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Regulation and Compliance > Federal Regulation

Insurers ponder court challenge to DOL rule

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WASHINGTON — The American Council of Life Insurers (ACLI) took a strong step this week toward challenging in court the Department of Labor’s new fiduciary standard, saying its board has approved a resolution “exploring the details of a legal challenge” to the new regulation.

However, some industry lawyers privately believe the ACLI statement was aimed at determining which financial industries and companies would join them in such a lawsuit ahead of the first deadline, which is June 7. That is the date the rule goes into effect.

These lawyers believe the ACLI will make its final decision as to whether to sue based on how much support it has from other interested parties. They see a steep climb to challenging it, both in court and in Congress.

One key trade group, the National Association of Insurance and Financial Advisers (NAIFA), has stated that its focus is to leverage all three branches of government to help bring about good policy and enable members to serve consumers.

“NAIFA will continue to explore all options. Our greatest strength is our grassroots advocacy, and that is primarily where we will continue to engage on the issue,” said Jules Gaudreau, NAIFA president. “NAIFA participates in several industry coalitions. Others in the industry are exploring litigation options.”

Those challenging it would have until then to seek an injunction preventing its implementation, although compliance will not start being phased in until April 2017. That is when financial advisors and agents must start to reflect the new rule, instead of the current “suitability” standard, when selling customers into 401(k), individual retirement accounts and similar investment vehicles.

The huge number of financial firms that are affected by the DOL ruling have until April 2017 to start complying with it. But the rule does go into effect on June 7. Total compliance is required by April 2018.

See also:

DOL fiduciary rule: The good, the bad and the ugly

3 steps to prepare for the DOL fiduciary rule

The rule will require agents, advisors, brokers, mutual fund managers and others in finance to act in the best interest of their clients when selling investment products into retirement accounts. It is regarded as the first comprehensive change in the rules of the road regarding sale of investment products into retirement accounts since the implementing statute, the Employee Retirement Income Security Act of 1974 (ERISA) was enacted in 1974.

A primary concern for insurers is how it will affect annuities sales. Under the rule, fixed annuities of various types will come under federal oversight for the first time. Consumer protections on these products have been the sole province of the states before the new rule was published.

In its statement, ACLI said it, “will make strategic decisions based on further direction given by our member companies,” according to Jack Dolan, an ACLI spokesman.

There are also efforts underway for the Senate to join the House to stop implementation of the regulation. The Congressional Review Act gives lawmakers 60 legislative days to stop implementation of a federal regulation. The House passed such a law April 29, but the vote came nowhere near the number of votes needed to get the two-thirds majority needed to overcome a certain presidential veto.

In response to our questions, C. Frederick Reish of Drinker Biddle & Reath in Los Angeles, discounted the Senate overturning the rule.

Reish is a partner in Drinker Biddle’s employee benefits & executive compensation practice group, chair of its Financial Services ERISA Team and chair of the Retirement Income Team. 

“I believe it can be filibustered and, if so, I am confident that the Democratic leadership will stop the bill,” Reish said. “While it’s possible that a majority of senators would vote against the regulation, I think it’s almost impossible for 60 Senators to vote against it. ”Even if that happens, the president has said that he would veto that action.”

As to proposed litigation, Reish said, “It is possible, but extremely difficult, to persuade a court to enjoin the implementation and enforcement of a regulation.”

He said it is necessary to keep in mind that it is the job of the administration to issue and enforce regulations. ”In other words, a judge would have to conclude that the DOL had so clearly exceeded its authority in ‘doing its job’,” that is, the government was abusing its authority,” Reish said. ”That is an uphill climb and an extraordinary remedy.”

While that has happened on a few occasions in the past — usually where the regulatory agency didn’t properly investigate and document the need for, and impact of, the regulation — the Department of Labor has been aware of this impending lawsuit for a year, and has carefully documented it analysis and authority in anticipation of the litigation. 

“The preamble and analysis clearly were written in anticipation of litigation,” Reish said. “So an injunction is possible, but not likely.”

Editor’s Note: Statements in this story by NAIFA President Jules Gaudreau were updated on May 16, 2016.

See also:

Senators raise concerns about advisor oversight

How the final DOL fiduciary rule will impact advisors


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