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August 08, 2016 at 08:12 AM
Four months ago, the Department of Labor released its controversial, industry-transforming rule requiring financial advisors to act in their clients’ best interest by upholding a fiduciary standard when providing retirement-account advice. Now district court hearings on three lawsuits aiming to kill the rule are about to get underway.
The central argument in the actions, filed by industry organizations, at least one insurer and The U.S. Chamber of Commerce, is that in establishing the rule, the Labor Department stepped beyond its authority.
The financial services and insurance industries lobbied against the regulation since first proposed in 2010. But it wasn’t until the final rule was released, on April 6 of this year, that litigation seeking to invalidate it could be filed.
The rule’s significance for advisors and insurance agents cannot be overstated.
“This is a major regulation because it shifts the ethics of the industry,” says Christine Lazaro, associate professor of clinical legal education at St. John’s University School of Law, in an interview.
In July, the Public Investors Arbitration Bar Association (PIABA) filed an amicus brief arguing that the DOL has in fact been empowered to oversee fiduciary conduct since 1978 under President Jimmy Carter.
But the Securities Industry and Financial Markets Association (SIFMA), a plaintiff in the first suit, brought on June 2, strongly disagrees.
“We believe the DOL exceeded its authority in defining who the fiduciary is. The SEC has a mandate to establish a uniform fiduciary standard, which SIFMA supports and which was given to them by Congress and [the] Dodd-Frank [Act],” says Kevin Carroll, SIFMA managing director and associate general counsel, in an interview.
That is, SIFMA supports a fiduciary standard for all financial advisors but under a rule that covers investor accounts across the board, not retirement accounts only.
“We are pro-fiduciary standard. We are pro-best interest standard,” Carroll stresses.
When SIFMA saw an early draft of the rule, the Association was convinced it would be “negatively impactful” on the industry. Hence, on behalf of its members, “we pursued all avenues to ameliorate or eliminate the negative impact,” Carroll says. These approaches included legislative solutions and speaking directly with the DOL.
Just as the first lawsuit was filed, President Obama vetoed a resolution passed by Congress to nullify the rule. He stated that the regulation was “critical to protecting Americans’ hard-earned savings and preserving their retirement security.”
That same day, the American Council of Life Insurers (ACLI) and the National Association of Insurance Financial Advisors (NAIFA) filed suit claiming that the DOL rule “will harm the very people it is meant to help.”
