It’s one thing to call the DOL’s final fiduciary rule “arbitrary, capricious, and contrary to law,” but it’s another thing altogether to sue the federal agency for creating the rule in the first place.  

A handful of prominent businesses, groups and even the U.S. Chamber of Commerce are legally taking on the Department of Labor as well as DOL Secretary Thomas Perez.

The lawsuit, which claims the DOL is essentially rejecting key longstanding securities laws and intruding upon the responsibilities and power Congress has given the Securities and Exchange Commission (SEC) with the fiduciary rule, was filed in U.S. District Court for the Northern District of Texas.

As reported previously, the fiduciary rule aims to grant plan participants greater protections by requiring brokers and advisers to act in their clients’ best interests when doling out investment advice.

Under the final rule, anyone providing investment advice – including brokers and advisers – will be designated as a fiduciary and must disclose any potential conflicts of interest to plan participants.

The plaintiffs in the lawsuit include:

  • the U.S. Chamber of Commerce,
  • Financial Services Institute,
  • Financial Services Roundtable,
  • Insured Retirement Institute
  • the Securities Industry and Financial Markets Association, and
  • a number of Texas-based business interest groups and affiliates of the Chamber of Commerce.

‘Regulatory power that is vested in the SEC’

One of the major points of contention in the lawsuit against the DOL is the power the new fiduciary law gives the agency over IRAs.

In the final rule, the DOL created a “Best Interest Contract Exemption,” which plaintiffs argue essentially expands the agency’s “affirmative” regulatory authority beyond ERISA to the oversight of IRAs.

That’s because the final rule says that any recommendation to a plan participant about rolling over assets from a 401(k) to an IRA constitutes a fiduciary act.

While the fiduciary rule doesn’t explicitly forbid such transactions or commission-based compensation for investment advice for those transactions, it does consider them to be prohibited transactions under ERISA. And the only way for brokers and advisors to be completely safe is to meet the specific criteria laid out in the rule’s Best Interest Contract Exemption (BIC).

That’s something many in the financial services industry have a major problem with. As the plaintiffs’ attorneys put it, the DOL has “assumed for itself regulatory power that is vested in the SEC in ways that will harm retirement savers” and create “significant burdens and liability risk” for brokers and advisors.

According to the lawsuit, the DOL knew extending its regulatory authority to IRAs would inevitably leave it open to legal actions because:

“The Department knew and intended that banning all transaction-based compensation would force financial services providers to accept the terms of the BIC exemption and agree, among other things, to be sued in class action litigation under the vague new standards.”

Showdown in the Supreme Court?

Based on the reactions of some of the major proponents of the new fiduciary law, this lawsuit may not be all that surprising. One of the leading advocates of the DOL’s fiduciary rule, Barbara Roper, the director of investor protection at the Consumer Federation of America, said the lawsuit was expected because:

“Firms that have profited handsomely under the current system find it (the rule) threatening. Despite their oft-pressed concern for low and middle income savers, it is those billions in excess profits that this lawsuit is intended to protect.”

No one in the employment law arena is expecting a quick ending to this lawsuit against the DOL. In fact, a number of employment law experts foresee additional lawsuits in the future. And a potential split among appellate courts could set the stage for a final showdown in the Supreme Court.

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