In the face of a fierce lobbying campaign, the U.S. Labor Department backed down in 2010 from a sweeping proposal to change how broker-dealers and investment advisers render advice on retirement accounts.
Six years later, with that rule set to take effect next April, the fight over the so-called fiduciary rule is heading to court.
On Thursday, a federal judge in Washington is set to hear the first major challenge to the fiduciary rule, which calls for brokers handling retirement accounts to work in their clients’ “best interests” — a heightened standard designed to curb billions of dollars in fees paid to financial industry.
Investment advisory groups and business advocates have lined up to challenge the rule, which was finalized earlier this year. The court fight has three fronts, with lawsuits pending in Washington, Texas and Kansas federal district courts.
The suit in Washington, brought by the National Association for Fixed Annuities, seeks a preliminary injunction to block the fiduciary rule, and also alleges the DOL rule is invalid on grounds that the agency exceeded its authority to regulate IRAs and that it improperly categorizes insurance agents as fiduciaries.
“It’s really the fixed annuity providers who think they have what it takes to get a preliminary injunction, so that’s why they’re coming first,” said Erin Sweeney, of the Washington law firm Miller & Chevalier. “Their view is fixed annuities are uniquely positioned to make the irreparable harm argument.”
Thomas Perez, the Labor Department secretary, said in June that a “handful of industry groups and lobbyists are suing for the right to put their own financial self-interests ahead of the best interests of their customers.” The department, Perez said then, would defend the rule “vigorously.”
Here’s a snapshot of the action unfolding in U.S. District Court for the District of Columbia, where a judge on Thursday takes up NAFA’s request for a preliminary injunction:
Meet the lawyers
Leading the charge for the industry groups is Bryan Cave partner Philip Bartz, a former U.S. Justice Department lawyer who has found success fighting federal regulators.
In 2010, Bartz represented Old Mutual Financial Network in its challenge of the U.S. Securities and Exchange Commission’s Rule 151A, which established jurisdiction over indexed annuities. The U.S. Court of Appeals for the D.C. Circuit vacated the rule on the grounds that the SEC’s analysis was arbitrary and capricious. At DOJ, Bartz served as deputy assistant attorney general for the Civil Division’s federal programs branch, which litigates on behalf of about 100 federal agencies.
U.S. Justice Department attorneys Emily Sue Newton and Galen Thorp, both of the federal programs branch, are defending the Labor Department. A 2010 graduate of the George Washington University Law School, Newton clerked in the U.S. Court of Federal Claims and served as a State Department lawyer before joining the Justice Department in 2015. Thorp has gained some notoriety this year in backing the League of Women Voters’ quest for a preliminary injunction preventing Kansas, Alabama and Georgia from requiring voters to provide documents proving their U.S. citizenship.
The main issues
In the buildup to Thursday’s hearing, the National Association for Fixed Annuities has argued that the Labor Department lacks authority to abandon a 40-year-old regulatory framework for retirement advice — the Employee Retirement Income Security Act. NAFA argues the rule would also improperly categorize insurance agents as fiduciaries.
The challengers zero in on the chief means of enforcing the Labor Department rule: a provision that allows investors to file class actions when they believe an adviser has not acted in their best interests. According to plaintiffs, the rule creates a private right of action that Congress never authorized.
“What the Labor Department is trying to do here is, through the back door, tell IRA providers that they have fiduciary duties because they have to enter into a contract for these products,” Sweeney of Miller & Chevalier said. “The Labor Department has no business regulating IRAs and trying to impose fiduciary duties, and it’s outside their authority.”
The Justice Department argues the rule is needed to address rampant conflicts of interest that have arisen as the market for retirement investment advice has evolved in the last four decades.