United States: Associations File Complaint Against DOL Fiduciary Rule

Last Updated: June 9 2016
Article by Steven D. Lofchie

Most Read Contributor in United States, August 2018

SIFMA and numerous financial trade associations (collectively, the "associations") filed a complaint against the Department of Labor ("DOL") with the U.S. District Court for the Northern District of Texas. The complaint challenges the legality of the DOL fiduciary rule applicable to broker-dealers, investment advisers and insurance agents, among others.

The associations asserted that in its adoption of the fiduciary rule, the DOL:

  • improperly exceeded its authority in violation of ERISA, the Internal Revenue Code and the Administrative Procedure Act;
  • unlawfully created a private right of action through the Best Interest Contract ("BIC") and Principal Transactions ("PT") exemptions;
  • failed to provide adequate notice for the comment period on the rule's proposal, and to consider and respond sufficiently to the comments it received;
  • failed to recognize that the Federal Arbitration Act prohibits the BIC and PT exemptions' regulation of class action waivers in arbitration agreements;
  • failed to provide proper notice and comment periods for the DOL regulation of fixed-indexed annuities and group variable annuities through the BIC exemption, which regulation is "arbitrary, capricious [and] barred by the Dodd-Frank Act"; and
  • impermissibly burdened financial institutions and professionals with compelled speech through the BIC exemption, in violation of the First Amendment.
Commentary / Steven Lofchie

As a matter of regulatory policy, this is a case that the DOL should lose. It makes zero sense for the DOL to adopt a rule that governs the interaction between securities brokers and advisers with IRA accounts, while the SEC and FINRA adopt rules that govern the interactions between securities brokers and advisers with the individuals who own those IRA accounts. How can anyone disentangle the requirements for a broker providing services that apply to an individual as a person as opposed to those that apply to the same individual as an IRA account?

The DOL's impropriety in exceeding the range of its jurisdictional scope would be troubling enough if the DOL's requirements were drafted clearly. That they are not drafted clearly could suggest that the DOL is operating well outside of its areas of expertise. It is also troubling that the DOL would advance rules that are as aggressive in jurisdiction as they are vague in expression, notwithstanding the fact that a majority of Congress voted its dissatisfaction with the DOL's rulemaking process. How can regulators expect to receive Congressional support or funding when their expansion of authority ignores Congressional oversight?

This is not the way that financial regulations should be created. The DOL should respect other regulators by being mindful when it adopts regulations in areas that fall within others' purview. It should show that respect by not adopting rules that would be impractical to implement and impossible to understand in specific contexts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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