DOL Fires Back at Litigation Claims

The Labor Department has filed a response to one of the litigation challenges to the fiduciary regulation – and gotten a court date in another.

District Judge Barbara M.G. Lynn agreed last month to let three lawsuits filed in the Northern District of Texas to be consolidated. While the parties had asked for a mid- to late-October date for oral arguments, that has now been set for November 17.

NAFA ‘Minds’

In a 105-page response to a suit filed in the U.S. District Court for the District of Columbia by the National Association for Fixed Annuities (NAFA), DOJ attorneys have submitted their arguments supporting their belief that the claims made are without merit.

In response to claims by NAFA that the Labor Department exceeded its statutory authority under ERISA and acted in an arbitrary and capricious manner, the Labor Department invoked legal precedent for a deferral to its authority by Congress and the courts, including the ability to grant exceptions to its requirements, such as the Best Interest Contract (BIC) Exemption. They also challenged NAFA’s contention that the Labor Department used ERISA as a basis for extending ERISA fiduciary status to IRAs as a “red herring,” since the Labor Department said that it “relied on its interpretive and rulemaking authority” under the Internal Revenue Code to do so.

The Labor Department goes on to state that it did not “impose ERISA fiduciary obligations” on fiduciaries to IRAs. Rather, they claim that while the Internal Revenue Code doesn’t contain provisions that parallel those of ERISA for IRAs, all that can be inferred from that “is that Congress did not intend to mandate (their emphasis) such obligations for fiduciaries to IRAs.” And that, according to the DOL’s response, doesn’t mean that the DOL couldn’t condition an exemption on standards akin to those in ERISA. “Those who qualify as fiduciaries with respect to IRAs are not subject to fiduciary duties under ERISA but are subject only to the parallel prohibited transaction provisions in the Code,” according to the Labor Department response.


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As for the notion that the Labor Department improperly created a private cause of action through the BIC Exemption, the response argues that no ‘right of action’ has been “created,” since it alleges that the actions are already available under state contract law.

‘Reasonable’ Doubts?

In response to the charge that the term “reasonable compensation” in the BIC Exemption is “so vague as to be without meaning,” the Labor Department asserts “it is a tall order for NAFA to show that the use of the adjective “reasonable,” which is pervasive in legal and judicial standards, is impermissibly vague,” citing references in common law, the Uniform Trust Code, and “longstanding ERISA and Code provisions.”

FIA ‘Meant’?

As for the claim that the Labor Department’s treatment of fixed income annuities (FIAs) as securities conflicts with the Dodd-Frank Act (which clarified that FIAs are to be treated as exempt from regulation under federal securities law), the Labor Department says it did no such thing, and that “whether or not FIAs are securities is irrelevant” since neither the fiduciary definition nor the Code nor the prohibited transaction provisions “turn in any way on whether the investment at issue is a security.” That said, the Labor Department’s response acknowledged that they reached their decision regarding FIAs “based on significant concerns” regarding their complexity, risk and conflicts of interest associated with recommendations. Additionally, the Labor Department maintained that congressional action regarding securities laws “does not impact DOL’s authority under ERISA and the Code to regulate investment advice by fiduciaries to tax-favored retirement vehicles.”

Regarding the notion that the provisions of the regulation are “unworkable,” the Labor Department noted that insurance companies will not be required to “scour the market to find the best possible investment option for each customer,” but that they must act prudently, making recommendations that a knowledgeable investment professional would make, that are in the best interests of the participant/IRA holder, and on a compensation unconflicted basis. And while the Labor Department acknowledges that some current market participants may exit, “such market adjustments happen even without new regulation” and that, based on the evidence, DOL thought “that most advisers will remain.” Moreover, “DOL concluded that some disruption of current practices was not only anticipated but necessary.”

BIC ‘Switch’?

The NAFA suit had also challenged that the Labor Department’s last-minute decision to switch FIAs from PTE 84-24 to the BIC Exemption, “without adequate notice, was arbitrary, capricious, unsupported, and contrary to law,” the Labor Department said that FIA’s eligibility for the BIC Exemption “was never in doubt” and that the agency has sought comment on both applying the PTE 84-24 and the BIC Exemption. Ultimately, the Labor Department seems to believe that it sufficiently outlined its concerns and rationale for doing so in the final regulation – while asserting that NAFA “incorrectly understates the risks involved in FIAs.” The response said that final regulations don’t need to be identical with those proposed, but merely “a logical outgrowth” of them, an outcome that the response said was discussed during the 2015 public sessions on the regulation.

Not surprisingly, the Labor Department closes by asking the court to grant the DOL a summary judgment.

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