Observers Say DOL Litigation Could Slow Regulatory Guidance
June 7, 2016 by Frank Klimko
WASHINGTON – Industry observers worry that recently filed litigation to vacate the U.S. Labor Department’s fiduciary rule update could have the unintended consequence of holding up agency guidance that is supposed to help companies comply with the new mandates.
“There is the possibility that the litigation could slow down the guidance,” said Stephen Saxon, chairman, Groom Law Group. “If the guidance has to go through the Department of Justice, that will slow things down quite a bit.”
Saxon spoke on a panel at the Insured Retirement Institute’s 2016 Government, Legal and Regulatory Conference, which focused on the implementation of the DOL rule. The IRI and eight other plaintiffs filed a federal lawsuit last week to upend the rule before its effective date next year (Best’s News Service, June 2, 2016).
Prior to the lawsuit, the department had promised adequate guidance to aid insurers, financial services firms and brokers/dealers in getting up to speed on the rule. Such assistance is much needed, Saxon said.
“The department has the opportunity to answer some of these questions, probably through some sort of sub-regulatory guidance,” Saxon said. “We need to talk about how some of these things work, like the Best Interest Contract exemption. There are some potential landmines for us.”
The BIC was designed to permit broker-dealers to continue to receive commissions. But for companies to qualify for the BIC, they must agree to be sued for breach of contract related to the best interest standards created in the rule. The breach of contract requirement is one part of the rule that is being challenged by the lawsuit.
Companies will be hard pressed to wait for the results of any lawsuit while they prepare for the new rule. Firms are now working on their compliance plans, hoping to have them in place by Jan. 1, which is the working deadline ahead of the April 10 effective date, Saxon said.
No one on the panel predicted whether the litigation would be successful.
“Whether it results in a mandate (for removal) or not, the process will be good to improve the rule,” said James Jorden, shareholder, Carlton Fields Jorden Burt, P.A. “They have very strong arguments, but it’s hard to say. The chances are 50/50, like in any lawsuit.”
“But this is a chance for them (DOL) to reach out and solve some of the issues,” identified in the lawsuit, Jorden said.
Experts on the panel were hopeful the DOL would revisit the decision on fixed indexed annuities, which were added them to the BIC, along with variable annuities. FIAs previously were covered under the old Prohibited Transaction Exemption — PTE 84-24.
Both sides need to work to get the rule right, said Seth Harris, former acting DOL secretary.
“There is going to be a huge problem if we have a lot of people, brokers and dealers, exiting the system because they are saying that it’s just not worth it,” Harris said.
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)
