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U.S. DOJ defends Labor Department’s fiduciary rule in court filing, says injunction would be ‘detrimental’

By Jessica Karmasek | Jul 12, 2016

WASHINGTON (Legal Newsline) - The U.S. Department of Justice asked a federal judge in a filing Friday to reject a challenge to the U.S. Department of Labor’s controversial fiduciary rule.

The DOL released its final rule in April. The rule mandates financial professionals who service individual retirement accounts, including IRAs and 401(k) plans, to serve the “best interest” of the savers and disclose conflicts of interest.

Last month, the National Association for Fixed Annuities, or NAFA, filed a lawsuit in the U.S. District Court for the District of Columbia. The named defendants include the DOL and Secretary Thomas Perez.

The DOL and Perez oppose NAFA’s motions for a preliminary injunction and summary judgment, arguing they are entitled to summary judgment on all counts in NAFA’s June 2 complaint.

The DOJ, on behalf of the DOL and Perez, filed its own proposed order with the D.C. federal court, arguing the rule is necessary to “safeguard the retirement savings of millions of American consumers.”

“NAFA contests both the Rule, which seeks to ensure that those who provide investment advice act in the best interest of their customers, and its related exemptions, which the Department crafted to allow advisers, including NAFA’s members, to collect compensation through transactions that would otherwise be prohibited by law,” DOJ lawyers wrote in last week’s 99-page filing.

“Given the Department’s broad statutory authority, as well as its thorough analysis and reasoned explanation for the regulations, NAFA’s six claims and request for a preliminary injunction should be denied.”

NAFA, in its 34-page complaint, argues the DOL exceeded the authority granted to it by Congress under the Employee Retirement Income Security Act of 1974, or ERISA.

The association also contends the new rule and its exemptions are not in accordance with law, impermissibly vague and “otherwise promulgated in violation of federal law.”

“The lawsuit seeks a preliminary injunction to stay the rule, which is currently scheduled to become operational in April 2017,” said Chip Anderson, NAFA executive director.

“NAFA believes this action is necessary, not only to defend the interests of our members, but to protect consumers against excessive government regulation that will only hurt average working Americans trying to save for retirement.”

The lawsuit alleges the DOL rule improperly categorizes insurance agents as fiduciaries and creates a private right of action, which only Congress can do.

The suit further alleges that the DOL’s decision to include fixed indexed annuities, or FIAs, under the Best Interest Contract Exemption, or BICE, in the final rule with no opportunity for “meaningful comment” and without adequate justification was arbitrary and capricious.

As fixed insurance products and not securities, FIAs and those who create, distribute and sell them stand to be uniquely harmed by this rule, NAFA contends.

“The inherent problems with this rule are vast and far-reaching,” Anderson said. “This rule is administratively unworkable, especially for the fixed annuity industry, and that means quality products and advice currently available to middle-income Americans will be harder to access and more expensive.”

NAFA also contends the new rules are “unworkable” for insurance companies, independent marketing organizations and individual agents, largely because the DOL rule and its exemptions are designed for the securities industry.

“Our organization strongly supports consumer protection but this rule exceeds DOL’s

rulemaking authority and will result in lost jobs in our industry, less choice for consumers and more lawsuits to line the pockets of class action lawyers,” Anderson said.

“We will do whatever we can to help policymakers create real solutions, but this rule will do more harm than good, and we will challenge it in the courts.”

The DOJ, on behalf of the DOL, argues that NAFA “wholly fails” to demonstrate that an injunction would be in the public interest.

“Not only would an injunction have a detrimental effect on other companies seeking to come into compliance with the Rule and investors relying on advisers with conflicts of interest, but it would also result in the public continuing to subsidize those who render investment advice, rather than the retirement investors whom tax-favored retirement plans were meant to benefit,” Justice Department attorneys wrote.

“The protection afforded under ERISA and the Code to plan participants and IRA investors, and the tax subsidies that they enjoy, reflect Congress’s recognition of the importance of plans and IRAs to retirement security. These subsidies are estimated to amount to $17 billion in 2016 alone. The Rule and exemptions seek to ensure that these tax preferences fulfill their purpose of helping consumers achieve retirement security, rather than unduly enriching conflicted investment advisers.

“Until now, investment advisers have been able to operate under financial conflicts and retirement investors have been paying the price of their tainted advice. This is the problem the Rule and exemptions seek to ameliorate, and NAFA has not shown that it is entitled to enjoin the solution DOL crafted to do so. Instead, NAFA asks for relief that would prolong and sustain the ongoing harm to retirement investors.”

A group of trade associations filed a similar challenge to the rule last month, arguing it will “undermine the interests of retirement savers.”

Financial Services Roundtable, joined by Financial Services Institute, 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, Texas Association of Business and the U.S. Chamber of Commerce filed a lawsuit in the U.S. District Court for the Northern District of Texas June 1.

Efforts to override President Barack Obama’s veto of a resolution that would quash the fiduciary rule failed last month.

The U.S. House of Representatives, in a June 22 vote, fell short of the two-thirds majority needed to overcome Obama’s veto of H.J. Res. 88, a resolution that would nullify the DOL’s final “conflict of interest” rule.

Obama vetoed the resolution on June 8, calling the DOL rule “critical” to protecting Americans’ savings and retirement security.

“The outdated regulations in place before this rulemaking did not ensure that financial advisers act in their clients’ best interests when giving retirement investment advice,” he said in a statement. “Instead, some firms have incentivized advisers to steer clients into products that have higher fees and lower returns -- costing America’s families an estimated $17 billion a year.

“The Department of Labor’s final rule will ensure that American workers and retirees receive retirement advice that is in their best interest, better enabling them to protect and grow their savings.”

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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Organizations in this Story

Lake Houston Area Chamber of Commerce Texas Association of Business U.S. Department of Justice U.S. Department of Labor

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