ACLI Attorneys Ready for Legal Challenge Against DOL Fiduciary Rule
October 18, 2016 by Frank Klimko
WASHINGTON – Attorneys for the American Council of Life Insurers are preparing for oral arguments next month in a lawsuit that questions the legality of the U.S. Department of Labor’s fiduciary rule update, which they say will upend the retirement advice industry.
“We are in the early days in an important piece of litigation in which there are dramatic consequences for the economy, for your businesses and for investors,” David Ogden, an attorney representing the ACLI in the DOL lawsuit, said at the ACLI Annual Conference held in Washington D.C. “We argue that DOL’s over-broad interpretation of a fiduciary is unreasonable and is contrary to the law.”
Ogden, a partner with WilmerHale, was part of a panel outlining the litigation, one of six lawsuits pending on the rule. The ALCI consolidated case will be heard Nov. 17 in the U.S. District Court for the Northern District of Texas (Best’s News Service, Oct. 7, 2016).
Ogden said the DOL overstepped its authority when it required fiduciaries using the Best Interest Contract exemption to agree to be sued for breach of contract related to the best interest standards. The BIC was designed to permit broker-dealers to continue to receive commissions. But, the BIC created a new private right of legal action, which is legally reserved for Congress and is not within the authority of the DOL, Ogden said.
“We argue that the department has misused its authority under the tax code to establish new substantive standards for service providers to IRAs,” Ogden said. “In crafting the BIC, DOL improperly exercised legislative power. This contradicts basic tenets of administrative law.”
In the lawsuit, the ACLI claims the rule update is unconstitutional because it restricts the ability of agents, advisers and brokers to talk with clients. Such interactions, like ordinary sales transactions, are protected commercial free speech, the Ogden said.
“In regulating that kind of speech, the department has done so in a manner that is discriminatory based on the Department of Labor’s judgments on the value of the speech and the contents of the speech,” Ogden said. “The rationales for restricting speech that are imposed are not sufficient and other much more direct and commonsense ways of addressing concerns about conflict-of-interest were available.”
Kelly Dunbar, also a partner at WilmerHale, said the lawsuit is also challenging a narrow part of the rule that applies to agents, brokers and dealers who distribute fixed indexed annuities. The rule mistakenly moves those products into the new BIC exemption, which is far more restrictive, from the old Prohibited Transaction Exemption, or PTE 84-24, Dunbar said.
The DOL ignored the costs of moving the FIAs into the BIC exemption and did not give proper notice it was contemplating such a re-designation, Dunbar said.
“When the department first suggested the revised fiduciary rule, the department proposed placing FIAs into the PTE 82-24,” Dunbar said. “For that reason, there was barely any discussion about how it would work if fixed indexed annuities were actually placed in the BIC.”
“That has significant consequences because fixed indexed annuities are sold through the independent distribution model and not by broker-dealers,” Dunbar said.
Even if the ACLI wins in the Texas federal court, appeals could linger for more than a year, Ogden said.
The post-ruling process could get more complicated if the judges all render different decisions on the rule, one upholding it and another vacating it, for example, Ogden said. In that case, the DOL could seek to implement the rule nationally except for the judicial districts where it received an initial adverse opinion, he said.
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)
