Professional groups representing the brokerage and insurance industries last week finally broke their silence on the Labor Department's regulation to raise investment advice standards for retirement accounts by filing a lawsuit that could put the rule in limbo.
"We will ask the court to proceed quickly in the case given how burdensome and disruptive the rule is and given the deadlines next year, which require preparation in the near future," said Eugene Scalia, a partner at Gibson Dunn & Crutcher and the lead attorney in the case. The lawsuit aims to vacate the rule and prevent the DOL from implementing and enforcing it.
PLAYING TO WIN
Mr. Scalia, son of the late Supreme Court Justice Antonin Scalia, has succeeded with several cases that halted financial rules. His hiring shows that the industry is playing to win.
"What seemed like a lull in activity really wasn't," said Steve Hall, legal director and securities specialist at Better Markets, an investor watchdog that supports the DOL rule. "What they were doing was furiously preparing the lawsuit."
The move amounts to a resounding rejection by the plaintiffs of the DOL efforts to modify the initial proposal — which requires financial advisers to act in the best interests of their clients — to address a torrent of criticism during an extensive comment period last year.
Five industry trade groups and four Texas business associations are party to the suit, filed in a Dallas federal court last Wednesday. The co-plaintiffs include the Securities Industry and Financial Markets Association, the Financial Services Institute, the Insured Retirement Institute, the Financial Services Roundtable and the U.S. Chamber of Commerce.
The National Association of Fixed Annuities also filed a claim against the rule last week, seeking a preliminary injunction to halt it. Other suits may also be filed before Tuesday, when the rule becomes effective.
FSI president and chief executive Dale Brown said it has taken the group's members — primarily independent broker-dealers — some time to read through the 1,023-page rule.
"Every day, we hear more and more concerns from our member firms, as they dig further and further into the rule," Mr. Brown said.
But the suit contained many of the same arguments the industry has made since the rule was proposed in April 2015, namely that it would make advice significantly more expensive to give and receive and price people with modest assets out of the advice market.
Among the charges in the eight-count claim are that the DOL: exceeded its statutory authority, violated regulatory requirements, unlawfully created a private right of action for clients to sue advisers, failed to properly assess costs and benefits, and violated advisers' speech rights.
"The DOL has very much overreached in developing this costly, complex and very prescriptive rule," said Ken Bentsen Jr., SIFMA president and chief executive.
The industry has made that argument many times, and now they've selected a venue — the northern Texas court — that may be sympathetic to it.
Last year, the court granted an injunction against a DOL workplace regulation that defined as a spouse a partner in a same-sex marriage.
"The court has been hostile to the Department of Labor," said Erin Sweeney, counsel at Miller & Chevalier. "If you're a plaintiff, it's the right court to bring the complaint in."
The fact that Texas judges will be deciding, when most of the parties involved in the suit are based in Washington, is controversial.
"It's an obvious case of forum-shopping," Mr. Hall said. "The idea that Texas is an appropriate venue is not credible."
Mr. Bentsen, who once served as a member of Congress from Texas, said the state is home to 27,000 brokers registered with the Financial Industry Regulatory Authority Inc. and has the third-most financial advisers in the country.
"This is a national, Main Street issue, so we think Texas is a good venue," he said.
How fast the court will act is anyone's guess. And it's always difficult to predict just how the case will shake out. But the odds that implementation will be delayed — one of the aims of the plaitiffs — are good, according to experts.
By April 2017, the rule is scheduled to be implemented. By that time, advisers must begin acting as fiduciaries for their clients. Full implementation of all provisions is slated for January 2018.
"I think there's a good chance [the suit] will extend the implementation period and spur discussion about how broker-dealers can implement requirements without having to overhaul their entire business model," said Brendan McGarry, a senior associate at Kaufman Dolowich & Voluck.
"My sense is the court will freeze the rule," said Tamar Frankel, professor of law at Boston University and a fiduciary advocate. "The court may say, 'We've had the status quo for the last 50 years. Let's keep it for the next few years until we decide where the rule goes.'"
Mr. Hall said the plaitiffs will have to prove that irreparable harm is being done by the rule. "They have a heavy burden," he said.
Ms. Frankel sees the struggle against the rule continuing to the nation's top court.
"One way or another the Supreme Court will have to make the decision," Ms. Frankel said. "Both sides are going to fight very hard."
It was immediately evident last week that the battle will be brutal. Labor Secretary Thomas Perez fiercely defended the regulation, saying it will protect workers and retirees from high-fee investments that erode savings.
PEREZ FIGHTS BACK
"Today, a handful of industry groups and lobbyists are suing for the right to put their own financial self-interests ahead of the best interests of their customers," Mr. Perez said in a statement last Thursday. "The rulemaking was one of the most deliberate, open regulatory processes in recent memory. The department's Conflict of Interest Rule is built upon solid statutory and legal foundations, and we will defend it vigorously."
Ms. Sweeney said the DOL may find itself in the same situation as the Department of Health and Human Services when it had to respond to the many claims against the health care reform law.
"It requires the DOL to fight a multifront battle," said Ms. Sweeney, a former DOL senior benefits law specialist.
For the past several weeks, many broker-dealers have accepted that the final rule is in place and have been preparing for implementation. Now, many of the industry groups that represent them are trying to eliminate the regulation. The best response may be to forge ahead with preparation while keeping an eye on the courts.
"We're taking all of those actions: this necessary next step to seek relief and very actively supporting getting ready to comply," FSI's Mr. Brown said.
SIFMA also is traveling down both tracks.
"The rule is here until it's not," Mr. Bentsen said. "While the court hears this case, we'll continue dealing with our members on the implementation at hand."
Ms. Sweeney cautions financial firms against waiting for the courts to act before addressing compliance, because next April will get here sooner than they think.
Brokers have the most changes to make in complying with the rule and are "going to have to move full-speed ahead," she said.