Earlier this month, eight industry and trade groups launched a broad challenge to the US Department of Labor’s (DOL) Fiduciary Rule (Rule) and related prohibited transaction exemptions that were released on April 6, 2016. The challenge was brought in in Texas federal court. Plaintiffs seek an injunction halting the regulations, which impose a fiduciary duty on financial professionals who advise retirement account savers, asserting that the new regulations will harm retirement savers, small US businesses, financial professionals, and financial services firms and insurance institutions. The suit challenges the new rules on First Amendment, statutory jurisdiction, and procedural grounds.
The new DOL regulations alter the duties of financial professionals who provide retirement advice, products, and services, requiring them to act in their client’s “best interest” when recommending investment products. Under the current rules, professionals are required to promote products that are “suitable” to an investor.
In redefining the term “fiduciary,” the Rule expands the designation to cover a person who makes any of various “recommendations” to a retirement saver and receives a fee or other compensation in connection with that recommendation. Consequently, the DOL rules ban common forms of compensation for financial services and insurance professionals, such as commissions and sales loads. According to the plaintiffs, the prohibitions on transaction-based compensation will harm investors by pushing them into fee-based accounts, which can be prohibitively expensive.
The complaint alleges that this redefinition of “fiduciary” under the Rule is “deliberately unworkable” and that “financial services firms and insurance institutions will have no choice but to seek an exemption from it.” But, the Rule’s Best Interest Contract Exemption is conditioned on financial services firms and insurance institutions agreeing to, among other things, subject themselves to fiduciary standards of conduct in contracts with their customers. Plaintiffs allege that this contract requirement violates the First Amendment by restricting financial professionals’ ability to advise clients.
Plaintiffs are further concerned that, because the DOL lacks authority to enforce these new fiduciary standards, the contract requirement exposes financial services firms and insurance institutions to liability in class action lawsuits. Barring firms from including class action waivers in their contracts conflicts with the Federal Arbitration Act and exposes firms to costly litigation, the complaint said.
Plaintiffs US Chamber of Commerce, the Securities Industry and Financial Markets Association, the Financial Services Institute and five other national and local business groups caution that the higher standards will impose billions of dollars of implementation costs and could hamper plaintiffs’ ability to provide advice to investors. They further assert that the new regulations will limit consumer choice by forcing retirement savers who need investment assistance to obtain it only by entering a fiduciary relationship—and bearing the associated costs. Plaintiffs argue that the Rule will impact small broker-dealers and retirement savers and that the DOL appeared to ignore comments from SEC staff members who shared their concerns.