Opponents to the new fiduciary Rule promulgated recently by the Department of Labor (DOL) believe they have a good shot at overturning that rule. At least, if you ask them, they will tell you they have made a strong case. The U.S. Chamber of Commerce and the American Council of Life Insurers (ACLI) were the lead Plaintiffs in a Dallas lawsuit, heard by Judge Barbara M.G. Lynn, that is attempting to invalidate the rule.
Other Plaintiffs in the Northern District lawsuit include the Indexed Annuity Leadership Council, the National Association of Insurance and Financial Advisors, the Financial Services Institute, Financial Services Roundtable, Greater Irving-Las Colinas’ Chamber of Commerce, Insured Retirement Institute, Lake Houston Area Chamber of Commerce, Lubbock Chamber of Commerce, Security Industry and Financial Markets Association and the Texas Association of Business. The lawsuit was consolidated from three separate complaints filed in June. There are two main issues in the cases:
• whether the rule implicates First Amendment rights, and
• whether the DOL attempted to create a right of action through rule-making.
Lawyers representing the U.S. Chamber and ACLI, respectively, made clear distinctions between their case and that of the National Association for Fixed Annuities. Though distinguishing the cases, the speakers continually returned to the ruling in the first court case filed opposing the DOL rule. That ruling was issued in November by Judge Randolph D. Moss in District of Columbia District Court. Judge Moss sided with the DOL in rejecting the National Association for Fixed Annuities’ request for a preliminary injunction. That decision was not surprising as the judge’s tough questioning of the Plaintiff’s lawyers was widely reported. Judge Lynn brought up the decision by Judge Moss several times during the hearing and said she has read the 92-page ruling.
A main argument on behalf of the Chamber and ACLI was on the free speech count of the lawsuit. The argument was that the DOL is “impermissibly regulating speech.” The DOL argued that it couldn’t possibly regulate speech, that it is only regulating the conduct of misleading advice. Judge Lynn didn’t agree on that and said that the DOL rule does more than “regulate misleading speech; it punishes it.” The DOL claims conflicts of interest are leading advisors to deliver inappropriate advice to clients. The government contended that the fiduciary rule merely requires advisors to act in the “best interest” of clients, disclose fees and accept only “reasonable compensation,” which were said to be “fundamental duties.”
The question before Judge Lynn is whether the Department of Labor has the right to establish a “private cause of action” with its fiduciary rule. Opponents claim only Congress can establish a private right of action, or the right for people to sue, as individuals or as a class, under an existing law.
In a 2001 Supreme Court decision, Alexander v. Sandoval, the high court wrote: “like substantive federal law itself, private rights of action to enforce federal law must be created by Congress.” That case is cited in the lawsuits brought against the DOL. However, the DOL denies that the rule “creates” a new private right of action.
The case hinges on how the courts view the rule’s Best Interest Contract Exemption, which enables advisors to receive commission-based compensation that the rule otherwise prohibits as long as they adhere to rigorous disclosure standards and sign a contract with clients. Calling it a “complicated case,” Judge Lynn conceded that she was “having a hard time” deciphering the issue. It will be most interesting to see how the judge rules in the case.
Sources: insurancenewsnet.com and plansponsor.com
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