Opponents have finally filed an anticipated lawsuit challenging the Labor Department's rule to raise investment advice standards for retirement accounts, but some observers say arguments levied against the regulation are flimsy and exaggerated.
“There are still some serious questions about the Department of Labor's authority to regulate to the extent they did with the new Conflict of Interest Rule, but many of the arguments in the complaint filed by the Chamber of Commerce look weak at best,” said Jamie Hopkins, an attorney and a professor at The American College of Financial Services.
The Chamber of Commerce, its affiliates and a number of financial trade associations filed the complaint late Wednesday in a Texas district court. An attempt through the courts to overthrow the fiduciary rule, which opponents view as costly and harmful for some retirement savers, had been widely expected.
Eugene Scalia, a partner at Gibson Dunn & Crutcher and the lead attorney in the suit, said the complaint asks the court to vacate the rule and prevent the DOL from implementing or enforcing it.
“We will ask that the court 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,” Mr. Scalia told reporters on a conference call Thursday morning.
Plaintiffs levied eight counts against Secretary of Labor Thomas Perez and the Labor Department.
Among them are the allegation the DOL exceeded its statutory authority in violation of the Employee Retirement Income Security Act of 1974, the Internal Revenue Code and the Administrative Procedure Act, saying the DOL's regulatory authority doesn't extend to individual retirement accounts. Further, the rule is irreconcilable with the language of ERISA and the Code, plaintiffs said.
“What the Labor Department has done is given [fiduciary] a meaning that is really unrecognizable,” Mr. Scalia said.
Echoing this sentiment, Ken Bentsen Jr., president and chief executive of the Securities Industry and Financial Markets Association, a co-plaintiff, said, “The DOL has very much overreached in developing this costly, complex and very prescriptive rule.”
However, observers say the DOL does have the authority to write rules governing who is and isn't a fiduciary in both the ERISA-plan world and IRA market.
“I think ERISA makes it really clear that the DOL has the right to promulgate the rules as to what is and is not a prohibited transaction. It can't enforce it on IRAs, but it definitely has the right to say what is and isn't a prohibited transaction,” said Marcia Wagner, principal at The Wagner Law Group.
Micah Hauptman, financial services counsel at the Consumer Federation of America, a group in support of the DOL rule, said the argument about the agency's overreach into the IRA market is “pretty desperate, and one that will not stand scrutiny.”
“Frankly, I think all the arguments the plaintiffs have made in this complaint, they're all really predictable and they are pretty weak,” Mr. Hauptman said.
While the Treasury Department has jurisdiction to enforce prohibited transaction rules in the IRA market, the Internal Revenue Code and ERISA have parallel provisions, and therefore adopt the same definition of fiduciary, Mr. Hauptman said. Because of those parallel provisions, the Labor Department has interpretive authority over IRAs with regard to fiduciaries, he said.
Further, the plaintiffs' argument that the rule is “arbitrary and capricious” seems unfounded, some say, due to the lengthy rule-making process that occurred since the rule was originally promulgated six years ago, including the effort the DOL made through rounds of public comments and testimony to address public concerns in its final rule.
“It's pretty hard to say they didn't take what the public said into consideration,” according to Ms. Wagner. “Arbitrary and capricious is a pretty hard thing to prove.”
But Mr. Hopkins thinks arguments about the rule being arbitrary and disruptive to the industry might be the strongest theme in the complaint.
“They rely on research out of the United Kingdom to show how similar regulatory changes can impact the financial services industry,” he said. Still, “it is unlikely that a court will rely heavily or at all on research describing a different regulation in the United Kingdom.”
The fact that the suit was filed in Texas could be an indication of potential “forum shopping” for courts that would be more favorable to plaintiffs, Ms. Wagner said. It almost doesn't matter, though, because the case is so important it will “probably end up at the Supreme Court,” she said.
However, Brian Hamburger, president and chief executive at MarketCounsel, a regulatory compliance consulting firm, said it's too early to postulate about that eventuality.
“I'm not quite sure we even want this issue getting all the way to the Supreme Court,” he said, given the industry is trying to implement this “pretty significant rule change” to have nothing ultimately come of it, depending on how the lawsuit turns out.
Indeed, Dale Brown, president and chief executive of the Financial Services Institute, another co-plaintiff, said it is both pursuing the suit and helping its members implement the rule simultaneously.
And regardless of the outcome of this suit, another one, likely from the insurance lobby, is almost inevitable, Mr. Hamburger said.
“It'd be silly for them not to. They have an obligation to protect the interests of their members,” he said.
Mark Schoeff Jr. contributed reporting for this story.Updates earlier version of the story to correct title for Brian Hamburger as president and chief executive at MarketCounsel, not managing director.