The U.S. Justice Department is urging a Washington federal judge to reject a challenge to a sweeping new rule that requires investment advisors to work in their clients' best interests — a heightened standard aimed at protecting retirement savers from billions of dollars in fees.
The National Association for Fixed Annuities, represented by a team from Bryan Cave, sued the U.S. Labor Department in June. The complaint alleges that the DOL strayed outside its authority in abandoning a 40-year-old regulatory framework for retirement advice — the Employee Retirement Income Security Act.
DOJ said in its papers Friday that, as the market for retirement investment advice has evolved in the last four decades, it has become rife with conflicts of interest costing clients billions of dollars.
See also: Final DOL fiduciary rule issued
“Based on the extensive public comments and evidence garnered during that process, the Department determined that such conflicts of interest are widespread and could cost investors in individual retirement accounts (in one segment of the market alone) between $95 billion and $189 billion over the next 10 years,” Justice Department lawyers wrote in their latest court papers.
“Until now, investment advisors have been able to operate under financial conflicts and retirement investors have been paying the price of their tainted advice. This is the problem the Rule and exemptions seek to ameliorate, and NAFA has not shown that it is entitled to enjoin the solution DOL crafted to do so,” the Justice Department added. “Instead, NAFA asks for relief that would prolong and sustain the ongoing harm to retirement investors.”
NAFA is required to respond to the government by July 22. A hearing in NAFA’s case is scheduled for Aug. 25. The lawsuit seeks a preliminary injunction to stay the rule, which is currently scheduled to go into effect in April 2017.
NAFA’s lawsuit alleges the DOL rule is invalid on grounds that the agency exceeded its authority to regulate IRAs and that it improperly categorizes insurance agents as fiduciaries.
The NAFA case is one of several that financial industry groups and business advocates brought against the rule. Other cases included actions in Texas and Kansas federal district courts.
The Consumer Federation of America, along with Better Markets and Americans for Financial Reform, is preparing to file an amicus brief later this week in support of the Labor Department rule.
“The DOL’s brief shows in detail why NAFA’s claims have no merit and why the court should deny NAFA’s motion for a preliminary injunction,” said Micah Hauptman, financial services counsel with the Consumer Federation. “Simply put, NAFA hasn’t met any of the requirements it would need to meet in order to stop the rule from going into effect. Granting a preliminary injunction is an extraordinary remedy, and NAFA hasn’t come close to proving such a remedy is warranted.”
Hauptman added that the “harm that continues to befall retirement investors as a result of fixed indexed annuities and other products being improperly marketed and sold to retirement investors is immense.”
While NAFA and others in the industry “perpetually claim that they serve their clients’ best interests, even NAFA concedes it is currently ‘impossible’ for the annuity industry to create an oversight mechanism that ensures investment advice is in retirement savers’ best interest. This shows the disconnect between firms’ marketing and advertising slogans and the reality of the matter.”
First proposed in 2010, the fiduciary rule was tabled after drawing more than 300 comment letters. The financial industry continued to lobby against the rule as the Labor Department pursued it anew, anticipating a legal challenge.
The Labor Department initially planned on having the fiduciary rule’s heightened standards take effect in eight months. But, in response to questions about the feasibility of complying with the requirements in time, the department pushed back the effective date by four months, to April 2017.