June 9, 2016
http://www.bna.com/labor-department-faces-n57982073912/
June 9 — The Department of Labor is fighting a multi-front war to defend its recently finalized fiduciary rule, which attempts to cut down on the supposedly conflicted investment advice given to retirement savers.
As of press time, five separate lawsuits now attack the rule from seemingly every angle, from the way the department approached the rule-making process to the way the rule restricts the speech of investment professionals. Congressional Republicans also tried to undo the rule by passing a resolution, which President Barack Obama vetoed on June 8.
Far from being copycats of one another, these lawsuits raise a variety of claims against the rule itself and the department's efforts to pass it. Three of the lawsuits bring free speech claims under the First Amendment and one claims that portions of the rule are unduly vague in violation of the Fifth Amendment's Due Process Clause.
A common thread running through each lawsuit is dissatisfaction with the department's decision to subject fixed indexed annuities to the new best-interest standard governing investment advice. This move came as a surprise to many in the financial industry because the DOL's proposed rule provided an exemption for these products.
Notably, three of the five lawsuits were filed in the same federal court in Dallas, a move that may be strategic.
“Judges generally tend to reflect the dominant beliefs of the people in the region where they serve, and it’s fair to say that the people in Texas are more skeptical of federal regulation these days, than the people in, say, Massachusetts,” Richard J. Pierce Jr., a law professor at George Washington University, told Bloomberg BNA June 9.
The groups leading the legal challenges against the fiduciary rule include the U.S. Chamber of Commerce, the National Association of Fixed Annuities, the American Council of Life Insurers, the Indexed Annuity Leadership Council and Kansas-based insurance companyMarket Synergy Group Inc.
Groups Suing DOL Over Fiduciary Rule
U.S. Chamber of CommerceFinancial Services Institute Inc.
Financial Services Roundtable
Greater Irving-Las Colinas Chamber of Commerce
Humble Area Chamber of Commerce
Insured Retirement Institute
Lubbock Chamber of Commerce
Securities Industry and Financial Markets Association
Texas Association of Business
National Association for Fixed Annuities
American Council of Life Insurers
National Association of Insurance and Financial Advisors
NAIFA-Texas
NAIFA-Amarillo
NAIFA-Dallas
NAIFA-Fort Worth
NAIFA-Great Southwest
NAIFA-Wichita Falls
Indexed Annuity Leadership Council
Life Insurance Co. of the Southwest
American Equity Investment Life Insurance Co.
Midland National Life Insurance Co.
North American Co. for Life and Health Insurance
Market Synergy Group Inc.
Odds Favor DOL
Pierce, who has written more than 20 books on administrative law, said that lawsuits seeking to invalidate federal regulations are successful only about 30 percent of the time.
“With any case of this type, my starting point is pretty simple: There’s about a 70 percent chance that the rule will be upheld and a 30 percent chance that it will be rejected,” Pierce said.
According to Pierce, judges weighing these lawsuits typically focus on three questions: (1) is the rule consistent with the language of the statute? (2) does the data considered in the rulemaking process support the final rule? and (3) has the agency adequately explained why the data supports its decision?
Pierce also pointed out a factor that could give the challengers in one lawsuit an additional boost.
“For half a century, the D.C. Circuit has been tougher on agencies than the other circuits,” Pierce said. “Its rate of rejecting agency rules is about 10 percent higher than the rate of rejection of agency rules in other circuits.”
Only one of the groups chose to file its lawsuit in a Washington federal court: the National Association of Fixed Annuities.
That lawsuit is already shaping up to be an unusual one: Less than a week after it was filed, an individual investment adviser unconnected with the lawsuit asked the court for permission to file a brief arguing that age and racial discrimination caused federal regulators to ignore his expert advice on these issues.
‘It's About Money.'
Andrew D.W. Hill, a registered investment adviser in Naples, Fla., characterized the lawsuits as an attempt by some segments of the financial industry to protect fat profit centers that do little to benefit individual savers.
“It's about money,” he told Bloomberg BNA June 9.
According to Hill, the department's rule will make it nearly impossible for advisers to continue selling certain variable annuities, which he said generate big profits and carry commissions as high as 7 percent. Hill said that these annuities are virtually never in clients' best interests because they offer no additional value beyond the underlying mutual funds contained in the annuity.
Hill supports the DOL rule and its effort to curb these practices.
“Obama has done a lot of things that have frustrated the heck out of me, but this may be the one thing he's gotten right,” Hill said.
Law Firms Litigating Against DOL
Gibson Dunn & Crutcher LLPBryan Cave LLP
McKenna Long & Aldridge LLP
Wilmer Cutler Pickering Hale & Dorr LLP
Thompson Coe Cousins & Irons LLP
Sidley Austin LLP
Carlton Fields Jorden Burt P.A.
Walters Bender Strohbehn & Vaughan P.C.
What's an Adviser to Do?
Greta E. Cowart, an employee benefits attorney in Winstead PC's Dallas office, said that entities subject to the DOL rule shouldn't look at these legal challenges as a reason to delay moving toward compliance in time for the April 2017 effective date.
“If a regulated entity does not make changes to become compliant and the litigation challenges do not succeed or get resolved by April 10, 2017, they may be in the position of giving up a segment of their business opportunities and potential revenues or risking being non-compliant with the resulting taxes on the prohibited transactions and the potential breach of fiduciary duty lawsuits,” Cowart told Bloomberg BNA in a June 9 e-mail.
According to Cowart, complying with the rule is likely to be a significant undertaking involving multiple steps, including: identifying the relationships subject to the rule and the compensation structures of those relationships; retraining advisers and customer service representatives; creating new documentation and record retention rules; and revising agreements and compensation structures.
“The short deadline to accomplish so much may have been intended to force some industries to change their practices in hopes that once changes were made, they would not revert to old ways if the litigation challenges do prove successful,” Cowart said.
Cowart isn't involved in any of the lawsuits.
Specific Allegations
Taken together, the lawsuits lob an impressive 28 legal claims against the DOL, the rule and the rule-making process. In addition to challenging the department's regulation of fixed income annuities, the lawsuits allege that the DOL:
- exceeded its authority under the Administrative Procedure Act by adopting an expanded definition of the word fiduciary that contradicts existing law;
- unlawfully created a private right of action that would allow individual lawsuits to proliferate without proper authorization from Congress;
- didn't provide sufficient notice of certain of its decisions and didn't adequately consider the comments it received from industry players;
- impermissibly extended fiduciary obligations under the Employee Retirement Income Security Act to individual retirement accounts;
- violated the First Amendment's free speech protections by unduly restricting the speech of investment advisers;
- violated the Due Process Clause by adopting an unduly vague regulation;
- failed to consider the rule's effects, particularly on small businesses; and
- unfairly disfavored certain retirement products without reasonable justification.
The National Association for Fixed Annuities' lawsuit was filed June 2 in the U.S. District Court for the District of Columbia by Bryan Cave LLP and McKenna Long & Aldridge LLP.
The American Council of Life Insurers' lawsuit was filed June 8 in the Northern District of Texas by Wilmer Cutler Pickering Hale and Dorr LLP and Thompson Coe Cousins & Irons LLP.
The Indexed Annuity Leadership Council's lawsuit was filed June 8 in the Northern District of Texas by Sidley Austin LLP.
Market Synergy Group Inc.'s lawsuit was filed June 8 in the U.S. District Court for the District of Kansas by Carlton Fields Jorden Burt P.A. and Walters Bender Strohbehn & Vaughan PC.
*For more information go to: www.BeverlyHillsEmploymentlaw.com
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