The Department of Labor filed a lengthy response Friday to the original lawsuit challenging its controversial fiduciary rule.
Initially filed by the U.S. Chamber of Commerce in Dallas federal court, the lawsuit later was consolidated with two similar challenges. The DOL brief cites 88 lawsuits, along with 11 statutes, seven regulations and 19 different acronyms.
The DOL response requests a summary judgment from Judge Barbara M.G. Lynn.
“DOL’s principles-based approach will directly advance the Government’s interest in protecting retirement investors in tax-favored accounts from conflicted advice without being more prescriptive than necessary,” wrote Galen N. Thorp, attorney with the Department of Justice.
The DOL sought to refute the plaintiff’s claims by arguing that the fiduciary rule is reasonable, consistent with the law and backed up by appropriate study.
"The Rule and PTEs overstep the Department’s authority, create unwarranted burdens and liabilities, undermine the interests of retirement savers, and are contrary to law," reads the U.S. Chamber complaint filed in June.
The complaint later was consolidated with lawsuits filed by the Indexed Annuity Leadership Council and the American Council of Life Insurers. A hearing date is set for Nov. 17.
The DOL responded with three significant counterpoints:
• That the department’s “reasonable interpretation of fiduciary ‘investment advice’ is entitled to deference.”
• That it has statutory authority to grant exemptions, which do not represent a “private right of action.”
• That the department completed appropriate cost-benefit analysis.
• That the inclusion of annuities in the Best Interest Contract Exemption is “reasonable.”
DOL: Plaintiffs Ignore Law
DOL attorneys argue that plaintiffs ignore ERISA’s text, legislative history, and Supreme Court precedent, all of which contributed to the evolved definition of “fiduciary” since the 1970s.
Instead, plaintiffs want Congress to rely on “common law” definition that isn’t appropriate, defendants argued.
Congress adopted a broad definition of “fiduciary” in ERISA, including a person who “renders investment advice for a fee or other compensation, direct or indirect,” the DOL argued. It gave the department the authority to interpret who qualifies as an “investment advice” fiduciary.
Still, the IALC claims that a showing of a “relationship of trust and confidence,” as purportedly required for fiduciary status under the common law, is compelled by the statutory text.
“ERISA’s fiduciary definition nowhere refers to the common law or a relationship of trust and confidence,” the DOL reply stated. “Congress expressly adopted ERISA’s definition to displace the common law because it had proven ineffective.”
In addition, the DOL rejected the plaintiffs’ claim that the rule unreasonably includes brokers and other salespersons who “are not paid for providing advice.” The reading “relies on a dichotomy between advice and sales that is neither reflected in ERISA nor existent in reality,” the DOL response stated.
ERISA extends fiduciary status, “regardless of status or title,” to individuals “to the extent they are performing one of the functions identified in the definition,” the DOL said.
DOL attorneys also rejected the plaintiffs’ claims that brokers and agents who are paid by commission are not offering “advice” as defined by the rule because they don’t get paid unless they make a sale. The response cites three cases in which that view was denied by a court.
“The fact that a broker or agent may not be compensated unless he or she finalizes a sale does not mean that the commission paid is not, at least in part, compensation for investment advice rendered during the course of the sale,” the response stated.
No ‘Private Right of Action’
A main thrust of the plaintiffs’ lawsuits is the claim that the DOL unlawfully created a “private right of action” with its exemptions, something attorneys say only Congress can do. The department disputed that claim.
“DOL has not created a private cause of action; instead, it has specified terms for contracts enforceable under existing state law,” the response reads.
Plaintiffs acknowledge that IRA transactions are already subject to state contract claims, DOL attorneys noted, and do not cite any case that counters an agency’s authority to craft conditions for exemptions.
The fiduciary rule exemptions – PTE 84-24 and the BICE – impose disclosure and recordkeeping mandates, limit compensation to “reasonable” amounts, and with the BICE, require a signed contract.
Opponents claim the exemption conditions are “arbitrary and capricious.” DOL attorneys denied that claim.
“It is hard to imagine conditions that DOL could impose as part of an exemption for financial transactions that would not have potential liability implications under other laws,” the response reads.
Exemptions are needed because traditional means to shield investors from conflicted advice have fallen by the wayside, the DOL claimed. As an example, the DOL cited independent fiduciaries assigned to plans.
“Where the adviser is dealing directly with retirement investors, no disinterested fiduciary of the investor is generally available to sign off on a transaction,” the response reads.
Careful Study Done
DOL's analysis that the rule’s benefits – saving retirement savers up to $4 billion a year – would outweigh the costs are “thoroughly flawed,” the plaintiffs allege. They contend the analysis failed to consider the cost to agents and independent marketing organizations, lost access to retirement help and other factors.
In response, the DOL pointed out that its estimates of compliance costs for the industry “included costs for insurers to help other entities in the market comply or if insurers did not fill this role, the costs incurred by those entities that would fill that role.”
Since each aspect of the industry can be expected to adopt a cost-efficient distribution model, costs for the independent channel “should not significantly exceed the calculated costs to insurers,” DOL attorneys concluded.
Plaintiffs also claim that the DOL failed to account for the alleged harm to consumers from decreased access to variable annuities and fixed indexed annuities.
“The rulemaking does not decrease access to any class of product, but rather appropriately protects the interests of retirement investors by requiring all classes of products to meet objective standards,” DOL attorneys wrote.
The DOL concedes that the rule may result in fewer recommendations of these products, but added that decreased recommendations do not equate to decreased access.
On the surprising late move of FIAs from PTE 84-24 to the BICE, DOL attorneys said the move was made because FIAs are complex and it wanted “a level playing field with variable annuities and mutual funds.”
“Similarly, the greater the investor’s need to lean (on) advisers’ recommendations, the more it is incumbent that advisers have a ‘powerful incentive’ to follow the impartial conduct standards,” the DOL response reads.
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]