As an already embattled Department of Labor continues to craft a major revision to the fiduciary standard that governs the sale of retirement products in accounts covered by ERISA, some lawmakers on both sides of the aisle are trying to prevent the imposition of federal regulation that they feel does more harm than good.

The Department of Labor’s Employment Benefits Security Administration (EBSA) has been under fire from the industry since last October, when it proposed Title 29, ?2510.3-21, Definition of “Fiduciary,” which would regard the advice given by retirement advisers and broker-dealers as having the same fiduciary responsibility as other investment advice. It would be the first major revision of the fiduciary standard in the sale of investment products since ERISA was enacted in 1974.

For example, at a recent House hearing, Ken Bentsen, executive vice president for public policy and advocacy for SIFMA–the Securities Industry Financial Markets Association–said that the only reason EBSA wants to change the rule is “in order to make it easier for the DOL to sue service providers.”

In another comment at the hearing, Kent Mason, a lawyer at Davis & Harman, LLP, Washington, D.C., noted the rule’s impact on small companies, such as insurance agencies, for whom the sale of retirement products is a core component of their business.

He argued that the DOL “is unable to estimate the number of small service providers that would be affected by the proposal.”

Moreover, he said, the DOL also “is unable to estimate the increased business costs small entities would incur if they were determined to be fiduciaries under the proposal.”

The momentum in opposition has grown in recent weeks as members of Congress–both Republican and Democrat–have joined the call for having the rule withdrawn and rewritten.

Moreover, a recent court decision has emboldened the industry to make its point even louder that the rule should be withdrawn.

On July 22nd, a decision by a panel of the U.S. Court of Appeals for the D.C. Circuit struck down a Securities and Exchange Commission rule granting outside investors proxy access rights.

The decision, by Judge Douglas Ginsburg, said that the agency had failed to consider the economic impact of the rule.

“We … hold the Commission acted arbitrarily and capriciously for having failed once again–as it did most recently in American Equity Investment Life Insurance Company v. SEC, and before that in Chamber of Commerce, adequately to assess the economic effects of a new rule,” the court said.

“Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters,” the court said.

Unlike the Securities and Exchange Commission, which has in the past ventured into areas where angels fear to tread, the DOL is quietly slowing the pace.

In comments two days before the decision came out, on July 20, Phyllis Borzi, EBSA administrator, said a final regulation will likely emerge in 2012 as the agency prepares a more detailed economic analysis and continues to review comments to address industry concerns that the rule will be too costly to implement and enforce.

At a recent House hearing, Borzi defended the decision to propose the new regulation. She said the old one was “outdated,” noting that, “too frequently [it] allows advisers to avoid responsibility for ill-considered recommendations and those involving financial conflicts of interest and self-dealing.”

Moreover, Borzi said that current business practices have focused on building a trust relationship with the client. Under the current rule, however, advisers are not fiduciaries if they claim that they did not understand that their advice would serve as a primary basis for the investment decision. Likewise, an adviser is not a fiduciary if the advice was given just once instead of on a regular basis.

At the House hearing, Rep. Phil Roe, R-Tenn., chairman of the Subcommittee on Health, Employment, Labor and Pensions of the House Committee on Education and the Workforce, said that, “While we support looking at ways to enhance this important definition, the current proposal is an ill-conceived expansion of the fiduciary standard.”

He added that the current proposal would undermine efforts by employers and service providers to educate workers on the importance of responsible retirement planning. What is worse, the proposal may deny investment opportunities and drive up costs for the individuals it is intended to protect.

“Remarkably,” Roe said, “the department failed to examine all of the potential costs of its proposal.”

But, Borzi defended the proposed regulation, noting that EBSA had received many public comments on the fiduciary proposal, and had itself flagged many of the proposal’s most contentious issues.

“Nobody has suggested to us an alternative structure from the structure we’ve proposed” in EBSA’s fiduciary rule, Borzi said. “They’ve had criticisms and comments and they’ve said, quite accurately–and because we knew we had to do it–to focus more on the cost of the rule.” But Borzi also noted that she was not convinced that the public comments have suggested such a fundamental alternative that EBSA needs to repropose the rule.

In his testimony, Bentsen said that, “However well intentioned, we believe the DOL’s proposed regulation has far broader impact than the problems it seeks to address.”

He said the proposed rule would reverse 35 years of case law, enforcement policy and the understanding of plans and plan service providers–as well as the manner in which products and services are provided to plans, plan participants and IRA account holders, without any legislative direction to move from the DOL’s contemporaneous understanding of the statute.

“That seems to us to be an inadequate basis for proposing such a dramatic change,” Bentsen said. “Of course, this enforcement rationale cannot apply to IRAs, over which the Department has no enforcement authority,” Bentsen said.

Mason, of Davis & Harman, also said that that EBSA did not perform any cost analysis with respect to the effect of the proposed regulation on IRAs.

He said that in the preamble to the proposed regulation, EBSA “repeatedly stated that it did not know the effect of the proposed regulation on the market.

“The Department’s estimates of the effects of this proposed rule are subject to uncertainty. It is possible that this rule could have a large market impact,” Mason said.

“For example, EBSA “is uncertain regarding whether, and to what extent, service provider costs would increase. The Department is also uncertain whether the service provider market will shrink because some service providers would view the increased costs and liability exposure associated with ERISA fiduciary status as outweighing the benefit of continuing to service the ERISA plan market.”

In other testimony at the hearing, Rep. Rush Holt, D-N.J., said EBSA had repeatedly failed to provide data to back up allegations that advisor conflicts were causing problems for consumers.

“What is the cost of this perceived problem?” Holt asked. “We must–you must, I think–characterize, describe and quantify the problem that you’re trying to solve.”

“It seems to be easy for Borzi to imagine that people will be misled by conflicted advice, but she has not supported that view,” Holt said. “For years, the effort to reduce conflicts of interest has seemed to be more about restraining investment corporations than about empowering the plan participants.”

In comments at a retirement seminar sponsored by the Financial Services Roundtable several days later, Sen. Kay Hagan, D-N.C., said that her office plans to meet with both Borzi and Secretary of Labor Hilda Solis to discuss the fiduciary proposal.

“You can’t have two [different fiduciary] definitions from the SEC and DOL and still provide people with the financial education they need,” said Hagan, who is also a member of the Senate Health Education Labor and Pensions Committee.

“Fiduciary rulemaking is an issue that’s at the top of the chart,” she said.