Compliance

DOL Files Fiduciary Lawsuit Brief Defending Advisory Market Authority

The DOL argues it must not lose its broad authority to regulate the workplace retirement planning market—notwithstanding the fact that it may very well decline to aggressively enforce the fiduciary rule under President Trump.

By John Manganaro editors@strategic-i.com | July 05, 2017

The U.S. Department of Labor (DOL) has submitted a lengthy new brief in the consolidated lawsuit filed by investment and insurance industry trade groups against the Obama-era fiduciary rule expansion, which took effect in transitional form in early June.

By way of background, the consolidated case discussed in the brief is pending in the 5th U.S. Circuit Court of Appeals, following a series of lower court decisions that largely sided with the DOL. The court has scheduled the appeal for oral argument on July 31, 2017. All told, arguments presented in the consolidated appeal are drawn from three distinct and diverse suits filed in the last year to halt the fiduciary rule expansion by investment and insurance trade groups, among others, such as the U.S. Chamber of Commerce.

Before digging into the text of the brief, it may be helpful for readers to first reflect on commentary shared by Timothy D. Hauser, deputy assistant secretary for Program Operations of the DOL’s Employee Benefits Security Administration (EBSA), who recently spoke to attendees of the 2017 PLANSPONSOR National Conference. Asked directly about the prospects for the fiduciary rulemaking, he suggested the multifaceted approach being taken by DOL “reflects the fact that we want to move forward on two tracks.”

“We are doing an analysis of issues brought up by Trump [i.e., by the lawsuits] and we are also considering new points of view people have expressed since the rule has started taking effect, which together means we are thinking about possible new exemptions that may be more streamlined and build upon changes we’ve seen in the advice marketplace that have already have come from the impact of this rule,” Hauser explained. In other words, DOL is seeking a happy middle ground between strict advice standards and an open/active marketplace that leverages developments in new share classes, as well as the development of new transparency tools to help people make better individual retirement account (IRA) rollover decisions.

Hauser told attendees outright that long-term DOL staff—who have been hired over the decades by both political parties—wholeheartedly believe there are deep conflicts of interest that exist in the investment and insurance advice domain. And so there frankly remains a lot of enthusiasm within the department to implement stricter rules, even with a new executive branch leader who has been rhetorically skeptical of the role of financial market regulation. The DOL has issued a request for information (RFI) about the fiduciary rule. Hauser noted there very well may be significant changes made to the fiduciary rule after the RFI process plays out.

As Hauser concluded, the effective date of most conditions of the stricter conflict of interest rules were moved back to January 2018, “and it’s possible the DOL will move other provisions to later than that, particularly if it decides to issue another streamlined exemption or alter terms of current exemptions so providers don’t have to engage in new system builds, if it decides there are better approaches.”

NEXT: What’s in the new DOL brief?

The text of the DOL brief stretches to nearly 140 pages and carefully lays out the department’s understanding of its authority to regulate financial advice given to investors protected by the Employee Retirement Income Security Act (ERISA) Titles I and II, as established by Congress in 1974 and subsequently amended. Also examined in detail are the tremendous changes that have occurred in the investment/advisory marketplace since the five-part fiduciary rule test was adopted.

Getting to the legal argumentation, DOL posits that plaintiffs’ counterarguments submitted to the 5th Circuit “fail to overcome Chevron deference.”

“DOL reasonably determined, notwithstanding the presumption that Congress incorporates the meaning of common-law terms into statutes, that this definition does not limit fiduciary status to individuals who give advice in the context of a relationship of trust and confidence,” the brief states. “DOL reasonably construed this definition to encompass commission-based compensation arrangements, as indeed DOL has done for more than 40 years. DOL reasonably declined to exclude salespeople from fiduciary status as a categorical matter, especially in light of industry representations during the notice-and-comment process. And DOL reasonably determined that adoption of a different interpretation was not compelled by the federal securities laws, which regulate securities transactions in general rather than those involving retirement investors in particular.”

The brief goes on to argue that plaintiffs’ specific challenges to DOL’s authority to issue the Best Interest Contract (BIC) Exemption also fail, described as follows: “The BIC Exemption is a lawful exercise of DOL’s statutory authority to issue administrative exemptions from the prohibited-transaction provisions in ERISA and the Code. A ‘conditional’ exemption may be issued so long as DOL finds it to be (1) administratively feasible, (2) in the interests of the plan and of its participants and beneficiaries, and (3) protective of the rights of participants and beneficiaries of the plan. DOL made those findings when it adopted the BIC Exemption, and plaintiffs have not challenged them on appeal.”

A variety of arguments are submitted to back the claim. For example, DOL says the BIC Exemption “also does not impermissibly create a cause of action … The exemption merely specifies, as a condition of qualification, certain provisions fiduciaries to IRAs must include in contracts with clients. Investors can vindicate their rights under these provisions only by suing under a preexisting state-law cause of action, and thus no federal cause of action has been created by DOL.”

However there is one “narrow exception” here that the DOL does concede: “The sole exception is a condition that excludes an adviser [from taking advantage of the BIC Exemption] who enters into an arbitration agreement that prevents investors from participating in class-action litigation. The government no longer defends that condition in light of the Acting Solicitor General’s construction of the Federal Arbitration Act in a case pending before the Supreme Court, but that condition is severable from the remainder of the fiduciary rule, as the rule itself makes clear.”

NEXT: What to take away 

There is too much argumentation covered in the DOL brief to examine in this story, but readers can take their own deep dive into the text here. It may also be helpful to consider commentary shared by David Kaleda, principal in the fiduciary responsibility practice group at Groom Law Group in Washington, D.C.

In the last issue of PLANADVISER print, Kaleda penned a column speculating about this very subject—why the DOL would continue to vigorously defend the fiduciary rulemaking in court while at the same time opening up an RFI process seeking input about delaying or wholly replacing the Obama-era rulemaking.

The short take of Kaleda’s argument is that, confusing on its face, the double-move does make roundabout procedural and tactical sense: Long-term DOL staff is concerned about maintaining the department’s broad litigation and enforcement capabilities in the retirement plan services marketplace, irrespective of the new administration’s disinterest in enforcement of the specific fiduciary rule policies dreamed up by the Obama Administration. Further, given the ongoing staffing issues at the DOL and other agencies, it should be no surprise that old priorities are dying hard. 

Kaleda observes that, even if the DOL makes an about-face and the former five-part test for determining whether an adviser provides fiduciary investment advice, used prior to the fiduciary rule reforms, once again becomes the law of the land, it is reasonable to expect the DOL to continue defending its own authority to promulgate rulemaking in both the district and appellate courts. Indeed, government agencies seem to have a natural tendency to defend their Congressionally granted authority.

“The DOL’s authority to regulate the financial services industry is separate from the authority conferred on the Securities and Exchange Commission, Financial Industry Regulatory Authority (FINRA) and state insurance, and other, regulators,” he concludes. “Notwithstanding the potential conflicts and overlaps, the courts appear to believe that the DOL and other regulators can co-exist and effectively regulate together. Notably, the District Court for the Northern District of Texas opined that part of the purpose of ERISA was to fill regulatory gaps, which presumably include those left by other regulatory regimes and their related agencies.”