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Regulation and Compliance > Federal Regulation > DOL

The DOL rule: A case for the courts

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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.”

Labor Security Thomas Perez has vowed to “vigorously” defend the rule.

Each hearing will take place before a district court judge. The first is set for August 25 in Washington, D.C., where arguments will be heard in a suit filed by the National Association for Fixed Annuities (NAFA). The next one, on an action brought by the Indexed Annuity Leadership Council and insurer Market Synergy, is scheduled for September 21 in Kansas (It was originally set for August 24.). 

On November 17, oral arguments will be heard in Texas district court on the first suit (which was consolidated from three separate suits with overlapping issues), whose nine plaintiffs include the Financial Services Institute, Financial Services Roundtable, Insured Retirement Institute and four Texas groups.

Advocates for all the litigation – but claimants in none — are several large regional firms, including Raymond James, Ameriprise Financial, Robert W. Baird and Janney Montgomery Scott.

The wirehouses, however, oppose the actions: Bank of America Merrill Lynch, Morgan Stanley, UBS and Wells Fargo, as well as JPMorgan Chase, are not supporters.

Further, in early July, the U.S. Justice Department urged a Washington D.C., federal judge to reject NAFA’s claim. And last month as well, the Consumer Federation of America, Better Markets, and Americans for Financial Reforms were preparing an amicus brief endorsing the rule.

Once a district court judge rules on each of the three cases, either party disputing the decision is permitted to file an appeal in Appellate circuit court.

How far will SIFMA take its fight?

“In litigation, you want to see what the decision is, and the reasoning and rationale, then make a judgment,” Carroll says. “That’s certainly what we’ll do, and I’m sure that’s what the DOL will do if the decision goes contrary to them.”

The first phase of the rule’s implementation is effective April 2017; second-phase, January 2018.

Meantime, expectations are for little let-up in conflict about this critical issue.

“The DOL stuff isn’t going away any time soon,” Lazaro says. “We’re going to be dealing with some aspect of this for the next year-and-a-half till, hopefully, the rule is implemented.”


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