Lawsuit could force delay to DOL fiduciary rule implementation

Experts weigh plaintiffs' likely arguments versus Labor Department's legal standing and odds in court.

A pending lawsuit against the Labor Department’s fiduciary rule creates uncertainty for the measure, even though the agency has expressed confidence it will hold up.
Four financial advice trade associations and the U.S. Chamber of Commerce plan to file the suit on Thursday, according to a source close to the matter who asked not to be identified.
Opponents will probably try to get a court to put a halt to the rule, according to Peter Chepucavage, an independent regulatory consultant.
“I would bet a lot that there’s going to be a delay on the implementation,” Mr. Chepucavage said. “The middle ground is for the court to say [to industry plaintiffs]: ‘We hear you, so we’ll extend the implementation date three to four months, unless we decide before that time that we’re sending this back for further review.’”
The measure — which requires advisers to act in the best interests of their clients when advising on retirement accounts — becomes effective June 7. Implementation will begin in April 2017, when all advisers must start acting as fiduciaries. Full implementation will occur in January 2018.
(More: Coverage of the DOL rule from every angle)
An advocate for the rule said the agency has the authority to do what the regulation entails, but is wary of the suit.
“I think the DOL is on solid legal ground,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “But you’re always concerned when these cases go to court.”
Neil Kleinhandler, a partner at the law firm Phillips Nizer, said the courts tend to give deference to regulatory agencies, but it’s hard to predict whether the DOL or industry will prevail.
“The odds are with the government, but it’s not a slam-dunk for either side,” Mr. Kleinhandler said.
Four groups in addition to the Chamber will participate in the court action: the Securities Industry and Financial Markets Association, the Financial Services Institute, the Financial Services Roundtable and the Insured Retirement Institute, according to the anonymous source.
The source said the suit will contain many of the same arguments the industry has made in comment letters about the rule.
For instance, critics have said the DOL lacks the authority to promulgate the rule and that it can’t provide clients with the ability to pursue class-action suits against advisers. They’ve also said the regulation would deny low- and moderate-income investors access to advice.
Mr. Kleinhandler said opponents of the rule have a good case to make on the last point.
“I’m glad someone is bringing this suit to test these regulations to see if there was overreaching,” Mr. Kleinhandler said.
The DOL asserts the rule is required to protect workers and retirees from high-fee investment products that erode savings.
The suit might also challenge the DOL on whether it followed regulatory steps properly.
Ms. Roper said the long comment period and the many modifications to the final rule would help DOL defend itself.
“They’re rock-solid on procedural grounds in terms of having a lengthy and open comment process,” she said. “They’ve been very responsive to comments received.”
The lawsuit will follow recent legislative attempts to stop the rule that have fallen far short of the super-majorities required to overcome a certain veto by President Barack Obama.
When the final rule was released in April, Labor Secretary Thomas Perez said it would “withstand legal scrutiny.”
Now that assertion will be tested in court.