Compliance

Texas Court Adds to Fiduciary Rule Debate Among Retirement Providers

A Texas district court judge has rejected industry arguments that the DOL exceeded its authority in crafting the forthcoming fiduciary rule—what this spells for the regulation’s future under the Trump administration is unclear. 

By John Manganaro editors@strategic-i.com | February 09, 2017
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In a lengthy decision penned by U.S. District Court Judge Barbara Lynn of the Northern District of Texas, little deference is shown to retirement industry providers’ arguments that the Department of Labor (DOL) fiduciary rule was improperly established, or that it will harm the adviser-provider-client relationship.

The decision represents a major setback for one of the first legal challenges to have been filed against the rule, put forth by a small group of national financial and business trade organizations including the U.S. Chamber of Commerce, Financial Services Institute, Financial Services Roundtable, Insured Retirement Institute, Securities Industry and Financial Markets Association, and others. Their self-stated objective was to “challenge the improper Department of Labor’s fiduciary rule for brokers and registered investment advisers serving Americans with individual retirement accounts (IRAs) and 401(k) plans.”

Their complaint argued that the rule will “hinder many of our member firms’ ability to continue providing the level of holistic financial advice and suitable investment options their clients are accustomed to.” Plaintiffs cited a series of by-now familiar potential “unintended consequences of the ambitious rulemaking,” stressing in particular that advisers servicing small-business plans “will be left with no choice but to limit or stop servicing those retirement plans … significantly reducing the retirement savings options available to their millions of employees.”

The trade groups asserted claims under the Administrative Procedure Act and the First Amendment to the United States Constitution, challenging the rule itself and the related “prohibited transaction exemptions” (PTEs) promulgated by DOL. Plaintiffs charged that DOL vastly overstepped its authority and is creating impermissible burdens and liabilities for the advisory and brokerage industries, “undermining the interests of retirement savers.” They suggested such work as redefining the role of investment advisers, as well as the grounds on which they can be dragged into 401(k) and individual retirement account (IRA) litigation, if it has to be done, should be undertaken by the Securities and Exchange Commission (SEC).

With the more-or-less outright failure of these arguments, ERISA attorneys and industry commentators are left even less certain than before—if that is even possible—as to what will come next with the rulemaking, set to start taking effect in just eight weeks or so. Ostensibly the White House has the authority to review and consider revising the rulemaking, demonstrated by the President’s most recent memorandum-order directing the DOL to do just that. But it is far from clear whether the effort to pull the teeth out of the rulemaking can be completed by the first deadlines in April, or even before the more strenuous compliance deadlines that will run by later in 2017 and 2018.

As one attorney told PLANADVISER recently, “this leaves firms in the uncomfortable position of not knowing with 100% accuracy whether the fiduciary rule will be delayed or not.”

NEXT: From the text of the suit