Outside voices and views for advisers

Dallas judge indicates possibility of vacating DOL fiduciary rule

DOL questioned at length during challenge brought by SIFMA, FSI, Chamber of Commerce and others

Nov 17, 2016 @ 5:56 pm

By Erin Sweeney

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Editor's note: Erin Sweeney, an attorney at Miller & Chevalier, attended the hearing Thursday in Dallas federal court for three lawsuits that have been filed to stop the Labor Department's fiduciary rule to raise investment advice standards for retirement accounts. The Securities Industry and Financial Markets Association, the Financial Services Institute and the U.S. Chamber of Commerce are among the plaintiffs. An edited version of her report from the courthouse follows.

The United States District Court for the Northern District of Texas' standing-room-only hearing was attended by DOL brass Assistant Secretary Phyllis Borzi and Elizabeth Hopkins, counsel for appellate and special litigation. Judge Barbara Lynn often appeared sympathetic to the plaintiffs and was very focused on how the case in front of her differed from Judge Randolph Moss' November 4 decision in the District Court for the District of Columbia upholding the regulation.

On the independent agent issue, which squarely addresses workability issues associated with the best-interest contract exemption, Ms. Lynn pressed the DOL to answer questions regarding the availability of information on competing insurance products to independent insurance agents.

“There is something of a wish and a prayer component to your argument that independent agents know of the possible commissions received by their competitors, isn't there?” Ms. Lynn asked the attorneys for the Department of Labor at oral arguments held Thursday in the consolidated industry and Chamber of Commerce challenge to the DOL's fiduciary regulation.

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

“The people that sell these products have many masters, or maybe none. How would one financial institution have this information?” she said.

In response, the DOL noted that the industry “knows what the market is paying in commissions. They know on a retrospective basis.” The DOL further pointed out that the BIC does not require “perfection.”

On the adequacy of the rulemaking, Ms. Lynn outlined her view of her role: “I understand my task is not to engage in a flurry of second guessing; that I am not being asked what I would do. The question is whether the conclusions [made by the DOL] are justified.”

In delving into those justifications, Ms. Lynn focused on the appropriateness of the DOL utilizing studies regarding mutual funds to reach conclusions regarding annuity products.

“What troubles me, is that there is a variety of financial arrangements between brokers and customers [in the mutual fund arena]. But all of the insurance agents are compensated by commissions,” she said. “Some mutual fund transactions are fixed fee and some are based on commissions. If mutual fund transactions are based on commissions, there may be an incentive to churn investments. But, that doesn't translate where everyone receives commissions.”

(More: A comprehensive, searchable database of advisers' fiduciary FAQs)

On the claim that the BICE creates a private right of action, Ms. Lynn outlined her understanding of the chamber's argument: “You are not literally saying that a private right of action has been created; your argument is that the DOL is imposing a regulation on the industry that it is not entitled to impose because it is impossible to conduct business without the BIC, which is a backhanded way of imposing the regulation on the industry.”

When the DOL responded that the legal obligation arises from the contract not the regulation, Ms. Lynn replied, “The argument is that the contract is being forced on them — that they can't operate without the BIC so they have to subject themselves to the BIC.”

On the novel First Amendment issues, the DOL maintained that the regulation did not regulate speech but instead regulated conduct. Even if the regulation could be construed as regulating speech, all that is being regulated is misleading advice, according to the DOL. Ms. Lynn pushed back on that view, stating that the rule “regulates more than misleading speech — it just punishes misleading speech. Speech is subject to the regulation.”

Ms. Lynn then asked whether the DOL's position is that speech is innately or inherently misleading without the BICE. The agency disagreed, noting that their position is that the industry “can say whatever they like as long as they are not recommending products that are not in the best interest.”

As for next steps, Ms. Lynn cautioned the court watchers not to read anything into her questions. “My questions are just questions,” she said.

She then mused out loud as to whether adequate time remained before the April compliance date for the case to reach the Supreme Court if a split in the circuits ensued with her ruling. After concluding that the case could not be decided by the Supreme Court prior to the April deadline, Judge Lynn then focused her attention on efforts to stay the regulation pending resolution of the litigation.

Along those lines, the DOL advised her that a motion to stay was pending before Mr. Moss and that the DOL's brief was due on Monday.

Ms. Lynn wrapped up the hearing by suggesting that she may issue her opinion sometime in the next month, and pointed out that she had read Mr. Moss' 92-page opinion, and said, “my goal is to write something shorter.”

Despite her “questions are just questions” comment, Ms. Lynn appeared sufficiently concerned with the DOL's process that the industry claimants may just have paved a viable pathway for Ms. Lynn to vacate the rule.

Erin Sweeney is of counsel at Miller & Chevalier. She can be reached at esweeney@milchev.com.


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