Some of the biggest Wall Street banks opposed an industry decision to sue the U.S. Labor Department over its new broker rules, exposing a fissure between the companies and their smaller competitors, people familiar with the matter said.
Debate over the high-profile litigation has roiled the Securities Industry and Financial Markets Association, one of several trade groups that sought to overturn the regulation in federal court in Dallas earlier this month. In a sign of the discontent, the association’s board held a vote on whether to join the case, a rare occurrence because it usually operates by consensus on such matters, the people said.
While the suit was ultimately approved with the strong backing of regional brokerage firms, tensions flared during conference calls and meetings leading up to the court filing, the people said. At one point, Wells Fargo & Co. threatened to quit the association, known as SIFMA, if it joined the suit, the people said.
The dissenters, which also included Morgan Stanley, Bank of America Corp. and JPMorgan Chase & Co., argued that it was time to move on after a bruising six-year lobbying battle that the Obama administration won by portraying brokers as riven with conflicts that drive up costs for retirement savers. Rather than take another reputational hit by trying to overturn a rule billed as pro-consumer, the big firms said they preferred putting the effort into complying with it.
The Labor requirements, adopted in April, call for brokers to put clients’ interest first, an obligation known as fiduciary duty. The policy affects trillions of dollars held in Individual Retirement Accounts and 401(k) plans, and is likely to spur massive changes in how brokers and financial advisers interact with clients.
Until the lawsuit, banks, mutual funds and insurers presented a united front against the plan, contesting it on Capitol Hill and at the Labor Department. They argued that it would raise costs for savers, cause brokers to drop less-affluent clients and narrow investment choices.
SIFMA sued along with the U.S. Chamber of Commerce, the Financial Services Roundtable, the Financial Services Institute and several other groups. Cases against regulators often are filed by trade associations to protect individual companies from any potential blowback from the government or the public.
In an interview, Kenneth Bentsen, SIFMA’s president and chief executive officer, said he doesn’t comment on board deliberations. Still, he stressed that Wells Fargo never said the bank was considering resigning its membership if the suit went forward.
“They never said it in any board discussion on the matter, nor did they say so to me,” Bentsen said.
In a statement, SIFMA said it followed a “standard procedure” in assessing whether to sue.
“Given the judgment of the board, particularly members with significant direct exposure, that the department acted inappropriately in crafting its rule that will cause harm to the retirement market, the board determined that it was necessary to challenge the rule,” the group said.
SIFMA chose to hold a voice vote on the suit, so there was no official tally. Still, it was clear that the majority of members supported the move, the people said.
Spokesmen for JPMorgan, Morgan Stanley and Bank of America declined to comment. Wells Fargo declined to discuss specifics of the lawsuit debate, except to say in a statement that the bank “continues to have a strong relationship with SIFMA” and other trade associations.
“We support a best interest standard and believe that professional financial advisers have a crucial role to play in encouraging retirement saving and investing,” Wells Fargo said in the statement. “Our firm has been an active advocate for our clients and financial advisers during the DOL’s rulemaking process, and we have a robust process in place for reviewing and implementing the final rule.”