Anticipated Lawsuit Against DOL Fiduciary Rule Has Arrived

Plaintiffs in a new federal lawsuit targeting the Department of Labor (DOL) are hoping to halt what they see as “over-reaching federal regulations that will restrict hardworking Americans’ access to retirement advice and planning services.”

The suit was filed this week in the U.S. District Court for the Northern District of Texas by a small group of national financial and business trade organizations including the U.S. Chamber of Commerce, Financial Services Institute, Financial Services Roundtable, Greater Irving-Las Colinas’ Chamber of Commerce, Insured Retirement Institute, Lake Houston Area Chamber of Commerce, Lubbock Chamber of Commerce, Securities Industry and Financial Markets Association, and the Texas Association of Business.

Their self-stated objective is to “challenge the Department of Labor’s fiduciary rule for brokers and registered investment advisers serving Americans with individual retirement accounts (IRAs) and 401(k) plans.” Those who have followed the fiduciary rule debate as it has unfolded over the years will be pretty familiar with the arguments presented against the Department of Labor’s (DOL) landmark regulations.

In a joint statement, the CEOs of the co-plaintiffs explained their grievances: “Our organizations have a long, well-documented record of support for the creation of a uniform best interest, or fiduciary, standard of customer care for financial professionals providing personalized investment advice to retail investors. The Department of Labor’s new, 1,023-page rule, however, creates sweeping changes to existing regulations that will make saving for retirement more difficult for the very same hardworking American families and individuals it claims to protect.”

The text of the complaint goes on to argue 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 cite 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 the retirement plans … significantly reducing the retirement savings options available to their millions of employees.”

It should be noted that there are many advisers and financial industry advocacy organizations arguing those who make predictions that a strengthened fiduciary rule will lead to less financial guidance and investment education for small-balance savers are missing the bigger picture.

In any case, the path ahead for the litigation will take some time to come into focus, but given the years of momentum behind the rulemaking, it’s going to be a tough fight to actually stall the DOL through a single district court lawsuit. During a recent PLANADVISER webcast called to discuss the rulemaking, for example, expert ERISA attorneys told advisers they should be planning to comply fully with the new fiduciary rule by upcoming deadlines in 2017 and 2018. Even if this lawsuit or any other is successful in the end, it’s not going to be a fast process, and the rulemaking may require substantial changes to ingrained business practices.

NEXT: More from the text of the complaint 

The lawsuit asserts claims under the Administrative Procedure Act and the First Amendment to the United States Constitution, challenging the rule itself and the related “prohibited transaction exemption” (PTE) promulgated by DOL. Plaintiffs charge that DOL overstepped its authority and is creating unwarranted burdens and liabilities for the advisory and brokerage industries, “undermining the interests of retirement savers.” They suggest such work as redefining the role of investment advisers, if it has to be done, should be undertaken by the Securities and Exchange Commission (SEC).

Throughout the text of the lawsuit, plaintiffs suggest the recommendations covered by the DOL rule “include many that have never been understood to entail fiduciary duties, such as whether to purchase an investment product, or offering a simple comparison between a firm’s own proprietary products.”

“Indeed, the rule makes it impossible to sell most individual retirement investment products without being deemed a fiduciary,” plaintiffs argue. “It also bars non-fiduciaries from engaging in a range of ordinary and customary communications with clients, including communications that explain their products and services.”

The suit also claims that the DOL’s approach to the rulemaking is fundamentally flawed: “Because the Department lacks affirmative authority to regulate financial services outside the context of employee benefit plans, it has sought to promulgate this new regulatory regime through its exemptive authority under ERISA. That is, the Department seeks to convert its authority to lift regulatory burdens into a means to impose them, resulting in the most sweeping change in retirement planning since the adoption of ERISA itself. By doing so, the Department has disregarded the regulatory framework established by Congress, exceeded its authority, and assumed for itself regulatory power that is vested in the SEC in ways that will harm retirement savers.”

According to plaintiffs, a result of this approach is that much of the policing under the new fiduciary rule will actually have to come from the plaintiffs’ bar. “Because the department itself lacks authority to enforce these new fiduciary standards of conduct, it requires that the new [Best Interest Contracts] expose financial services firms and insurance institutions to liability in class action lawsuits. Another newly promulgated exemption, the Principal Transactions exemption, requires these same contractual obligations and liabilities.”

A copy of the complaint is available online here.