Lawsuits That Aim to Stop the New Fiduciary Rule

The Department of Labor (DOL) issued a rule earlier this year that automatically elevates all financial advisors who work with retirement plans or accounts to the status of a fiduciary. This rule promises to have a far-reaching effect on the financial industry as a whole and the retirement planning sector in particular. However, several key organizations in the industry have responded to this rule by filing lawsuits aimed at overturning it. There are now five suits pending in various courts that have the potential to derail the rule and its impact on retirement planners.

Those in the industry who oppose the DOL rule can cite a list of grievances with the rule and how it was written. A report by Goldman Sachs maintains that the annual cost of compliance with the new rule will come in at about $7 billion, with an upfront cost of nearly twice that amount. The rule also promises to drastically curtail the sale of fixed-indexed annuities, which are up by a whopping one-third compared to the same period from last year. (For more, see: The New Fiduciary Rule: Will Lawsuits Overturn It?)

LIMRA researchers stated that the rule will decimate those sales because of the onerous and expensive disclosures that will have to be used in order to sell these products. The association of life insurance and financial services companies predicts that variable annuity sales could drop by as much as 25% to 30% and fixed annuity sales could decline by 5% to 10%. This prediction was released even before the DOL rule included fixed-indexed contracts in its Best Interest Contract Exemption (BICE) requirements.

Needless to say, several annuity carriers and client advocate groups have vehemently opposed the rule, as they feel that it has the potential to adversely affect retirement security for millions of Americans who stand to benefit from the guaranteed lifetime income provided by annuities. Here is a breakdown of the five lawsuits that are currently making their way through the legal process. (For more, see: How Advisors Must Ramp Up Technology for Fiduciary Rule.)

• The National Association for Fixed Annuities vs. DOL and Secretary Thomas Perez: The National Association of Fixed Annuities (NAFA) filed a suit alleging that the DOL rule’s definition of reasonable compensation is too vague, and the inclusion of fixed-indexed annuities in the BICE is “arbitrary and capricious” and “contrary to law.” The suit states that: “The FIA industry was blindsided by this last-minute switch (the inclusion of indexed annuities in the BICE requirements), and the impact will be highly detrimental to the FIA industry and its clientele.” The suit was filed in the U.S. District Court for the District of Columbia, and after becoming the first lawsuit against the rule to come to court, it was rejected in November 2016. Later that month NAFA filed an emergency motion to stop the rule's implementation while they pursue an appeal, but a D.C. Circuit court denied the request in December 2016.
• U.S. Chamber of Commerce vs. DOL and Secretary Thomas Perez : The U.S. Chamber of Commerce is teaming up with several other organizations, including the Financial Services Institute, the Financial Services Roundtable, the Insured Retirement Institute, the Securities Industry and Financial Markets Association and several other local business groups in Texas for this suit. The lawsuit alleges that the DOL has “improperly exceeded” its authority by creating this rule, is in violation of ERISA and other rules, and that it has “unlawfully created a private right of action.” The filing states that “The Department bootstrapped its way into regulating matters outside its jurisdiction by first defining the term ‘fiduciary’ in an impermissibly broad manner, and then exploiting its exemptive authority to obligate financial services professionals to accept special duties and liabilities that have no basis in ERISA and the Code.” The suit was filed in the U.S. District Court Northern District of Texas by law firm Gibson, Dunn and Crusher. The plaintiffs in this suit are now appealing, after a U.S. federal court judge in Texas ruled in favor of the DOL.

All five lawsuits have the same legal objective. The plaintiffs are seeking an injunction that will prevent the Department of Labor from enforcing its rule. In the long run, they are asking the courts to vacate and set aside the rule and declare it unconstitutional. Even if the lawsuits only succeed in getting this injunction, the implementation period will stop so that the rule can be dissected so each feature can be addressed on a separate basis. It will effectively delay the process until President Barack Obama is out of office and provide opponents with the necessary time to wield greater influence over the creation of a revised fiduciary rule. (For more, see: How Advisors Can Plan for Fiduciary Rule Changes.)

DOL rule opponents who are confident in their ability to win in court can point to the failure of the Securities and Exchange Commission (SEC) to enforce Rule 151A back in 2008, which was shot down in court by a lawsuit similar to the ones being filed now. The judge told the SEC that it could not prove that the rule would improve competition, the formation of capital and efficiency.

Time will tell whether the lawsuits that are currently pending against the DOL rule will be successful. It will likely be several months before there is even an indication of what the courts will decide on this issue. In the meantime, the industry continues to prepare for life under the rule as if it will be permanent. (For more, see: Making the New Fiduciary Rule Clear for Clients.)