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Regulation and Compliance > Federal Regulation > DOL

Consumer groups reject DOL lawsuits

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WASHINGTON — Three consumer groups are asking a D.C. federal court to deny a trade group’s request for an injunction that would bar the Department of Labor (DOL) from implementing its fiduciary standard rule next April, pending further legal proceedings.

The friend of the court brief was filed by Better Markets, Inc., Consumer Federation of America, and Americans for Financial Reform. It challenges a lawsuit seeking the injunction filed June 2 by the National Association for Fixed Annuities (NAFA).

See also: NAFA plots course in DOL rule fight

At its core, the brief argues that the public interest is best served by denying the requested injunction “both because of the terrible toll exacted on savers from conflicted advice and because the industry’s own public comments belie their hyperbolic claims of imminent harm.”

The first court hearing will be held Thursday, Aug. 25.

At the core of NAFA’s complaint is that the DOL inappropriately decided to include fixed indexed annuities (FIAs) under the Best Interest Contract Exemption (BICE) in the final rule, rather than under the less onerous PTE 84-24 as originally proposed.

The suit argues that the DOL did this “with no opportunity for meaningful comment and without adequate justification,” that as a result, inclusion of FIAs under the rule was arbitrary and capricious.

“As fixed insurance products and not securities, FIAs and those who create, distribute and sell them stand to be uniquely harmed by this rule,” the suit contends.  

In general, NAFA contends in its lawsuit, the DOL rule is invalid on grounds that the agency exceeded its authority to regulate IRAs and because it improperly categorizes insurance agents as fiduciaries. Moreover, the lawsuit alleges, “the rule creates a private right of action, which only Congress can do,” by allowing consumers to file lawsuits if they feel they are harmed by the performance of a financial product sold into their investment account.

See also:

3 exciting unintended consequences of the DOL rule

DOL fiduciary rule targeted in second lawsuit   

In their brief, Better Markets, CFA, and AFR take particular aim at a claim in the NAFA lawsuit that the DOL did not conduct an adequate cost-benefit analysis in justifying the rule.

It is a recent trend for businesses seeking to throw out a federal rule to argue that crafters of the rule did not conduct an adequate study of the potential cost of the rule before implementing it.

See also: DOL 101: The fiduciary rule’s impact on insurance-only agents

A panel of the U.S. Court of Appeals for the D.C. Circuit in July 2009 in American Equity v. SEC vacated Rule 151A, which would have regulated FIAs as variable annuities, on that basis in a unanimous decision written by Judge David B. Sentelle, then chief judge of the circuit. That decision, plus an amendment to the Dodd-Frank Act sponsored by Sen. Tom Harkin, D-Iowa, resulted in the classification of FIAs as fixed annuities subject to state rather than federal oversight.

The issue was brought up earlier this week by Jason L. Smith, CEO and founder of Clarity 2 Prosperity, Cleveland, in discussing why independent marketing organizations, the primary distributors of FIAs, are reluctant to apply for a status as financial institutions under the fiduciary rule pending resolution of the NAFA lawsuit as well as one filed in Kansas by Synergy Marketing Group. That suit will be heard in Kansas City Sept. 21.

“I think they are putting their head in the sand and hoping that through the lawsuits the whole DOL thing goes away,” Smith said.

In their friend of the court brief, lawyers for Better Markets, CFA and AFR argue that the inadequate benefit analysis contention by NAFA in its suit

“has no basis.”

The brief says that, “NAFA’s argument represents a now-familiar tactic among opponents of regulatory reform to second-guess the choices Congress has made and hold an agency’s rulemaking to statutory standards of economic analysis that do not exist in its organic statute.”

Finally, the Better Markets, CFA and AFR brief argues that, “NAFA’s claims that the rule will have “devastating consequences” for the FIA industry are unsubstantiated and hyperbolic assertions that, even if true, could never justify the issuance of injunctive relief under the ‘balance of harms’ or ‘public interest’ prongs.

“If those predicted industry harms really were to unfold — and they will not — they would be far outweighed by the enormous benefits the rule will confer on retirement savers and the public at large,” the friend of the court brief says.

It adds that, “The DOL’s regulatory impact analysis was exceptionally thorough and followed a conservative methodology that substantially underestimates the billions of dollars in retirement savings that millions of American workers and retirees lose every year as a result of adviser conflicts of interest.”

See also:

DOL 101: The fiduciary rule’s impact on IMOs

DOL fiduciary rule: Disruption or opportunity?

U.S. Chamber: DOL overstepped its authority with fiduciary rule

What’s behind the surge in fixed indexed annuity sales?


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