Little credence is being afforded anti-DOL rule crowd that is trying to flip the script on who is screwing whom

June 6, 2016 — 9:47 PM UTC by Lisa Shidler


Brooke’s Note: If the success of a cause can be measured by the desperation of its opponents then this attempt for some cowboy justice in Texas may be the final harbinger of success for the fiduciary movement.

Re-enacting the Alamo, the SIFMA-led fiduciary rule-haters have taken their posse to Texas in a last-stand effort to draw the DOL rule-makers into a losing position.

The case relies on logic as mystifying as it is audacious — but don’t tell that to the plaintiffs: the U.S. Chamber of Commerce, Financial Services Institute, Financial Services Roundtable, the Greater Irving-Las Colinas’ Chamber of Commerce, Insured Retirement Institute, Lake Houston Area Chamber of Commerce, Lubbock Chamber of Commerce, Securities Industry and Financial Markets Association, and Texas Association of Business.

The lawsuit, which names Department of Labor secretary Thomas E. Perez, asks for an injunction against the rule. Enforcement of most of its provisions have been pushed to 2017, but some will go into effect next year. See: A veteran of securities law killed his weekend reading all 1,000 pages of the DOL rule — and has a takeaway to share.

The lawsuit suit offers a three-pronged argument for quashing the rule:

First, that it would allow investors to file class-action lawsuits dealing with individual retirement accounts and “expose financial services firms and insurance institutions to liability in class action lawsuits.”

Next, that it will hurt retirement savers and “small businesses, and tens of thousands of businesses—including many operating in North Texas and the Dallas-Fort Worth metroplex—that provide retirement advice, products, and services.” (In what some observers term “court-shopping,” the plaintiffs filed the lawsuit in the U.S. District Court for the Northern District of Texas — a district that has been historically friendly to the financial services industry.)

Finally, it contends that the rule stretches the term “fiduciary” until it is unrecognizable. “Through its redefinition of 'fiduciary,’ the Department expands who is covered by the term in a manner that is inconsistent with the statutory text and the ordinary and historical understanding of what constitutes a fiduciary relationship,” reads the lawsuit. See: Do 401(k) assets require all fiduciary care all the time?.

Scraping bottom

Fiduciary advocates have two words for the plaintiffs: Nice try.

“This is last resort,” says Louis Harvey, president of Dalbar Inc. in Boston. “For it to be successful, the plaintiffs would need to get a ruling before the industry has implemented the new rule. This is not even remotely possible given the complexity of the issues.”

Even if they were successful in getting the rule vacated after its enactment, he says, the victory would be Pyrrhic at best.

Jason Roberts: They're saying the definition of fiduciary is unrecognizable and I think that's curious given the DOL clearly has definitional authority. Jason Roberts: They’re saying the definition
of fiduciary is unrecognizable and I
think that’s curious given the DOL
clearly has definitional authority.

“There is also no value after the rule is implemented. The financial services industry would have to explain why they choose to stop acting in the client’s best interest. That would be a PR nightmare.” See: How 10 top groups define 'fiduciary’.

Jason Roberts, ERISA attorney and CEO of Pension Resource Institute, a consultancy in Manhattan Beach, Calif., agrees. “The debate is designed to be had through comment and testimony process. By the time you get to litigation, it means you’ve already lost.”

Roberts also calls nonsense on the lawsuit’s contention that the DOL has gone too far with its definition of “fiduciary.”

“They’re saying the definition of fiduciary is unrecognizable and I think that’s curious given the DOL clearly has definitional authority.”

In April, the DOL issued a long-debated final rule that defines what it means to be a fiduciary and sets up rules pertaining to advice for individual retirement accounts and 401(k) plans. The rule requires brokers act as “fiduciaries.” See: Snakes and ladders: What to expect in the unexpectedly triumphant final DOL fiduciary rule.

