Fiduciary Rule’s Challengers Warn Judge of ‘Extraordinary Risk’ for Advice Industry
September 1, 2016 by C. Ryan Barber
A judge in Washington heard arguments for more than two hours Thursday on whether to block a U.S. Department of Labor rule that requires investment advisers to act in their clients’ best interests—a heightened standard designed to curb billions of dollars in fees in the retirement plans marketplace.
U.S. District Judge Randolph Moss of the District of Columbia did not immediately rule on the National Association for Fixed Annuities’ request for a preliminary injunction. With similar challenges pending in Kansas and Texas, the hearing provided the first in-court glimpse into the debate over the Labor Department regulation.
Numerous investment and consumer groups are closely following the cases, which challenge a final rule published in April. The broad new regulation, set up to combat excessive fees and conflicts of interest, expands the definition of “fiduciary” in relationships between advisers and their customers. The rule, set to take effect in part by April 2017, covers investment advice for employee benefits plans and individual retirement accounts.
The National Association for Fixed Annuities, represented by the law firm Bryan Cave, contends the Labor Department ran against the will of Congress and abandoned the 40-year-old regulatory framework for retirement advice. In requesting a preliminary injunction, the annuities group argued regulators had no authority to extend fiduciary duties to individual retirement account transactions. NAFA’s membership includes insurance companies and individual insurance agents.
Describing the rule as the “embodiment of overreach,” Bryan Cave partner Philip Bartz said the Labor Department’s new standard would effectively put certain insurance agents out of business. “It was a last-minute decision, it was clearly an afterthought. And the impact wasn’t thought through,” Bartz said in court.
“I think it’s clear that there’s irreparable injury here,” he added.
Moss directed many of his questions to a provision of the rule that allows investors to file a class action when they believe an adviser has not acted in their best interests. Bartz said the rule would make it impossible for insurance agents to comply both with the Labor Department’s standard and state regulations.
“They’re going to get their butts sued off,” Bartz said. “We’re talking about extraordinary risk and extraordinary consequences if you do this wrong.”
Bartz also criticized the Labor Department’s requirement that insurance agents’ compensation be “reasonable,” leaving the industry to speculate how to define that term. “The fact of the matter is that the Department of Labor refuses to say what unreasonable compensation is,” he said.
U.S. Department of Justice lawyers Emily Newton and Galen Thorp argued the Labor Department needed to revisit the 40-year-old regulatory framework for retirement advice because the retirement plans market has grown more complex. Demand for retirement advice has also increased, they said.
Thorp tried to assure Moss that the Labor Department based the fiduciary rule on “ample evidence.”
“The evidence across the board,” Thorp said, showed that “whenever you have a professional adviser and an inexperienced client plus a conflict of interest, it ends badly for the consumer.”
Three nonprofit public interest groups—Americans for Financial Reform, Better Markets Inc. and the Consumer Federation of America—on Wednesday backed the Labor Department’s analysis in support of the rule. The groups argued in an amicus briefthat billions of dollars in retirement savings are lost because of conflicts of interest.
The groups defended the work that went into the fiduciary rule as “one of the most thorough, thoughtful, and accommodating rulemakings in history, spanning five years, including a nearly six-month comment period and four days of public hearings.”
“If the court were to hold this extraordinary process inadequate, then future attempts by the DOL and many other agencies to adopt rules in the public interest will become easier targets for litigation, based fundamentally on nothing more than the regulated industry’s self-serving, unfounded, and ultimately irrelevant claims of harm to their bottom line,” wrote Better Markets president and chief executive Dennis Kelleher, a former litigation partner at Skadden, Arps, Slate, Meagher & Flom.
AARP Inc. also backed the Labor Department rule. The group argued in July that the retirement system’s move from defined benefit plans to IRAs and 401(k) plans has created a need for protection from conflicts of interest.
An injunction to block the rule would “perpetuate the myth that all investment advisors are already required to give retirement investors advice in their best interest,” AARP Foundation Litigation lawyers wrote in an amicus brief.
“In short,” AARP’s lawyers argued, “conflicted advice resulting in higher fees and expenses can have a huge impact on the amount of retirement income; indeed, it could cost retirement investors billions of dollars each year.”
Hearings are set in Kansas and in Texas, where the U.S. Chamber of Commerce is a lead plaintiff, in the coming months. U.S. district judges are not bound by decisions in other federal trial courts. Still, trial judges can—and have recently—issued nationwide injunctions to block regulatory initiatives.
The fiduciary rule litigation is playing out in three separate federal appellate circuits, giving rise to the potential for a divide among courts as the cases are fought beyond the trial level.