A federal appeals court on Thursday refused to block Obama administration regulations that were adopted to minimize conflicts of interest in the retirement-investment industry, a significant setback for financial planners, insurance agents and other advisors who said the rule will disrupt the marketplace.
The National Association for Fixed Annuities in November urged the Washington court to freeze for at least 10 months the April 10, 2017 start date of the new rule, which requires financial professionals who give retirement advice to put the best interest of their customers before commissions or fees. The U.S. Labor Department in April adopted the new regulations, a project more than six years in the making. Rules governing retirement investment advice had remained unchanged for decades.
The annuities association, which advocates for financial advisors, brokers and insurance agents, earlier told the U.S. Court of Appeals for the D.C. Circuit that its members "will be forced to accelerate irreversible, costly, and industry-altering actions in the weeks ahead to restructure their entire distribution system, which has been in place for decades." The group on Friday said the Labor Department engaged in "far-reaching rulemaking, well outside its area of expertise."
In the order Thursday, D.C. Circuit judges Karen LeCraft Henderson, David Tatel and Sri Srinivasan said the annuities association "has not satisfied the stringent requirements for an injunction pending appeal."
The annuities group was represented by the law firm Bryan Cave. The association could ask the full appeals court to reconsider, or take the dispute to the U.S. Supreme Court.
The fiduciary rule requires firms and advisors "to make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer." Investment advisors must charge what regulators call "reasonable compensation" and firms cannot make any misrepresentations about recommended investments. The regulations expanded the scope of "fiduciary" responsibilities in the retirement investment market.
"Together, the rule and exemptions impose basic standards of professional conduct that are intended to address an annual loss of billions of dollars to ordinary retirement investors as a result of conflicted advice," the DOL said in rolling out the regulations.
The Justice Department on Dec. 6 urged the D.C. Circuit to "not take the extraordinary step of enjoining lawful regulations issued after six years of public comment and consideration, whose continued operation is essential to the nation's retirement security."
The department described as "speculative" the contention that the new regulations will cause "irreparable" harm to members of the annuities group.
"Any economic injuries plaintiff's members might sustain are outweighed by the harm to retirement investors whose savings are threatened by conflicted advice," Michael Shih, a Justice Department lawyer, wrote in court papers.
Other fiduciary suits pending
Lawsuits challenging the fiduciary rule are pending in Texas, Kansas and Minnesota federal district courts. The U.S. Chamber of Commerce is a plaintiff in consolidated cases in Texas. A judge in Dallas heard argument on Nov. 17.
A Kansas judge last month refused to enjoin the new rule, rejecting a challenge from the insurer Market Synergy Group Inc. The ruling was the second win for the Labor Department in defending the regulations.
U.S. District Judge Randolph Moss on Nov. 4, presiding in the National Association for Fixed Annuities case, was the first judge to reject a challenge to the new rules. Moss both denied a preliminary injunction request and also ruled on the merits of the regulations. He later refused to stay his decision pending the outcome of the annuities group's appeal in the D.C. Circuit.