'Commission’ not a dirty word

Dale Brown, president and CEO of the Financial Services Institute, one of the plaintiffs, defends the lawsuit, saying its intent is to provide a level playing field for fee-based and commission-based advice models alike, thus making retirement plans available to a wider swath of investors.

“Contrary to what supporters of the rule will claim, this legal challenge is solely about ensuring the rules governing retirement advice work for all retirement investors. This rule does not pass that test,” he said during a press conference announcing the lawsuit last week. “And the reason we are bringing this legal challenge is to protect those smaller investors who will be harmed by this rule — pushing a dignified retirement even farther out of reach.” See: Eavesdropping on FSI OneVoice: An industry under pressure, but looking for the opportunity.

The lawsuit contends that DOL’s definition of “fiduciary” would prohibit, in certain cases, advice and products in which compensation was based in a commission-based model.

“In doing so, the Department bans common and long-accepted forms of compensation for financial services and insurance professionals, such as commissions and sales loads (a mutual fund sales charge),” according to the lawsuit. “The Department is well aware that these methods of compensation are essential for firms and professionals to continue to offer many of the valued services and products they provide.” See: Why Obama and the DOL are all wet when it comes to the proposed fiduciary rule.

Name calling

To win an injunction, the plaintiffs must convince the court that such an action is necessary to “prevent irreparable harm.” Roberts says that will be a high bar to clear.

“Where the plaintiffs will struggle, I believe, is with demonstrating a likelihood of success on the merits of their claims. There is a well-established body of precedent that federal agencies are given broad discretion in developing and implementing regulations. Indeed, the Supreme Court held that courts should defer to agency interpretations of such statutes unless they are unreasonable. One of the ways to attack the reasonableness of the regulation, however, is to allege that it is 'arbitrary and capricious,’ which the complaint does repeatedly.”

But even if the court upholds the rule’s underlying premises, there’s a danger that it could dilute or delay implementation of the law by a piecemeal rolling back of certain provisions, says Roberts.

Dale Brown: We are bringing this legal challenge is to protect those smaller investors who will be harmed by this rule — pushing a dignified retirement even farther out of reach. Dale Brown: We are bringing this
legal challenge is to protect those
smaller investors who will be harmed
by this rule — pushing a
dignified retirement even farther out of

“Some of the claims are stronger than others, and the court may be inclined to send the DOL back to the drawing board on those discrete issues. I believe it would be highly unlikely that the court would throw out the entirety of the rule.” See: The DOL’s final rule contains a litany of 11th hour concessions to brokers that show Wall Street lobbyists earned their keep.

But Harvey is confident that the fate of the law will remain in the legislative and executive arenas.

“I would expect that the argument of the administration would be that Congress has the power to stop all or any part of the new rule, but has not done so. Congress is not likely to override the certain veto from Obama,” he says. “I don’t think this is going anywhere. Any changes will come from the DOL, not the courts.”

Court of last resort

After the DOL issued its final, pro-fiduciary rule after years of debate, The anti-rule groups likely felt they had no choice but to pursue legal action, says Rick Meigs, president of in Portland, Ore.

“Since the Chamber [of Commerce] and the other national groups were not able to convince the DOL to water down the rule, and having failed to convince Congress to halt it, they have now turned to the courts. I can’t comment on the legal merits of the lawsuit, but it appears to me that they are making the same arguments that got little or no traction at the DOL or in Congress.”

“Personally, I believe the rule will go forward in some form and that it will be good for Americans and the industry,” Meigs adds.

For its part, the Department of Labor issued a statement last week saying that there is widespread support of the rule but that there is a “small, vocal minority who support the status quo that enables them to put their own interests first. This lawsuit seeks to vindicate their desire to put their own interests ahead of their clients’ best interests.”

Mentioned in this article:

Pension Resource Institute, LLC
Compliance Expert
Top Executive: Jason C. Roberts

Retirement Law Group, PC
Regulatory Attorney
Top Executive: Jason C. Roberts

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