Washington INsider

Washington INsiderblog

Mark Schoeff Jr. looks at what's really happening on Capitol Hill - and the upshot for advisers.

Judge's questions show inclination to uphold DOL fiduciary rule

In first of five lawsuits against the measure, federal judge Randolph Moss not likely to grant preliminary injunction sought by the National Association of Fixed Annuities

Aug 26, 2016 @ 12:03 pm

By Mark Schoeff Jr.

Federal judge Randolph Moss didn't state his position Thursday regarding how he will rule on a lawsuit against a major Labor Department investment-advice regulation.

But his questioning of plaintiffs and defense attorneys during a hearing that lasted more than three hours indicated he is probably leaning toward upholding the regulation and not granting the preliminary injunction being sought by the National Association of Fixed Annuities.

If Mr. Moss denies a preliminary injunction, the case wouldn't die at that point, but NAFA would be unlikely to continue pursuing it at the district level because the case wouldn't be decided until well after the DOL rule must be implemented next spring. NAFA instead would likely seek an expedited appeal.

This is the first of the five lawsuits against the DOL rule to be given a hearing. The next one, also a preliminary injunction motion, will be held Sept. 21 in a Kansas federal court. A separate hearing on several other suits will occur in November in Dallas.

“I will now go about trying to figure this all out,” Mr. Moss said at the end of Thursday's proceedings in the District Court for the District of Columbia.

That was his official position. But as he examined the arguments that NAFA laid out in its suit, he pushed its lawyer, Philip Bartz, a partner at the law firm Bryan Cave, to demonstrate how many insurance agents would lose their jobs because of the new rule, which, NAFA argued, would curb their ability to charge commissions.

(More: The most up-to-date information on the DOL fiduciary rule)

NAFA must meet a high bar — proving the DOL rule would cause irreparable harm — in order to obtain a preliminary injunction.

Mr. Bartz didn't appear to provide the answer Mr. Moss sought.

“It sounded to me like he didn't think they had what it took to make the irreparable harm standing,” said Erin Sweeney, counsel at Miller & Chevalier, who attended the hearing. “He's likely to side with the government on this one.”

That's not to say Mr. Moss wasn't painstaking in his questioning.

He explored whether the DOL exceeded its authority by creating a private right of action for clients to sue their advisers if the advisers fail to act in their best interests in retirement accounts.

He seemed to come down in favor of the agency because clients would be suing over the breach of the best interest contract, and breach of contract is not a novel right of action.

“I'm still thinking this through,” Mr. Moss said. “At this point, I'm not sure there's a Sandoval problem,” he said, referring to a case, Alexander v. Sandoval, that revolved around a private right of action.

But he said he was less certain that the DOL deserved the judicial deference given to regulators in previous cases, because of questions surrounding how it put fixed annuities under the best interest contract, the enforcement of contract and its potential to cause many lawsuits.

On that point, Mr. Bartz offered one of the more earthy moments of the hearing.

“They'll have to become a [registered investment adviser],” he said of insurance agents who will have to change their business model under the DOL rule. “They would be crazy not to. They'll get their butts sued off.”

In DOL's defense, Emily Newton, a lawyer for the Department of Justice, said the agency “borrowed from existing duties” granted by Congress to determine what investment products are subject to the best-interest contract.

Labor Secretary Thomas Perez said Thursday the rule will withstand the court challenges.

“We have great confidence in what we did,” Mr. Perez told reporters in a White House conference call Thursday. “We have clear legal authority” to promulgate the rule.

Mr. Moss must now retreat to his chambers to formulate an opinion. Ms. Sweeney expects him to issue a ruling within 30 days.

There's a chance there will be a split in the circuits, with Mr. Moss ruling against a preliminary injunction and Judge Daniel Crabtree in the Kansas court granting one. Both are appointees of President Barack Obama.

“Getting it off his desk means getting it up to the circuits and ultimately to the Supreme Court,” Ms. Sweeney said of Mr. Moss' likely desire to give the plaintiffs a chance to appeal.


What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Are investors getting complacent?

Tom Florence, CEO of 361 Capital, discusses growing investor complacency and why he thinks overconfidence might be creeping into adviser and investor decision making.

Latest news & opinion

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.

SEC enforcement of advisers drops in Trump era

The agency pursued 82 cases against advisers and firms in fiscal year 2017, down from 98 the previous year.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print