Friday, June 24, 2016

Will Fiduciary Rule Survive Rising Tide of Lawsuits?

The first week of June saw the filing of two lawsuits challenging the Department of Labor’s final fiduciary rule and its accompanying exemptions.  Those in a position to know were confident that it was only a matter of time before additional lawsuits were filed, and they were right.  At the time of drafting this blog, the number of suits had increased to five.  Just how many will ultimately be filed is still an open question.  The common aim of these legal actions is an injunction to prevent the collective guidance from being implemented, despite the official June 7th effective date and start of transition period having already been reached.  It is the hope of some opponents that an injunction could buy time, and that a new administration in the White House might choose to nullify the guidance.

Regardless of the probability of success of these legal challenges, it seems this result was inevitable, if for no other reason than that this guidance has been accompanied by more controversy than the industry has seen in a very long time. 

The plaintiffs in the first lawsuit filed included a group of chambers of commerce and financial services industry groups, filing in a jurisdiction – the U.S. District Court for the Northern District of Texas – that is not particularly cozy with Washington, D.C., interests.  Whether this venue – a venue also chosen for at least one of the subsequent lawsuits – will translate to an injunction remains to be seen.  Even if this happens, it is certain that the DOL would file an appeal in an attempt to vacate the injunction.  Some speculate that the legal process could ultimately lead to the U.S. Supreme Court. 

The plaintiffs’ arguments for an injunction are numerous, and while similar in nature,  are not completely uniform from one lawsuit to another.  Collectively, they include – among other charges – DOL infringing on the authority of other federal and state agencies, doing financial harm to investors, violating the Federal Arbitration Act, violating the First Amendments freedom of speech, exposing financial advisors and their employers to litigation risk, and issuing a final rule with new conditions that allowed no opportunity for public review and comment. 

This last accusation is one that is thought to have a greater chance of swaying a court in favor of the plaintiffs.  There were, in fact, some important new provisions in the final rule that were not open to comment, if for no better reason than that no one knew of them before April’s release.  One of these was a sweeping definition of the “management” of securities.  Another was the loss of the prohibited transaction exemption for Indexed annuities.

 Another charge that might have some possibility of “sticking” is that DOL, despite their claims to the contrary, does not appear to have coordinated in a serious way with the Securities and Exchange Commission (SEC), an agency empowered by the Dodd-Frank Wall Street Reform Act to undertake such a regulations project as this.  DOL has released e-mails as evidence of some communication with SEC, but many feel these do not come close to the level of cooperation or coordination hoped for and expected.

More than one of the lawsuits charged that DOL was “arbitrary and capricious” in formulating its final regulation.  This may have merit from the standpoint that DOL could reject at will any of suggestions in the more than 3,500 comments it received on the regulations.  But the long history of these regulations – dating back to 2010 – and the multiple comment periods and public hearings, suggest a deliberate process rather than caprice.

To obtain an injunction, plaintiffs must generally demonstrate certain things.  For instance, convincing a court that the plaintiff’s case has merit and could potentially be won at trial.  Or, that failure to issue the injunction will result in injury to another party, such as retirement investors.  These may not be so easy to prove to a court’s satisfaction.

There is a history of federal agencies being given the benefit of the doubt in interpreting statutes and issuing regulations.  We have, however, seen cases in which the courts have overruled federal regulatory agencies, such as a U.S. Tax Court ruling that overrode a 30-year IRS interpretation of how many IRA rollovers a taxpayer is entitled to.  But the courts are inclined to defer to the interpretive judgment of federal agencies unless there is a compelling reason to do otherwise. 
Perhaps this is one of those compelling situations.

Legal actions like these motions for injunction end in a formal request for remedies.  Perhaps surprising in our generally secular society, the official name for this request for remedy is called a “prayer for relief.”  Perhaps that’s fitting, since both supporters and opponents are hoping for a little divine intervention for their side.  Whether, or how, that happens will ultimately be up to the courts.