Flurry of lawsuits filed to overturn DOL fiduciary rule

Less than two months after the Department of Labor (DOL) released its final fiduciary rule, a flurry of lawsuits has been filed to overturn it. The DOL’s controversial rule expands the definition of fiduciary of an employee benefit plan to add brokers and advisers providing advice to IRA, Archer medical savings account (MSA), and health savings account (HSA) owners and Coverdell education savings account (ESA) participants.

Lawsuits Filed

The U.S. Chamber of Commerce, Securities Industry, and Financial Markets Association, Financial Services Roundtable, and six other financial service and business trade groups filed the first lawsuit in U.S. District Court for the Northern District of Texas. The plaintiffs seek to have the DOL’s fiduciary rule and prohibited transaction exemptions vacated and set aside before taking effect in April 2017. Their complaint asserts that the DOL’s fiduciary rule and prohibited transaction exemptions “overstep the Department’s authority, create unwarranted burdens and liabilities, undermine the interests of retirement savers, and are contrary to law.”

The eight counts that form the basis of the plaintiffs’ complaint mirror many of the comments that the DOL received during the two comment periods. The complaint alleges that the DOL has improperly exceeded its authority in violation of ERISA, the Internal Revenue Code (IRC), and the Administrative Procedure Act. It notes that ERISA grants the DOL regulatory authority over covered employee benefit plans—but not over IRAs sold to individual savers—and that the authority over prohibited transactions under IRC Section 4975 is given only to the Department of the Treasury.

Another count alleges that the DOL unlawfully created a private right of action through a written, enforceable contract requirement that would enable IRA owners and participants in non-ERISA plans to sue financial institutions and their representatives for breach of the DOL’s standards of conduct. The complaint notes that it is a well-established principle that only Congress may create a private right of action.

A second count alleges that the DOL’s fiduciary rule, which forbids financial institutions and representatives from relying on the best interest contract exemption if they include an arbitration agreement with a class action waiver in their customer contracts, violates the Federal Arbitration Act (FAA). The FAA requires arbitration acts to be enforced according to their terms, and federal agencies are prohibited from overriding the FAA’s protections of the enforcement of arbitration agreements, unless Congress has conferred such authority.

The complaint also alleges that the DOL failed to provide adequate notice and to sufficiently consider and respond to comments. It specifically cites the DOL’s failure to adequately consider and respond to proposed alternatives related to the scope of the rule—such as commenters’ requests for a broad seller’s exception—and multiple comments that the DOL’s Regulatory Impact Analysis had critical defects. Another count alleges that the DOL arbitrarily and capriciously assessed the rule’s benefits, consequences, and costs. The complaint alleges that the DOL’s claim that the rule would offer significant financial benefits to retirement savers, which it estimated at $4 billion a year, was based on a flawed analysis. It asserts that the DOL improperly extrapolated the underperformance of outlier mutual funds to all mutual funds and ignored and underestimated the rule’s direct and indirect costs to the financial services industry and retirement savers. Indirect costs include those from class action lawsuits and costs to savers from lost access to retirement planning advice and assistance.

Other counts allege that the rule violates the Administrative Procedure Act because

• it is arbitrary, capricious, and irreconcilable with the language of ERISA and the IRC;
• the DOL’s regulation of fixed-index annuities and group variable annuities through the best interest contract exemption is barred by the Dodd-Frank Act; and
• the best interest contract exemption impermissibly burdens speech in violation of the First Amendment.

A second lawsuit—filed by the National Association for Fixed Annuities (NAFA) in U.S. District Court for the District of Columbia—also alleges that the DOL exceeded its statutory authority under ERISA and seeks a preliminary injunction to stay the rule.

A third lawsuit also has been filed in U.S. District Court for the Northern District of Texas—the same venue as the initial lawsuit—by the American Council of Life Insurers, the National Association of Insurance and Financial Advisors (NAIFA), and state and local NAIFA chapters. The insurance industry plaintiffs make similar arguments to the others suits, alleging that the DOL lacked authority to promulgate the fiduciary rule, and are asking the court to vacate the rule and prevent the DOL from enforcing it.

Two more industry lawsuits have been filed, one in the U.S. District Court for the Northern District of Texas and another in the U.S. District Court for the District of Kansas. These lawsuits also ask the court to vacate the rule and argue that the DOL lacks authority to enact the fiduciary rule.

The U.S. District Court for the District of Columbia will hold a hearing on August 25, 2016, on NAFA’s request for a preliminary injunction. No court dates have been set for the three other lawsuits filed in U.S. District Court for the Northern District of Texas or the lawsuit filed in the U.S. District Court for the District of Kansas. The Texas court may be the most favorable venue for the plaintiffs as the court has ruled against the DOL in previous high profile cases.

Potential Battles Ahead

After President Obama vetoed a resolution that was approved by both the House and Senate to block the fiduciary rule—and neither chamber was able to gather a supermajority to override the veto—the courts are now the only option for the industry. It is likely that more lawsuits will be filed in the coming weeks to overturn the DOL’s fiduciary rule. If these suits are filed in multiple jurisdictions, it would require the DOL to fight a prolonged legal battle on multiple fronts. And, if there are split decisions among the circuit courts, the case could wind up before the U.S. Supreme Court.

That said, it is expected that—much like the Patient Protection and Affordable Care Act—the Obama Administration’s Justice Department will strongly defend the fiduciary rule. U.S. Secretary of Labor, Thomas E. Perez, issued a statement in response to the initial lawsuit noting that the fiduciary rule “is built upon solid statutory and legal foundations, and we will defend it vigorously.”

Be Ready to Follow Final Rule

It will take some time for the lawsuits to wind their way through the courts and the clock is ticking on the fiduciary rule’s April 2017 implement date. Credit unions should not wait for the courts, and would be well-advised to review the final rule and how it will affect their policies and procedures so that they are prepared to comply with the final rule when it goes into effect. This includes evaluating direct and indirect compensation related to IRAs, the types of communications provided to IRA owners, the compensation schemes and incentive payments to employees working with IRAs, and arrangements with third-party brokers and investment advisers, if applicable.