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Fiduciary Rule Opponents, Backers Make Their Case

The first of the suits challenging the Labor Department’s fiduciary regulation got its day in court last week.

In oral arguments before Judge Randolph Moss on the U.S. District Court for the District of Columbia, the plaintiffs (the National Association for Fixed Annuities) tried to make the case for a preliminary injunction to block implementation of the regulation.

According to Morning Consult, NAFA’s attorney, Philip Bartz of the Washington law firm Bryan Cave, noted that when Congress drafted ERISA, it never intended to allow regulators to create a new private right of action.

Moreover, Bartz said it would be “impossible to comply with absent a major restructuring” of the distribution system for fixed annuities so that they line up with the requirements of the Best Interest Contract Exemption (BICE) under the regulation – and also faulted DOL for requiring companies to achieve this restructuring in the remaining months before it enters into force, according to the report.

Other elements of the rule, such as whether DOL has the authority to regulate products like individual retirement accounts, amounted to an “embodiment of overreach” that could cause irreparable harm to the industry, said Bartz, according to the report.

Counsel for DOL said that while Congress created no precise definition of the advisers that should be regulated as fiduciaries, it did provide room for the DOL’s action by establishing a “necessary and appropriate” standard, and – particularly in view of the switch in emphasis from DB to DC, a shift in retirement investment strategies to a model that relies on investment professionals directly advising consumers makes the fiduciary rule’s changes appropriate, according to the report.

Amicus Brief

Supporting the arguments of the Labor Department in an amicus brief was a group calling itself the Financial Planning Coalition, a collaboration of three national organizations of financial planners: Certified Financial Planner Board of Standards (CFP Board), the Financial Planning Association (FPA®) and the National Association of Personal Financial Advisors (NAPFA). The group, which claims to represent nearly 80,000 financial planning professionals “of all business models and sizes,” in the brief stated that the current regulatory framework “fails to align advisers’ interests with investors’ by leaving open significant loopholes that allow for the sale of a financial product that may not be in the best interests of the investor.”

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The brief argues that the Department’s “strengthened fiduciary rule is therefore necessary and appropriate to protect the public,” citing three primary rationales for their position:

  • Investors currently suffer from a lack of complete, truthful disclosures (investors believe that their advisers are acting in the investors’ best interests even when their lengthy legal disclosures – specifically Form ADV – directly state they are not).

  • Empirical research and the Coalition’s practical experience confirm that middle-income investors will retain ready access to professional financial advice under a fiduciary standard of conduct. (Since the CFP Board established its fiduciary requirement in 2008, the number of CFP® professionals has grown by 30% to more than 74,000.)

  • Based on CFP® professionals’ experience under standards similar to those required by the Best Interest Contract Exemption, that exemption provides a workable solution to the conflict-of-interest problem.

What remains to be seen is whether Judge Moss will agree with the plaintiffs that the alleged harm done by the regulation will indeed be irreparable, and impose the injunction – or whether he will accept the Labor Department’s arguments for deference to its determinations.

Meanwhile, two other cases in federal courts – in Kansas and Texas – have yet to have their day in court.