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Regulation and Compliance > Federal Regulation

Court Refuses NAFA Bid to Block DOL Fiduciary Rule

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A federal appeals court on Thursday refused to block Obama administration regulations that were adopted to minimize conflicts of interest in the retirement-investment industry, a significant setback for financial planners, insurance agents and other advisors who said the rule will disrupt the marketplace.

The National Association for Fixed Annuities in November urged the Washington court to freeze for at least 10 months the April 10, 2017 start date of the new rule, which requires financial professionals who give retirement advice to put the best interest of their customers before commissions or fees. The U.S. Labor Department in April adopted the new regulations, a project more than six years in the making. Rules governing retirement investment advice had remained unchanged for decades.

The annuities association, which advocates for financial advisors, brokers and insurance agents, earlier told the U.S. Court of Appeals for the D.C. Circuit that its members “will be forced to accelerate irreversible, costly, and industry-altering actions in the weeks ahead to restructure their entire distribution system, which has been in place for decades.” The group on Friday said the Labor Department engaged in “far-reaching rulemaking, well outside its area of expertise.”

In the order Thursday, D.C. Circuit judges Karen LeCraft Henderson, David Tatel and Sri Srinivasan said the annuities association “has not satisfied the stringent requirements for an injunction pending appeal.”

The annuities group was represented by the law firm Bryan Cave. The association could ask the full appeals court to reconsider, or take the dispute to the U.S. Supreme Court.

The fiduciary rule requires firms and advisors “to make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer.” Investment advisors must charge what regulators call “reasonable compensation” and firms cannot make any misrepresentations about recommended investments. The regulations expanded the scope of “fiduciary” responsibilities in the retirement investment market.

“Together, the rule and exemptions impose basic standards of professional conduct that are intended to address an annual loss of billions of dollars to ordinary retirement investors as a result of conflicted advice,” the DOL said in rolling out the regulations.

The Justice Department on Dec. 6 urged the D.C. Circuit to “not take the extraordinary step of enjoining lawful regulations issued after six years of public comment and consideration, whose continued operation is essential to the nation’s retirement security.”

The department described as “speculative” the contention that the new regulations will cause “irreparable” harm to members of the annuities group.

“Any economic injuries plaintiff’s members might sustain are outweighed by the harm to retirement investors whose savings are threatened by conflicted advice,” Michael Shih, a Justice Department lawyer, wrote in court papers.

Other fiduciary suits pending

Lawsuits challenging the fiduciary rule are pending in Texas, Kansas and Minnesota federal district courts. The U.S. Chamber of Commerce is a plaintiff in consolidated cases in Texas. A judge in Dallas heard argument on Nov. 17.

A Kansas judge last month refused to enjoin the new rule, rejecting a challenge from the insurer Market Synergy Group Inc. The ruling was the second win for the Labor Department in defending the regulations.

U.S. District Judge Randolph Moss on Nov. 4, presiding in the National Association for Fixed Annuities case, was the first judge to reject a challenge to the new rules. Moss both denied a preliminary injunction request and also ruled on the merits of the regulations. He later refused to stay his decision pending the outcome of the annuities group’s appeal in the D.C. Circuit.

“The new rules were adopted to protect retirement investors from conflicted advice and potential losses to their retirement savings,” Moss wrote. “Enjoining the rule would delay this protection. It would also interfere with the implementation of three regulations that were lawfully adopted after nearly six years of study, public comment, and consideration.”

The Trump effect

Looming on the horizon is how President-elect Donald Trump’s DOL will respond to the fiduciary rule. Trump on Dec. 8 said he would nominate fast-food chief executive Andrew Puzder as the Labor secretary. Puzder’s thinking on the fiduciary rule isn’t known, but he has widely advocated for a deregulatory labor agenda. Barbara Roper, director of investor protection for the Consumer Federation of America, said Puzder is “an unknown quantity as far as the fiduciary rule is concerned, though his general antagonism toward regulation is of concern. We can only hope that he’ll live up to the president-elect’s pledge to make Washington work for average Americans.”

The fiduciary rule, Roper said, pits the interests of workers and retirees against financial firms that are fighting to preserve their ability to profit. “So, if that pledge was more than just empty campaign rhetoric, the rule should be safe,” she said.

The U.S. Chamber of Commerce said Monday it is “already working” with Trump administration transition officials to “undo” the Department of Labor’s fiduciary rule.

Advisors, lawyers and lobbyists said the Trump administration could move to repeal and replace the rule, or expand some of its exemptions. Trump would not be able to undo the rule with a stroke of a pen.

Industry officials, speaking at a conference in Florida on Dec. 6, predicted implementation of the rule could be delayed but not altogether derailed.

Skip Schweiss, head of advisory advocacy at TD Ameritrade Institutional, said he doubted the rule will outright die. “To undo the rule would require a new rulemaking,” he said. “While I do think a delay is likely, I don’t see a flat-out repeal. Maybe delay by a modified rule [via] a deal in Washington.”








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