The U.S. Chamber of Commerce and a consortium of financial industry trade groups will file a lawsuit challenging the Department of Labor’s (DOL) fiduciary rule as early as today, according to reporting in the Wall Street Journal.
Unnamed sources told the Journal that one focus of the lawsuit will be a provision in the rule’s Best Interest Contract Exemption that allows investors to file private class-action claims if advisors give conflicted advice on investment products and fail to act in an investor’s best interest.
Advisors that recommend investors rollover assets from a 401(k) plan to an IRA will have to do so under the BIC exemption, a binding contract that holds advisors to a fiduciary standard of care.
Even when advisors offer fee-based services, as opposed to variable commission-based compensation on investment products, they will have to document why the rollover recommendation is in the client’s best interest.
The rule does not ban commission-based compensation or the sale of proprietary investment products, nor does it prohibit specific investments like actively managed mutual funds, or require advisors to offer the least-expensive investments available.
Nonetheless, ERISA attorneys have said offering commission-based investments under the rule will make compliance with the BIC exemption difficult.
Last week, Assistant Secretary of Labor and head of the Employee Benefits Security Administration Phyllis Borzi explained that DOL’s statutory power to regulate IRAs is limited, which is why regulators crafted the private action provision of the BIC exemption.
“The consumer has to enforce the rule through state contract actions,” said Borzi, addressing a consortium of fiduciary advocates at an event hosted by the Institute for the Fiduciary Standard.
The lawsuit challenging DOL’s authority to issue such a broad regulation comes as little surprise. Shortly after the rule was finalized in April, David Hirschmann, CEO of the Chamber’s Center for Capital Markets Competitiveness, indicated the organization was weighing a legal challenge to the rule in a press call.
In April, Labor Secretary Thomas Perez said “If we get sued, we’ll be ready for it,” addressing members of the media on the day the U.S. House of Representatives passed a resolution to block implementation of the rule on a party-line vote.
“Not only is the final product a very good product, but the process leading to the product (the final rule) was an impeccable process and as a result, they (opponents of the rule) don’t have a legal leg to stand on in a lawsuit,” said Perez.
Last month, in a conference call with more than 1,000 industry stakeholders, Fred Reish and Brad Campbell, ERISA attorneys with Drinker Biddle and Reath, said the DOL went to considerable lengths to craft a rule that would stand up against legal challenges.
Campbell told attendees that hoping for a legal ruling against the DOL is not an advisable strategy. “We have to plan as if this rule will survive,” said Campbell.
One potential outcome of the impending legal challenge could be a delay in implementation of the rule, as a court could rule that the legal challenge would have to run its course before retirement advisors and providers would have to comply with the new regulation.
The first scheduled deadline for compliance with the rule is April 10, 2017.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
