Fiduciary rule: Bulletproof to first attack?

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In what could be their last hope to block the implementation of the fiduciary rule, the U.S. Chamber of Commerce, SIFMA, FSI and other business groups have asked a federal court in Texas to vacate the Department of Labor's new regulations.

The lawsuit was filed Wednesday — less than a year before the initial provisions of the new regulations are due to be implemented. Indeed, firms' compliance departments are racing to prep hundreds of thousands of advisers for the rule.

The lawsuit also comes after President Obama vowed to veto efforts by congressional opponents to block the rule; opponents in the Senate lack the votes necessary to overcome a veto.

The lawsuit argues that in crafting the fiduciary rule the Labor Department exceeded its authority.

"We've always pursued this on a multitrack process," says David Hirschmann, CEO of the chamber's Center for Capital Markets Competitiveness. "This is a logical and necessary step that has to be taken now so that we can get a decision in time before the rule goes into effect next April."

In a statement, Labor Secretary Tom Perez vowed to vigorously defend the rule, saying it "is built upon solid statutory and legal foundations."

"People saving for retirement have a legal right and a compelling economic need to receive retirement investment advice that is in their best interest. Today, a handful of industry groups and lobbyists are suing for the right to put their own financial self-interests ahead of the best interests of their customers," Perez said.

The lawsuit's likelihood for success, as well as its scope, could be limited, according to legal experts.

Tamar Frankel, a fiduciary expert and professor at Boston University School of Law, says that because the lawsuit is filed in Texas, it is not likely to impact the rule's implementation – at least not initially and, if so, only in Texas.

If the lawsuit succeeds, Texas "can say, 'We will not recognize a claim that is made in our jurisdiction,' " Frankel says.

For a legal decision to bind all states, it would need to rise to the level of the U.S. Supreme Court, she adds.

The leaders of the trade groups say they chose Texas in part for symbolic reasons: It's not home to the federal government or Wall Street.

The leaders of the trade groups say they chose Texas in part for symbolic reasons: It's not home to the federal government or Wall Street.

"I think it's important that a case that impacts Main Street Americans, be heard in a Main Street location," says Eugene Scalia, an attorney with Gibson Dunn & Crutcher, which is representing the plaintiffs.

The timing of the lawsuit doesn't favor the plaintiffs, given the investments many of their members already have made to come into compliance with the new rule, says Mercer Bullard, a professor of law at the University if Mississippi.

"The plaintiffs' decision to delay filing until now may be a costly one," Bullard says. "The rule will take effect on schedule until a court says otherwise. It is not clear that a court will reach a decision before firms will already have had to change their systems in anticipation of the April 17 compliance."

In a follow-up email, reporters for Financial Planning asked the groups leading the lawsuit if there would be any avenues left to block the fiduciary rule should this lawsuit fail.

"The question is premature," says Kevin Carroll, SIFMA managing director and associate general counsel. "We are confident in the merits of our lawsuit and its likelihood of success."

Meanwhile, industry groups and firms are readying themselves and advisers for the regulations' implementation.

"We are very actively helping out members do everything they can to comply with the rule," says FSI CEO Dale Brown. "We are taking all actions."

Leaders of major wealth management firms have also said that they are spending millions to update compliance systems and procedures in order to comply with the new regulation.
Indeed, LPL Financial President Dan Arnold, speaking to analysts last month, said that "the impact from the rule will be very manageable for our business."

This latest move by the DoL's opponents is also the most recent in the long-running battle over the department's efforts to craft a fiduciary standard, which was first proposed in 2010.

A final version of the fiduciary rule was made public earlier this year. It was more than 1,000 pages long – a fact noted by many wealth management executives and trade groups.

"It creates miles of red tape and makes it much more costly and difficult to provide retirement advice to small savers," says Tim Pawlenty, a former Republican governor of Minnesota and current CEO of the Financial Services Roundtable, one of the parties behind the lawsuit.

"It creates miles of red tape and makes it much more costly and difficult to provide retirement advice to small savers." --Tim Pawlenty

Fiduciary supporters, who have championed new fiduciary regulations as necessary to protect clients from unscrupulous brokers, were swift to criticize the lawsuit.

"Any further delay in the implementation stands to negatively impact millions of American retirement savers," says the Financial Planning Coalition, which includes the CFP Board, the FPA and NAPFA.

Although the plaintiffs reiterated that their primary concern in filing the suit is to protect small investors who, they say, stand to be most harmed by the rule, no investor advocacy groups are a party to the lawsuit.

"investor advocate groups would be welcome to join," a spokesman said, when questioned on the subject.

Later Frankel said that seemed unlikely: "I doubt whether an investor advocacy group would join."

The lawsuit argues that in crafting the fiduciary rule the Labor Department exceeded its authority.

Repeating arguments made previously by DoL opponents, the lawsuit emphasizes that the authority to craft a fiduciary rule belongs to the SEC, which was authorized to do so under the Dodd-Frank Act.

The plaintiffs say that "the department has disregarded the regulatory framework established by Congress, exceeded its authority, and assumed for itself regulatory power that is vested in the SEC in ways that will harm retirement savers."

Leaders of the trade groups say the rule will impose enormous costs on businesses and brokerage firms, particularly due to the fact that the clients will have the ability to file class action lawsuits against firms.

"Many of these lawsuits are not intended to go to court. They are intended to force a settlement," Hirschmann says. “So advisers will have to plan for the litigation risks. Our fear is that they will not only want to set aside funds for litigation risks, but that they will simply stop serving clients.”

As it unfolds, the lawsuit could help answer, or at least explore, a relatively unknown question of law, says Frankel, the law professor: Whether a regulatory body like the Labor Department can indeed grant a private right of action to investors, allowing them to sue.
"The rule in this case specifically created a right of action," Frankel says. "The question is really whether ERISA gave the government and the Labor Department the authority to give a private right of action. To the best of my knowledge, which is not encyclopedic, I don't remember an answer to that question."

In general, she says, "the tendency of the courts was not to open the door to private rights of action."

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