Texas federal judge upholds DOL’s fiduciary rule, denies motion to stay case

By Jessica Karmasek | Feb 10, 2017

DALLAS (Legal Newsline) - A Texas federal judge this week upheld the U.S. Department of Labor’s controversial new fiduciary rule.

The DOL released its final rule in April. The rule, sometimes referred to as the conflicts of interest 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.

Judge Barbara M.G. Lynn, in a detailed 81-page order released Wednesday, shot down each of the plaintiffs’ major arguments, most notably deciding that the rule does not exceed the DOL’s authority.

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 their lawsuit in the U.S. District Court for the Northern District of Texas June 1.

The U.S. Chamber’s Institute for Legal Reform owns Legal Newsline.

Soon after, the Chamber’s lawsuit was consolidated with separate lawsuits filed by the American Council of Life Insurers and the Indexed Annuity Leadership Council.

In their lawsuits, the associations argued the rule will “undermine the interests of retirement savers.” They also argued the rule and related prohibited transaction exemptions, or PTEs, overstep the DOL’s authority, create “unwarranted” burdens and liabilities, and are contrary to the law.

In particular, ACLI argued the new rules violate the First Amendment, as applied to the “truthful commercial speech” of their members. ACLI is a trade association representing nearly 300 member legal reserve life insurance companies operating in the U.S. and abroad.

Lynn said, at worst, the only speech the rules “even arguably regulate” is misleading advice.

“Plaintiffs and their members may speak freely, so long as they recommend products that are in a consumer’s best interest. If an investment adviser recommends a product merely because the product makes the most money for the adviser or financial institution, despite the product not being in the investor’s best interest, such advice is not appropriate for the investor and would be misleading,” she explained.

“Thus, even if Plaintiffs’ First Amendment claim were analyzed as a regulation of commercial speech, the rules would withstand First Amendment scrutiny because they only seek to regulate misleading advice and statements.”

ACLI said in a statement it was “disappointed” with the judge’s decision.

“ACLI and NAIFA (National Association of Insurance and Financial Advisors) continue to believe that the regulation is arbitrary and capricious, contrary to law and violates the First Amendment,” it said. “We support responsible and balanced regulations that protect the interests of retirement consumers. But the regulation is neither reasonable nor balanced. It will harm the very people it is meant to help -- retirement savers who now, more than ever, need access to the guaranteed lifetime income products (personal pensions) offered by ACLI and NAIFA members. It is essential that all Americans receive the financial advice they want and need.”

It added, “This decision underscores the urgency for the administration to act immediately to delay this misguided regulation. A delay will provide time for the administration to conduct a thoughtful review and to work with ACLI, NAIFA and other stakeholders toward public policies that help Americans achieve their financial and retirement security goals.”

John Berlau, a senior fellow at the Competitive Enterprise Institute, a self-described “non-profit libertarian think tank,” also said the ruling was disappointing.

But he argues the decision shouldn’t have any bearing on President Donald Trump’s recent decision to suspend the rule.

“Both Democrats and Republicans have rightly expressed concern about the devastating effects the fiduciary rule could have on access to investment options and advice for poor and middle-class savers,” he said in a statement.

Last week, Trump ordered a review of the rule.

Trump’s memorandum instructs the department to conduct a new study to determine whether the rule is likely to harm investors and the financial industry, and if it does, the rule can be rescinded or revised.

The U.S. Department of Justice, on the same day Lynn issued her decision, filed a motion to stay the case, citing Trump’s memorandum.

The DOJ argued it would not serve the “judicial economy” to issue a ruling at this point.

“A judicial decision on a rulemaking as complex as this while the Department is undertaking the examination and potential promulgation of a proposal pursuant to the Presidential Memorandum can be expected to cause confusion with the affected public, whether parties to this litigation or not,” it wrote. “Therefore, Defendants respectfully request that the Court stay the proceedings in this action pending the results of the review directed by the President.”

Lynn denied the motion.

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

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Competitive Enterprise Institute U.S. Chamber of Commerce U.S. Department of Justice U.S. Department of Labor U.S. District Court for the Northern District of Texas White House

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