Firms Focusing on Fiduciary Rule Compliance While Crossing Fingers on Lawsuits
August 23, 2016 by Ryan Rainey, Morning Consult
With the Labor Department’s fiduciary rule slated to take effect in April, industry opponents are hinging their hopes on stalling or blocking the regulation through three separate legal challenges. But in the meantime, they’re also planning for another possibility: full implementation of the rule.
“Almost every company we’ve talked to since the rule has come out has been 100 percent engaged in becoming compliant with the rule,” said Alice Joe, managing director of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce. “With any litigation, there’s never any certainty about whether or not you’re going to win.”
Of the three lawsuits, that one that has drawn the most attention was filed by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Roundtable in the U.S. District Court for the Northern District of Texas. Representing the plaintiffs is Eugene Scalia, a Washington-based lawyer whose most recent accomplishment was helping MetLife Inc. shed its designation as a systemically important financial institution through a federal case.
In his brief submitted for the Texas court last month, Scalia focused on two key elements: that the Labor Department overstepped its authority in issuing the rule, and that the agency established a private right of action for violations of its Best Interest Contract Exemption, something only Congress has the authority to do.
The private right of action claim is considered the most dangerous threat to the rule from the perspective of supporters like Better Markets, which takes issue with characterizing the right to challenge Best Interest Contract violations as a private right of action.
The private right of action “hangs over the industry and hangs over the individual firm to the tune of untold liability” said Ira Hammerman, SIFMA’s general counsel.
“Even if the firms spend all of this money to come into compliance with the final rule — if at the end of the day they are still at risk of private rights of action with untold potential liability — a win at the court level would still be very helpful to members,” Hammerman said.
Stephen Hall, the legal director at Better Markets, said the claim is “meritless.”
“What the DOL has done is not create a private right of action,” he said. “What it has done is establish conditions under which any established financial adviser can continue commissions.”
But if a broker-dealer violates the conditions of the exemption, Hall said, the rule gives consumers recourse to challenge those violations.
Plaintiffs in the Texas case have asked the court for summary judgment and an injunction to block all implementation of the rule. But they’ll have to wait a while before a judge makes that decision; the first hearing is scheduled for Nov. 17, less than six months before the rule’s implementation deadline. Joe said the plaintiffs believe Judge Barbara Lynn will issue a ruling in the first three months of next year. The implementation deadline is April 10.
The two other challenges to the rule were filed in federal district courts in Kansas and the District of Columbia. The Kansas lawsuit, brought by a Topeka-based insurance marketing organization called the Market Synergy Group, rests on a narrow argument dealing with how the rule addresses the middlemen between insurance carriers and insurance agents.
The D.C. case is likely to receive a ruling first, Joe said, since oral arguments are scheduled for Aug. 25. The National Association for Fixed Annuities filed that suit and has asked the court for a preliminary injunction blocking the rule.
A victory in any of those federal cases could launch a long appeals process with the potential to go as high as the Supreme Court. Because the three district courts reside in separate appellate circuits, there’s also the potential for conflicting rulings from the appellate judges, even though the cases are not identical.
Split opinions from separate appellate courts increases the likelihood of the Supreme Court taking up a case.
However, litigation will not be a substitute for compliance with the law, meaning companies are gearing up for the possibility of the fiduciary rule entering into force in April with all of its provisions intact.
A cottage industry focused on helping firms comply with the fiduciary rule has emerged since this year’s April rollout. The Financial Services Institute, for example, has offered packages that cost as much as $8,000 that offer “five critical tools to assist firms” with implementation. FSI is a plaintiff in the Texas lawsuit.
The international law firm Sutherland, Asbill & Brennan LLP is also seeking clients looking for guidance on implementation. The firm owns the website dolfiduciaryrule.com, which it uses to promote legal compliance services.
“We have sort of looked at the full spectrum of elements of this whole new regime,” said Allison Wielobob, a Sutherland attorney.
While some companies, including U.S. Chamber of Commerce members, are seeking the Labor Department’s help with implementation, the agency could find itself walking on eggshells to avoid having its responses to private sector inquiries come up during legal proceedings, according to Joe.
“As any defendant in a lawsuit, I think they are cognizant that any response that they give might come up in the litigation,” Joe said.
Michael Trupo, a Labor Department spokesman, rejected suggestions that regulators aren’t engaging enough with companies.
“This is not the case,” Trupo said. “In fact, we are encouraging anyone with questions to contact us.”
Industry stakeholders are also planning for how the agency will implement and enforce the rule. In some cases, Joe said, the Labor Department has “taken the most narrow view” of how to implement a rule.
Wielobob noted after the agency finalized a rule dealing with fee disclosures under section 408(b)2 of the Employee Retirement Income Security Act, the same statute that gave the Labor Department the fiduciary rulemaking authority, the agency gave companies about a year after the implementation date before it began clamping down on enforcement.
Wielobob worked on regulatory issues as an attorney at the Labor Department for a decade before leaving the agency last year.
Beyond the lawsuits, there’s one more variable that might affect implementation: the November election. GOP nominee Donald Trump has said he would declare a temporary moratorium on all new federal regulations if he takes office in January. If that happens, the question will become whether DOL should re-propose the rule with more industry-favorable language or shelve it altogether.
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