DOJ Fires Back at Fiduciary Rule Opponents

Department of Justice attorneys are urging a federal judge to reject a request for a preliminary injunction halting the Department of Labor fiduciary rule.

The DOJ filed the first response Friday to a series of lawsuits filed by opponents of the rule, which was published in April. Three lawsuits are active, and the DOJ response was filed in U.S. District Court for the District of Columbia.

That is where the National Association for Fixed Annuities filed its lawsuit against the DOL.
In a 105-page response, DOJ attorneys argue that the six claims made in the NAFA suit are without merit. Below are the six NAFA claims and the DOJ response:

NAFA CLAIM: The Department exceeded its statutory authority under ERISA and acted in an arbitrary and capricious manner.

DOL RESPONSE: Court precedence backs up the DOL standing to regulate investment advice under ERISA, the response reads.

“The text, legislative history, and purposes of ERISA support the agency’s reasonable interpretation of ‘investment advice,’ and that interpretation is entitled to deference,” the complaint said.

NAFA CLAIM: The Department exceeded its limited statutory authority and jurisdiction … by promulgating a Rule that imposes ERISA fiduciary duties on parties to transactions involving IRAs.

DOL RESPONSE: The DOJ calls this a “red herring,” claiming that the DOL is not citing ERISA to extend fiduciary duty to IRAs.

“Those who qualify as fiduciaries with respect to IRAs are not subject to fiduciary duties under ERISA but are subject only to the parallel prohibited transaction provisions in the Code,” the response reads.

NAFA CLAIM: The DOL improperly created a private cause of action through the Best Interest Contract Exemption.

DOL RESPONSE: No ‘right of action’ has been created, the DOJ said, as the available actions are ones already available under state contract law.

“The exemption simply provides that a fiduciary who wishes to engage in a transaction otherwise prohibited by ERISA and the Code can do so only if it makes a written commitment to the customer to adhere to the impartial conduct standards, provide basic disclosures, and be subject to oversight by a financial institution that does not incentivize the adviser to violate these standards,” the DOJ response reads

NAFA CLAIM: The term ‘reasonable compensation’ is unduly vague and violates the Fifth Amendment.

DOL RESPONSE: On this point, DOJ attorneys argue that the standard of ‘vagueness’ is less stringent for civil statutes than criminal statutes. The term is used frequently as a standard throughout ERISA code, the DOJ noted.

“NAFA cannot demonstrate that a term plain enough for use throughout ERISA becomes unintelligible when included in a private contract,” the DOJ response reads. “Courts have ruled that variations of the term ‘reasonable’ are not impermissibly vague in a wide variety of statutes or regulations.”

NAFA CLAIM: The “last-minute” decision to add fixed indexed annuities to the BICE was “arbitrary, capricious, unsupported, and contrary to law.”

DOL RESPONSE: The DOJ denied that the rule impermissibly treats FIAs as securities, and that it will put advisors out of business. The exemption does not apply unduly harsh requirements, the DOJ response reads, just requires advisors to act with “prudence” and “loyalty.”

As for the “last-minute” addition of FIAs to the BICE, the DOJ cited case law stating that final rules need not be identical to those proposed, but “a logical outgrowth” of them. The possibility was openly discussed during 2015 public sessions on the proposed law, the DOJ wrote.

“NAFA and other market participants demonstrated their awareness of the possibility that the Department might shift FIAs out of PTE 84-24 when they used their comments to recommend for and against such an action,” the response reads.

NAFA CLAIM: DThe rule violates the Regulatory Flexibility Act by failing to take into account the negative impacts on small businesses.

DOL RESPONSE: The DOJ argued that the DOL consulted with the Small Business Administration, made changes to the rule based on feedback, and complied with the criteria of the RFA.

The DOJ response asks the court to grant the DOL a summary judgment.

The other two lawsuits are:

Market Synergy Group filed suit in U.S. District Court for the District of Kansas, while three lawsuits filed by several plaintiffs in U.S. District Court Northern District of Texas were consolidated by the court.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.