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Regulation and Compliance > Federal Regulation > DOL

DOL Rule Survives Court Challenge by Annuity Group

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A Washington federal trial judge on Friday refused to block the U.S. Labor Department’s sweeping new fiduciary rule that the Obama administration crafted to help curtail conflicts of interest in the retirement-planning industry.

U.S. District Judge Randolph Moss, in a 92-page ruling, rejected arguments from the National Association for Fixed Annuities that the Labor Department unlawfully went against the will of Congress to adopt a rule that would bring — as the judge described it — “catastrophic consequences” for the fixed annuities market.

The Labor Department rule extends extends fiduciary duties to those who advise individual retirement accounts. The rule, which requires retirement savings advice be provided in the “best interest” of the client, creates an obligation for advisors to follow professional standards and puts the investor’s financial interests in the “driver’s seat,” Moss wrote.

“[T]he department explained at length how the relationship between advisers and investors has changed,” Moss wrote. “It found that the increased complexity and variety of financial products in the marketplace has sown ‘confusion,’ ‘increase[d] the potential for very costly mistakes,’ left retail investors more dependent on expert advice, and exposed plan participants and [individual retirement account] owners to unknown conflicts of interest.”

The ruling was the first in a series of suits industry professionals brought against the Labor Department this summer. The ruling in the lawsuit in Washington, filed in June, comes as judges in Texas, Kansas and Minnesota take up separate challenges. The U.S. Chamber of Commerce is a lead plaintiff in consolidated cases in the Northern District of Texas.

“The final rules together permit otherwise prohibited compensation arrangements — such as commissions to an agent based on the retirement investor’s investment decisions — provided that the financial institution acknowledges its fiduciary status under ERISA and/or the code,” Moss wrote.

Moss said “the predominance of commission-based compensation” is not “inescapably fixed for all time.” Moss wrote: “Although the court recognizes that it may be difficult and costly for financial institutions to move away from that model of compensation, the prospect of alternative compensation methods is not illusory. The choice may not be pleasant one, but it is real.”

Moss continued: “Importantly, there is also a clear nexus between the risk that commission-based compensation will skew investment advice and the condition that advisers paid on a commission basis must provide advice that satisfies the duties of loyalty and prudence.”

The challenges ultimately could lead to a divide among appellate courts about the lawfulness of the rule, creating a conflict that the U.S. Supreme Court is asked to resolve. The regulations were six years in the making.

The National Association for Fixed Annuities, represented by a team from Bryan Cave, argued in court on Aug. 25 in Washington that the fiduciary rule, which requires investment advisors to act in their client’s best interests, is the “embodiment of overreach.” The rule is set to take effect in part next April.

Insurance companies and individual insurance agents make up part of the annuities association’s membership. Bryan Cave partner Philip Bartz said the new standard outlined in the fiduciary rule would effectively put certain certain insurance agents out of business. “I think it’s clear that there’s irreparable injury here,” Bartz told Moss.

Bartz was not immediately reached for comment Friday afternoon.

At the court hearing, Moss asked a series of questions about a provision in the rule that allows investors to file a class action when they believe an advisor has not acted in their best interests. The provision has caused alarm in the financial industry.

“They’re going to get their butts sued off,” Bartz said in court. “We’re talking about extraordinary risk and extraordinary consequences if you do this wrong.”

U.S. Justice Department lawyers Emily Newton and Galen Thorp had urged Moss not to block the new regulations. The increased complexity of the retirement-plan market compelled the Labor Department, they argued, to revisit the 40-year-old regulatory framework for retirement advice.

“The evidence across the board,” Thorp said, showed that “whenever you have a professional advisor and an inexperienced client plus a conflict of interest, it ends badly for the consumer.”

In Topeka, Kansas, U.S. District Judge Daniel Crabtree on Sept. 21 took up insurance agency Market Synergy Group Inc.’s suit against the fiduciary rule. U.S. District Judge Barbara Lynn in Dallas, Texas, has set a hearing for Nov. 17.

The ruling in NAFA v. Labor Department can be found here.

(Related on ThinkAdvisor: DOL Releases FAQs on Fiduciary Rule)


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