Biz groups gear up for court fight over financial adviser rule

Biz groups gear up for court fight over financial adviser rule
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The Obama administration and financial services groups are set for a showdown in a Texas courtroom this fall over one of the president's top priorities for protecting retirement investors. 

The Labor Department's (DOL) fiduciary rule is aimed at heightening compliance standards for unregistered investment advisers, but business groups and financial firms see the move as a step that reaches far beyond the administration's authority. 


Their attorneys see the potential for an unprecedented change in the way the federal government could be allowed to enforce law. 

Oral arguments are scheduled for Nov. 17 in the U.S. District Court for the Northern District of Texas between the Labor Department and nine plaintiffs, including the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association.

The plaintiffs, represented by a team of lawyers from Gibson Dunn & Crutcher LLP, have eight counts on which they are seeking relief, most notably the alleged private right of action associated with the Best Interest Contract Exemption (BICE). 

Fixing ERISA.

The DOL’s new rule attempts to fix a discrepancy in the Employee Retirement Investment Security Act, which exempted broker-dealers from fiduciary status. The rule will re-categorize broker-dealers who provide retirement advice as fiduciaries and subject them to increased levels of regulation and compliance.

Under ERISA, registered investment advisers are prohibited from receiving variable compensation and must charge a flat fee to clients. Broker-dealers rely on a commissioned-based model for many of the non-ERISA products they sell, including individual retirement accounts (IRAs). 

As a result, the rule will permit broker-dealers and insurance agents selling IRAs and other non-ERISA plans to continue receiving commissions via BICE. Under the exemption, advisers will be required to state they are fiduciaries, disclose all fees and compensation, disclose any conflicts of interests and steps to mitigate them. 

But Lisa Bleier, managing director at SIFMA said complying with the BICE exemption will take a significant toll on broker-dealers.

“Within the Best Interest Contract Exemption, there are a lot of parts that somebody needs to put in place that range from setting up a system for tracking and monitoring for conflicts of interest, supervision with regard to those conflicts of interests, the creation of the contract, the creation of the website, a significant amount of information that is to be made available on the website, as well as additional information that’s to be pushed out to clients,” she said. “It’s creating an entire structure that is complicated.”

Private right of action. 

Should advisers violate the terms of the contract, plan investors are permitted to sue, either individually or collectively, for breach of standards of conduct — the alleged private right of action.

In their lawsuit, the plaintiffs argue the DOL acted in a manner that violates, “the well-established principle that only Congress may create a private right of action.”

Stephen Hall, legal director for financial advocacy group Better Markets, told The Hill Extra the DOL didn’t create a private right of action, but is simply enacting contract law.

“Part of the stipulation is, ‘If you want to keep [earning variable compensation], you have to enter a contract. You have to make certain commitments,’” he said. “It is under long-established, centuries-old contract law; that’s what creates the right of the investor who may be damaged by a breach of the terms of the contract to seek redress from the adviser.”

“It’s not the DOL creating a cause of action,” Hall said. 

Marcia Wagner, an attorney with Wagner Law Group specializing in ERISA law, said she could argue both sides of the private right of action argument.

“I don’t know how the courts are going to come down on that,” she said.

“Of all the issues that were raised in the lawsuit, this is the most creative and most intriguing — is it constitutional for an agency within the executive branch to invent within a private [contract] a right of class action lawsuit as a way of enforcing the law?

“It’s unprecedented from my experience and I’ve been practicing ERISA law for 30 years,” Wagner said. 

Time to comply.

Regardless of the outcome, Wagner said she expects the verdict to be appealed up to the Supreme Court, which would result in years of litigation. The DOL’s fiduciary rule takes effect April 10, 2017, and advisers will have to comply no matter the decision from the district court. 

The verdict “almost becomes irrelevant unless the court grants a stay, which I don’t see happening,” she said. “So, you’re going to be in this situation where, constitutional or not, an overbroad definition or not, we have a hard deadline of April 10 and that’s not that far away.”

The DOL’s fiduciary rule is the subject of an additional lawsuit — Market Synergy Group, Inc. v. U.S. Department of Labor. 

That lawsuit seeks a preliminary injunction against the rule due to the inclusion of fixed indexed annuities in BICE rather than the older, laxer Prohibited Transaction Exemption 84-24.

A preliminary injunction requires an extremely strong argument and neither Hall nor Wagner expect it to be granted in the case. 

Market Synergy Group, represented by D.C. firm Carlton Fields Jorden Burt, stated in its official complaint that although, “the Department exceeded its authority and acted improperly in promulgating that Rule, this suit challenges only the Department’s conduct in adopting the revisions to PTE 84-24, which contradicted the revisions announced in the Department’s proposed rulemaking.” 

Oral arguments were heard Sept. 21.

The National Association of Fixed Annuities lost a similar case against the Department of Labor on Nov. 4 in which it called for an injunction against the rule in the U.S. District Court for the District of Columbia based on the inclusion of fixed indexed annuities under BICE. 

The DOL declined to comment on this story.

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