First Fiduciary Rule Challenge Leads to Thorough DOL Victory

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By Jacklyn Wille

Nov. 7 — The Department of Labor’s fiduciary rule has received its first round of judicial scrutiny, and the result was a thorough victory for the department ( Nat’l Assoc. for Fixed Annuities v. Perez , 2016 BL 369523, D.D.C., No. 1:16-cv-01035, 11/4/16 ).

On Nov. 4, a federal judge in Washington completely rejected one of the six pending lawsuits challenging the rule, which is aimed at reducing the supposedly conflicted investment advice given to retirement savers. The National Association for Fixed Annuities had asked for an injunction blocking the rule from being enforced, but the judge denied the request and went a step further by ruling for the department on each of NAFA’s six challenges to the rule and the DOL’s process for adopting it.

In upholding the rule, Judge Randolph D. Moss of the U.S. District Court for the District of Columbia said that a “common theme” ran through each of NAFA’s challenges: namely, that the conditions imposed on certain investment advisers made commission-based compensation “sufficiently unattractive” that they may “decline to take advantage” of the department’s legal exemption, forcing them to restructure their systems at “enormous cost.” Moss said that these concerns “were not lost” on the DOL, which reasonably determined that “the risk that retirement investors would suffer significant losses due to conflicted investment advice raised even greater concerns.”

This decision will no doubt be read with interest by the parties involved in the five other pending lawsuits challenging the department’s rule. The next word on these challenges is expected to come from a federal court in Kansas, which in September held a hearing in a similar case brought by Kansas insurance company Market Synergy Group Inc. Lawsuits brought by the U.S. Chamber of Commerce, the American Council of Life Insurers and the Indexed Annuity Leadership Council will go before a Texas-based federal judge next week. Another lawsuit is pending in a Minnesota federal court.

Judge Moss’ decision could spell good news for so-called robo-advisers, which seek to provide investment advice through online, algorithm-based platforms with little human involvement. Shares of Financial Engines, the California-based investment advice company that recently announced plans to enter the world of robo-advisers, saw an increase of more than 10 percent between its opening on Nov. 4 and press time on Nov. 7. Shares of other companies that recently rolled out robo-advising platforms, including Charles Schwab Corp., BlackRock Inc., Morgan Stanley and Bank of America Corp., were all up modestly over the same period.


Secretary of Labor Thomas E. Perez called the ruling “a win for working Americans.”

“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,” Perez said in a statement e-mailed to Bloomberg BNA. “I’m pleased that the court recognized the comprehensive and thoughtful process we used in crafting this rule—this ruling is a win for working Americans who simply want a secure retirement.”

NAFA said in a statement that it was “disappointed” by the decision and planned to “move quickly” to appeal to the U.S. Court of Appeals for the D.C. Circuit.

Greta E. Cowart, an employee benefits attorney in Winstead PC’s Dallas office, told Bloomberg BNA that the decision “seems to be well reasoned” but cautioned that this was “just the beginning of what may be a long journey before we get to a new normal.”

Andrew D.W. Hill, a registered investment adviser in Naples, Fla., called the decision “good news.” Hill, who supports the fiduciary rule and the department’s efforts to regulate investment advice, told Bloomberg BNA that he continues to see affluent investors being sold “high commission products that fail to meet their long term goals” based on “incredible” sales pitches by financial advisers.

Arguments Rejected

In its legal challenge, NAFA argued that the DOL’s new definition of “rendering investment advice” exceeded the department’s regulatory authority under the Employee Retirement Income Security Act. The new definition expands the department’s regulatory purview to those who give investment advice that doesn’t occur on a “regular basis”—such as those who advise on one-time events, like rollovers to individual retirement accounts.

Moss disagreed with this challenge, explaining that the department’s new interpretation was in line with “ordinary usage” and was more easily reconciled with the statutory text than the prior interpretation, because the statute itself didn’t distinguish between advice given regularly and advice connected to one-time events.

NAFA also argued that the DOL lacked authority to extend ERISA’s twin duties of prudence and loyalty—which apply to fiduciaries of employer-sponsored retirement plans—to arrangements like IRAs. According to NAFA, the “clear distinctions” Congress drew between employer-sponsored plans and IRAs precluded the DOL from regulating IRAs more aggressively.

Moss had some sympathy for this theory—calling it “closer to the mark” than NAFA’s other arguments—but nevertheless found that Congress’ decision to put these arrangements in different titles of ERISA “says little, if anything” about whether Congress intended to bar the department from imposing ERISA’s fiduciary duties on IRA advisers in certain circumstances.

Private Right of Action

One accusation that several groups—including NAFA, the Chamber of Commerce and the American Council of Life Insurers—had lobbed at the DOL was that the rule created an unauthorized private right of action that would allow individual lawsuits to proliferate.

Specifically, the groups claimed that by premising favorable treatment on advisers that enter into “best interest contracts” with their clients, the DOL created an unauthorized avenue for investors to sue advisers that don’t live up to the DOL’s standards. The groups claim that only Congress, and not regulatory agencies, can create federal causes of action.

Moss disagreed with this characterization entirely. In his view, requiring parties to enter into private contracts wasn’t tantamount to creating a private right of action. Moss explained that any lawsuit stemming from such a contract would be brought under state contract law, and not ERISA or other federal statutes.

Fixed Indexed Annuities

Finally, NAFA challenged the DOL’s decision to regulate fixed indexed annuities more aggressively than fixed rate annuities. While the latter annuity provides a guaranteed rate of return, the former generally provides a variable rate that is guaranteed to stay above zero.

Most of the lawsuits against the DOL challenge this distinction, which NAFA described as a “last-minute decision” that didn’t allow for proper notice and comment from affected parties.

Disagreeing, Moss said that the DOL gave ample notice that it was evaluating whether it had “drawn the correct lines” between various annuity and insurance products, and it gave a reasoned explanation for the decision it ultimately made.

Possible Road Forward?

Although Moss’ opinion was a thorough defeat for NAFA, other fiduciary rule critics may take heart at one portion of his opinion.

Specifically, Moss used lack of standing to reject a portion of NAFA’s challenge to the DOL’s revised definition of “investment advice.” According to NAFA, the DOL’s own statements betrayed that the newly broadened definition could “sweep in some relationships that are not appropriately regarded as fiduciary in nature.” That the DOL purported to provide a carve-out for these relationships didn’t absolve it of regulatory overreach, NAFA argued.

Moss didn’t reject this argument outright. Rather, he said that because those other relationships didn’t involve the sale of annuities, NAFA “has no standing to complain about” overbreadth that might affect the interests of others.

Winstead attorney Greta Cowart said that this reasoning “leaves open a door” for challenges by other groups with interests beyond the sale of annuities.

It will be “important to watch how the various courts address other challenges to the breadth of the regulation by other affected parties or interest groups,” Cowart said.

NAFA was represented by Jacob A. Kramer and Philip D. Bartz of Bryan Cave LLP in Washington. The DOL was represented by Emily S. Newton and Galen N. Thorp of the Department of Justice in Washington.

To contact the reporter on this story: Jacklyn Wille in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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