The U.S. Labor Department late Monday urged a federal appeals court to largely uphold Obama-era regulations that confronted and sought to curtail conflicts of interest in the retirement-investment market.
The government’s brief in the U.S. Court of Appeals for the Fifth Circuit, the first filing from Labor Secretary Alexander Acosta that addressed the so-called “fiduciary rule,” comes as federal officials move simultaneously to revise provisions of the regulations and perhaps further delay implementation past the Jan. 1, 2018 effective date.
Obama administration officials hailed the fiduciary rule, which was six years in the making, as “a historic step to protect the savings of America’s workers.” The regulations broadened the scope of “fiduciary” responsibilities, putting a new emphasis on the best interest of retirement-advice clients over profits. President Donald Trump in February urged labor regulators to reassess the rule.
“The Presidential Memorandum, and DOL’s ongoing reexamination of the fiduciary rule, may result in a new assessment of the rule’s costs and benefits upon review of the updated record,” U.S. Justice Department lawyers wrote in their brief Monday on behalf of federal labor regulators.
Still, the government’s lawyers said the challengers—including the U.S. Chamber of Commerce—“have failed to identify any reason why the fiduciary rule, including its associated exemptions, should be vacated in full.” The government defended what it described as its “detailed discussion of the inadequacies in the existing regulatory landscape.”
The government’s brief said one provision in the fiduciary rule that restricts class-action waivers should be vacated. Financial advisers who wanted to qualify for a “best interest contract exemption”—essentially allowing certain compensation schemes to continue, with greater disclosures to the client—would have been blocked from prohibiting class actions. The government called the condition “a discriminatory obstacle to arbitration that cannot be harmonized” with the Federal Arbitration Act.
“Severance of the condition would not impair the function of the exemption or of the fiduciary rule in general,” Justice Department lawyers wrote. “Thus, invalidation of this condition does not mandate invalidation of the remainder of the [best interest contract exemption], let alone the entire fiduciary rule.”
Meanwhile, Acosta Seeks Comment on Revisions
Labor Secretary Alexander Acosta said in May that regulators were unable to stop the fiduciary rule from partially taking effect in June. “We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input,” Acosta wrote in a Wall Street Journal op-ed. “Respect for the rule of law leads us to the conclusion that this date cannot be postponed.”
Labor Department regulators last week began the formal administrative process of taking a new look at the retirement-savings rules. The U.S Securities and Exchange Commission said last month it would begin taking comment on its own fiduciary rule.
The Employee Benefits Security Administration, a division of the Labor Department, published a “request for information” that seeks public input on the scope of the rule, and asks for comment on extending the Jan. 1 applicability date for some provisions. The comment window is open for 30 days.
The U.S. Chamber of Commerce, balking at the 30-day window, asked the agency to extend the period to 60 days. “The current rule has now been in effect for only 20 days, and its full consequences—intended and unintended—are not immediately apparent,” two Chamber officials wrote in a letter to the Labor Department on June 30. “The requested comment period extension will allow the concerned public necessary time to observe the impacts of the rule more fully.”
Business and industry groups last year lost several court challenges to the rule. Judges in Texas and in Washington refused to stop the implementation of the retirement-saving rule, and the challengers didn’t fare any better in U.S. appeals courts.
The U.S. Court of Appeals for the Fifth Circuit has scheduled a July 31 argument date to hear the challenge there.
A team from Gibson, Dunn & Crutcher, led by partner Eugene Scalia, represents the U.S. Chamber in the appeals court. Wilmer Cutler Pickering Hale and Dorr represents the American Council of Life Insurers and Sidley Austin represents Indexed Annuity Leadership Council. Other groups that challenged the rule include the Financial Services Roundtable, Securities Industry and Financial Markets Association and the Financial Services Institute.
The challengers have called the fiduciary rule “one of the most aggressive and hotly debated regulations ever promulgated by the Department of Labor.”
The D.C. Circuit, where another dispute is pending, has not set an argument date. The National Association for Fixed Annuities, represented by a team from Bryan Cave, filed the suit in Washington’s federal trial court. Briefing in the appeals court is set to conclude on Sept. 29.
U.S. District Judge Randolph Moss in Washington, presiding in the National Association for Fixed Annuities case, in November refused to freeze his earlier decision that upheld the merits of the regulations.
“The new rules were adopted to protect retirement investors from conflicted advice and potential losses to their retirement savings,” Moss wrote then. “Enjoining the rule would delay this protection. It would also interfere with the implementation of three regulations that were lawfully adopted after nearly six years of study, public comment, and consideration.”
Article Published by The National Law Journal July 3 2017
Written by Mike Scarcella