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DoL scores win in first legal challenge to fiduciary rule

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A federal judge handed the Department of Labor a decisive win in its first legal defense of the fiduciary rule.

U.S. District Court Judge Randolph Moss in Washington denied the National Association for Fixed Annuities' request for a preliminary injunction to halt the rule's implementation, scheduled to begin next April.

"It's a really encouraging sign for those of us who think the rule is beneficial and important and just," says Barbara Roper, director of investor protection at the Consumer Federation of America, which filed a brief for the defense with the court. "People were watching [this case] because it asked for the preliminary injunction, which had the possibility of stopping everything in its tracks."

The first case "sets the tone," adds Micah Hauptman, the federation's financial services counsel. "We were always confident that the department was on firm legal ground and that the industry was just desperately trying to stop the rule. This decision just confirms that point."

The annuities association did not respond to a request for comment.

"The court rejected all the industry's baseless arguments," Steve Hall, legal director for the investor advocacy group Better Markets, said in a statement about the decision.

The Labor Department has been working on the rule, which it finalized this spring, since 2010. Labor Secretary Tom Perez has said the rule is necessary to protect American investors, who lose about $17 billion annually to conflicted financial advice in their retirement accounts.

The annuities association filed the lawsuit over the summer, calling the rule "impermissibly vague." It followed others, including one filed by the U.S. Chamber of Commerce and SIFMA, which are challenging the fiduciary rule in a Texas federal court. The first hearing set for that suit, widely regarded as potentially the most substantial, is Nov. 17.

All told, six cases were filed against the rule nationwide. Three of those were combined into one Texas case, Hauptman says. All of them deal, generally, with the issue of whether the department exceeded its authority and whether the rule is compatible with securities laws.

In its request for an injunction, the annuities group opposed aspects of the rule's best interest contract exemption, which will allow advisers to continuing selling many commission-based products, such as annuities.

"NAFA argues," Moss wrote, "that the department’s use of its exemption authority will lead to 'an absurd and irrational result' because it will subject those IRA advisers who are paid on a commission basis (and who must, accordingly, rely on the exemption) to … fiduciary duties, but will not extend those same duties to those who are paid an asset management fee (and who, accordingly, need not rely on the exemption).

"But, far from irrational," Moss continued, "that is precisely the point. In the department’s view, those who are paid on a commission basis may be tempted to make investment recommendations that maximize their compensation while disserving the interests of plan participants and beneficiaries. Advisers paid an asset management fee generally will not face this conflict."

Perez issued a statement reacting to Moss’ ruling, saying: "The conflicts of interest rule was developed after substantial input from a variety of stakeholders, including the industry, and it will make sure that retirement savers receive advice that puts their interests first. I'm pleased that the court recognized the comprehensive and thoughtful process we used in crafting this rule."

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