Close Close

Regulation and Compliance > Federal Regulation > DOL

DOL's Perez Vows to Fight Mounting Fiduciary Lawsuits

Your article was successfully shared with the contacts you provided.

Labor Secretary Thomas Perez has vowed to “vigorously” defend the department’s rule amending the definition of fiduciary on retirement advice against the mounting lawsuits that were lobbed against the rule in June.

A total of five lawsuits had been filed by press time. Nine plaintiffs filed suit in U.S. District Court for the Northern District of Texas on June 2. They were the Securities Industry and Financial Markets Association, the Financial Services Institute, the Financial Services Roundtable, the U.S. Chamber of Commerce, the Insured Retirement Institute and four Texas groups, including the Texas Association of Business.

The American Council of Life Insurers and the National Association of Insurance and Financial Advisors said they “reluctantly” filed suit in the same Northern Texas District, while the annuity industry was quick to follow with three more lawsuits in the following days.

[Editor's Note: On June 17, the DOL filed a motion to consolidate the three Texas-based lawsuits because they “challenge the same agency rulemaking and present substantially the same legal issues.” On June 20, the plaintiffs agreed to consolidation, but a judge must grant it.]

The National Association for Fixed Annuities filed suit in U.S. District Court for the District of Columbia and a hearing on that case has been set for Aug. 25.

The lawsuit seeks a preliminary injunction to stay DOL’s rule amending the definition of fiduciary under ERISA, which is currently scheduled to become operational in April 2017.

The fourth and fifth legal challenges to the rule were filed by the Indexed Annuity Leadership Council and insurer Market Synergy, based in Kansas. IALC, which is composed of life insurers, filed its lawsuit against DOL in the U.S. District Court for the Northern District of Texas, while Market Synergy filed in the U.S. District Court for the District of Kansas.

Just as the lawsuits were being filed, President Barack Obama followed through with his promise to veto resolutions under the Congressional Review Act passed by the House and Senate to kill DOL’s rule.

Too Late? Forum Shopping?

At least one industry expert maintains that the nine heavyweight plaintiffs represented by the DOL’s former solicitor, Eugene Scalia, waited too long to move on their complaint, and that they are headed for a battle with DOL to have the venue moved from U.S. District Court for the Northern District of Texas to Washington.

Scalia, a partner in Gibson, Dunn & Crutcher’s Washington office, who’s the son of the late Supreme Court Justice Antonin Scalia, told IA that during his time as DOL solicitor, “I don’t recall a case where we felt we needed to move” venues.

Scalia added that “we expect to seek a means fairly promptly to be resolved in advance of the [April] compliance deadline.”

The eight-count suit asks that DOL’s fiduciary rules be “thrown out by the court” and that DOL be “prevented from enforcing the rules,” Scalia said on a separate call with reporters.

Why Texas? Scalia stated on the call with reporters that the DOL rule’s impact “is nationwide, but it’s very great in Texas. It’s appropriate that [the lawsuit be filed] in a Main Street jurisdiction; it’s not an inside-the-Beltway case.”

Ken Bentsen, president and CEO of SIFMA, agreed on the call that while all of the trade groups represent members nationwide, about 27,000 advisors in Texas are registered with FINRA and that Texas ranks third in the U.S. in terms of the number of advisors and fourth in the number of broker-dealers, which “underscores the fact that this is a Main Street issue.”

But Mercer Bullard, professor of law at the University of Mississippi Law School and founder of Fund Democracy, an advocacy group for mutual fund shareholders, told IA that “the plaintiffs have hurt their cause by delaying” filing suit until now. “Why should a court be sympathetic to their request to postpone the effective date when they waited so long to file and then filed where they know there will be a fight over removing the case to D.C.?”

The groups’ “actions undermine their argument that postponement is necessary,” Bullard said. “It seems they’re betting on the court from the country of Texas ruling for them strictly on political grounds.”

Bullard added that “the [fiduciary] issue is national; DOL is in D.C., the real plaintiffs are based in D.C.; the faux Texas plaintiffs have no special Texas interest.” Also, the parties to the suit are in Washington, as are the “people who made” the DOL rule. “This is just blatant forum shopping.”

Defining Fiduciary; Class-Action Lawsuits

Scalia, who co-chairs Gibson, Dunn & Crutcher’s Administrative Law and Regulatory Practice Group and is a member of its Labor and Employment Practice Group, said the lawsuit first challenges the “definition and meaning” of the word fiduciary.

“Fiduciary is a very familiar and important word in the legal lexicon,” Scalia said, “and DOL has given it a meaning that is unrecognizable. Our complaint begins with the overbroad definition of fiduciary.”

The suit also challenges DOL’s oversight of IRAs as well as the rule’s creation of a “private right of action” to bring class-action lawsuits under the Best Interest Contract Exemption, which Scalia called “one of the most troubling aspects” of BICE.

DOL’s rule, the complaint states, and its prohibited transaction exemptions “overstep the department’s authority, create unwarranted burdens and liabilities, undermine the interests of retirement savers, and are contrary to law.”

The suit also states that DOL’s fiduciary rule would “upend” the “well-developed regulatory framework” currently enforced by the SEC, state regulators and FINRA. It argues that DOL’s rule will have “harmful consequences for retirement savers, 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.”

Market Synergy’s complaint challenges only the department’s conduct in adopting the revisions to prohibited transaction exemption (PTE) 84-24, “which contradicted the revisions announced in the department’s notice of proposed rulemaking.”

The complaint states that in promulgating the final revisions to PTE 84-24, which make the exemption available to “fixed rate annuities,” as defined by DOL, but not to one class of fixed annuities — specifically, “fixed indexed annuities” — the department “acted without providing adequate notice and an opportunity for comment.” The suit further claims DOL’s action reflected “arbitrary and capricious conduct in excess of its statutory authority and in clear violation of its obligations to make necessary findings under applicable law.”

Jim Poolman, IALC’s executive director, stated that while the group’s litigation doesn’t dispute that retirement advisors should act in the best interests of their clients, DOL’s rule “will harm millions of hard-working Americans who need the principal protection and lifetime guaranteed income that fixed indexed annuities offer.”

The final DOL regulation “unfairly targets certain types of fixed annuity products, making it harder for Americans to purchase fixed indexed annuities when it is in their best interest to do so,” he said, adding that “this legal challenge is necessary because the rule creates an unworkable standard for independent agents and insurance companies and goes far beyond DOL’s authority.”

Much Ado About Nothing?

Industry advocates of DOL’s rule believe the lawsuits will have little impact.

“It has been clear from the outset of this process that industry groups would challenge the DOL rule in court,” said CFA Director of Investor Protection Barbara Roper.

“After all, financial firms, such as those represented by these trade associations, are able to earn billions of dollars a year in excess profits under the current regulatory regime,” Roper said. That money “comes directly from the hard-earned retirement savings of American workers and retirees.”

Added Roper: “We believe the DOL rule is based on a sound legal foundation and their process set the standard for openness, thoroughness and attention to comments submitted. Contrary to the arguments being put forward, DOL has clear authority both to define fiduciary investment advice under ERISA and the tax code, and to set the conditions for any exemptions from the prohibited transaction rules.”


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.