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DOL Gets First Victory In Fiduciary Rule Challenges

DOL Gets First Victory In Fiduciary Rule Challenges

By Y. Peter Kang of

The U.S. Department of Labor’s so-called fiduciary rule for retirement account investment advisers was promulgated after an adequate analysis and within the agency’s authority, a D.C. federal judge ruled Friday, giving the government its first victory in one of many challenges to the new rule.

U.S. District Judge Randolph D. Moss said the DOL’s modification of the definition of who is considered a fiduciary — and therefore on the hook for any breach of fiduciary duty — was made within its statutory authority and was promulgated via a satisfactory rule-making and notification process. The judge shot down the argument of the group challenging the rule, the National Association for Fixed Annuities, which contended that the change runs counter to what Congress intended when it drafted the Employee Retirement Income Security Act and would have “catastrophic consequences” for its members if enacted.

The DOL’s interpretation of a fiduciary as one who “renders investment advice” for a fee was reasonable and sufficiently explained during the rule-making process, said Judge Moss, who denied NAFA’s bid for summary judgment and request for a preliminary injunction blocking enactment of the rule.

“The department explained at length how the relationship between advisers and investors has changed,” the judge said in a 92-page ruling. “It found that the increased complexity and variety of financial products in the marketplace has sown ‘confusion,’ ‘increased the potential for very costly mistakes,’ left retail investors more dependent on expert advice, and exposed plan participants and IRA owners to unknown conflicts of interest.”

The judge brushed aside NAFA’s argument that the rule could have unintended consequences and “sweep in” relationships that aren’t of a fiduciary nature, saying the group acknowledged that this potential spillover was unrelated to the sale of annuities.

“NAFA cannot complain that it or any of its members live under a sword of Damocles because the department might someday revoke or modify the scope of the relevant exemption,” he said. “The asserted overbreadth and corresponding exemption have no bearing on the plaintiff or its members.”

Representatives for the parties did not immediately respond to requests for comment late Friday.

Friday’s ruling was the first victory for the DOL in the half-dozen lawsuits filed against it in the past five months by financial industry groups challenging the rule.

The fiduciary rule was promulgated in April and will be phased in starting April 2017. It requires financial professionals who advise retirement accounts to act in their client’s best interest when recommending investment products, a higher standard than the current approach of promoting products that are merely suitable to an investor.

In unveiling the rules, the Obama administration said it heeded advice from more than 3,100 comment letters after the hotly contested measures were first proposed in April 2015.

In a similar, consolidated lawsuit challenging the rule in Texas federal court, eight industry and trade groups including the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association allege that the DOL ignored commenters who expressed concern over how the rule will affect retirement savers and small broker-dealers, including comments from staff at the U.S. Securities and Exchange Commission. That matter is pending.

Parallel suits by a financial planner in Minnesota federal court and an insurance agency in Kansas federal court are also pending.

In the instant case, the DOL filed a cross-motion for summary judgment in July, extolling the virtues of the rule while pointing out that throughout the life of an “open rule-making process spanning almost six years,” the agency received and responded to numerous public comments and ultimately delivered a “reasoned explanation” for the final decision.

During oral argument held in August, one issue that Judge Moss homed in on was a portion of the DOL’s policy known as the best interest contract exemption, which allows fiduciaries to engage in otherwise prohibited transactions on the condition that the adviser enter a written agreement with an investor.

While NAFA contended that the BIC exemption improperly creates a federal cause of action for investors that the agency never had the authority to make, Judge Moss ruled Friday that this just wasn’t the case.

“The department did not create a ‘cause of action’ or a ‘private litigation right,’ he said. “Rather, any action brought to enforce the terms of the written contract would be brought under state law, and, as both parties acknowledged at oral argument, state law would ultimately control the enforceability of any of the required contractual terms.”

NAFA is represented by Philip D. Bartz and Jacob A. Kramer of Bryan Cave LLP.

The DOL is represented by Benjamin C. Mizer, Channing D. Phillips, Judry L. Subar, Galen N. Thorp and Emily Newton of the U.S. Department of Justice.

The case is National Association for Fixed Annuities v. U.S. Department of Labor et al., case number 1:16-cv-01035, in the U.S. District Court for the District of Columbia.



The team of investment fraud lawyers at Starr Austen & Miller LLP fights for the protection of investors and handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence and breach of trust.