NAFA appeals court victory for DOL fiduciary rule

The Labor Department is coming off a big win, but will the judgment have legs in this appeal and the five other suits still pending against the regulation?

Nov 7, 2016 @ 2:04 pm

By Mark Schoeff Jr.

The Labor Department is off to a good start defending in court a regulation that would raise investment advice standards for retirement accounts, but it's the early innings of a long game.

The first decision last Friday, in which the DOL rule was upheld by a federal court judge in Washington, has been appealed by the group bringing the action.

The National Association for Fixed Annuities announced Monday it is seeking expedited review by the D.C. Circuit Court of Appeals of the ruling by D.C. District Judge Randolph Moss, which granted summary judgment to the DOL and denied NAFA's motion for a preliminary injunction.

“We are obviously disappointed by the court's decision, but we have always assumed this case would get decided by a higher court, and we are pleased the issues will get de novo review by the Circuit Court,” Chip Anderson, NAFA executive director, said in a statement.

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

The NAFA suit is one of several around the country that has been filed against the DOL rule, which would require advisers to act in the best interests of their clients in 401(k), individual retirement accounts and other qualified accounts.

The rush to appeal is part of a strategy to push the lawsuits against the rule toward the Supreme Court, according to Erin Sweeney, counsel at Miller & Chevalier.

“The only way you're going to dilute the impact [of the D.C. District Court decision] is to have circuit courts going the other way,” Ms. Sweeney said.

Another suit seeking a preliminary injunction from the insurance industry is under consideration in a Kansas federal court.

A suit brought by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and several other groups will be heard in a Dallas federal court on Nov. 17. Another case has been filed in Minnesota.

The industry opposes the rule because it says that it will significantly increase liability risk and regulatory costs for financial advisers. The DOL says the rule is required to protect workers and retirees from conflicted advice that results in high fees that erode retirement savings.

The DOL's victory in the D.C. Circuit could influence other courts, according to Andrew Stoltmann, the incoming president of the Public Investors Arbitration Bar Association.

“It's definitely a very important step in the right direction,” said Mr. Stoltmann, founder of an eponymous law firm. “I think the same footprint and the same arguments that carried the day in D.C. will be enough to carry the day in the other lawsuits that are pending.”

Judge Moss rejected NAFA's challenges on each of the grounds that it pursued — from the department's authority to promulgate the rule to the validity of the contract advisers must sign with clients to act in their best interests to the DOL's justification for putting fixed annuities under the contract.

“This decision spells out how the department dotted its 'i's and crossed its 't's on complying with its regulatory authority,” said Micah Hauptman, financial services counsel at the Consumer Federation of America. “The decision confirms that DOL is on firm legal ground, and we expect the DOL to win the other cases as well.”

One contentious area that is part of the Texas case is whether DOL has given investors a new reason to sue their advisers.

“The Department did not create a 'cause of action' or a 'private litigation right,'” Judge Moss wrote in his opinion. “Rather, any action brought to enforce the terms of the written contract would be brought under state law, and, as both parties acknowledged at oral argument, state law would ultimately control the enforceability of any of the required contractual terms.”

Opponents of the rule seek a different conclusion in the other cases.

“DOL is creating a new cause of action with respect to IRAs that it has no authority to create, and DOL's argument that it was merely adding terms to a state law contract is, as the plaintiffs argue, a sophistry,” Bradford Campbell, counsel at Drinker Biddle & Reath, wrote in an email. “I hope the judges in the remaining cases recognize this.”

There may be better days ahead for that argument.

“The tougher cases are in Kansas and the Northern District of Texas,” Ms. Sweeney said.


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