Editor’s Note: After press time, Thrivent Financial for Lutherans issued its own challenge to the Department of Labor’s fiduciary rule by filing suit in the U.S. District Court in Minnesota for the DOL’s attempt to block alternative dispute resolution methods, Bloomberg reported on Sept. 30.
The industry was bracing itself at press time in mid-September for Judge Randolph Moss, U.S. district judge for the District of Columbia, to hand down the first decision in the string of lawsuits against the Department of Labor’s fiduciary rule under the Employee Retirement Income Security Act, or ERISA.
Moss heard oral arguments in the Washington courtroom for nearly three hours in late August in the case brought by the National Association for Fixed Annuities. While Moss did not immediately render a decision, he promised to do so fairly quickly. At least one legal observer anticipated a ruling by the end of September.
Oral arguments in the case brought in Kansas against DOL by the insurer Market Synergy — which asked the court for a preliminary injunction of the rule — took place on Sept. 21. On Nov. 17, oral arguments will be heard from both the DOL and lawyers representing plaintiffs in the three consolidated lawsuits filed in Texas against DOL’s rule.
Micah Hauptman, financial services counsel at the Consumer Federation of America, said it remains unclear whether one judge’s decision could influence another in the cases. “There is reason to believe that each judge is not viewing the case before him or her in total isolation,” he said, but “I assume each judge will make a decision on the case before him or her on its own merits.”
As the DOL lawsuits marched ahead, House Financial Services Committee Chairman Jeb Hensarling’s Financial CHOICE Act — the sweeping financial reform bill that seeks to replace the Dodd-Frank Act and kill DOL’s fiduciary rule — passed out of committee in mid-September by a 30-26 vote.
During the contentious markup of the bill, Hensarling, R-Texas, repeatedly stated that his Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs (CHOICE) bill offers a “better way” to economic growth and protecting investors than Dodd-Frank.
The Act would block the Labor Department from implementing its new fiduciary rule by incorporating into the bill Rep. Ann Wagner’s Retail Investor Protection Act, H.R. 1090. The bill sponsored by the Missouri Republican, which passed the House last year, would require the Securities and Exchange Commission to move first on a fiduciary rulemaking before DOL can implement its fiduciary rule.
The Court Cases
NAFA’s suit in Washington, along with the one brought against DOL in Topeka, Kansas, by Market Synergy, asks the courts to stay the rule. The first compliance deadline for the DOL rule is April 2017, but the SEC isn’t likely to pass its own fiduciary rule for years.
Lawyers representing NAFA told Judge Moss during oral arguments that insurance agents would be forced to become registered investment advisors under DOL’s fiduciary rule and that the current distribution system for fixed indexed annuities would have to be reworked.
Philip Bartz, a partner at Bryan Cave and a former U.S. Justice Department lawyer representing NAFA, said during his arguments that DOL’s rule embodies “overreach” to “do things that Congress never intended” and that it’s “at odds” with state insurance law.
Bartz further maintained that DOL’s “new” fiduciary definition is “overbroad” and that DOL “threw” fixed indexed annuities into the fiduciary rule’s best interest contract exemption “at the last minute.”
The rule would cause “extraordinary” harm to the $50 billion industry, Bartz argued, noting that 60% of fixed indexed annuity sales are made through individual insurance agents.
Bartz told the judge that the fixed indexed annuity industry must “change its entire distribution model in 10 months. It’s clear there’s irreparable harm here.” He suggested the industry needed at least another 10 months to comply after the April 2017 effective date.
Bartz also argued that ERISA would now preempt state law under the rule and that the rule improperly created a private right of action that could set up class-action lawsuits against insurance companies and agents. “They are going to have their butts sued off,” Bartz told the judge.
A former lawyer for the DOL who was observing the hearing, Erin Sweeney, said DOL disagreed with Bartz’s contention, saying that “the applicable cause of action is breach of contract, which already exists under state law.”