's Washington office and a son of the late Supreme Court Justice Antonin Scalia.

In its 22-page brief, the coalition argues that the 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."

Instead, the coalition's brief argues that "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."

Further, the coalition said, "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."

One long-time observer of the fiduciary standard process, Ron Rhoades, said he thinks none of the three lawsuits will succeed completely. At the FPA National Conference in mid-September, Rhoades, an attorney who leads the financial planning program at Western Kentucky University, said that most of DOL's rule, "maybe 99%," would be upheld by the courts.

— Read Nationwide Says DOL Rule Behind Jefferson National Deal on ThinkAdvisor.