The DOL Lawsuit Explained

• Coalition files lawsuit to stop the DOL's Fiduciary Rule

The U.S. Chamber of Commerce-led lawsuit against the U.S. Department of Labor seeks to overturn new rules requiring advisors to exert a fiduciary standard of care in dealing with retirement accounts.

Here are the eight counts that form the basis for the complaint, which asks the U.S. District Court for the Northern District of Texas to immediately vacate the rule:

* Count One: The Labor Department has “improperly exceeded” its authority in violation of the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code and the Administrative Procedure Act.

ERISA grants the DOL authority only over covered employee benefit plans, not over individual retirement accounts, or IRAs, when “sold to individual savers,” the plaintiffs allege.

* Count Two: The rule violates the Administrative Procedure Act because it is “arbitrary, capricious, and irreconcilable” with ERISA and the Internal Revenue Code.

The rule is so broad that it includes activity “long been understood to be sales-related and not fiduciary,” the plaintiffs argue.

* Count Three: The DOL “unlawfully created a private right of action.”

The Best Interest Contract (BIC) Exemption and the Principal Transactions Exemption (PTE), which allow advisors to collect third-party fees and commissions, violates the Administrative Procedures Act by enabling IRA participants and other non-ERISA plans to sue financial institutions and advisors for “breach of standards” imposed by the DOL.

* Count Four: The DOL failed to provide adequate notice and to consider and respond sufficiently to the thousands of comments it received last year.

Citing just one example, the plaintiffs allege that DOL regulators failed to review its Regulatory Impact Analysis even after dozens of commentators informed the department of the analysis’ defects.

* Count Five: The Federal Arbitration Act prohibits the Best Interest Contract (BIC) and Principal Transaction Exemptions’ (PTE) Regulation of class action waivers in arbitration agreements.

The DOL does not have the authority to override the Federal Arbitration Act’s protections of “enforceability of arbitration agreements,” without Congressional authority, plaintiffs argue. There is nothing in ERISA that contains such an override, the lawsuit says.

* Count Six: Regulation of fixed indexed annuities and group variable annuities through the BIC exemption is “arbitrary, capricious, barred by the Dodd-Frank Act, and was not subject to proper notice and comment.”

By placing variable annuities and fixed indexed annuities under the BIC, the department is looking to regulate products that Congress removed from federal regulation when it prohibited the SEC from regulating FIAs if the products met state standards, the lawsuit claims.

* Count Seven: DOL regulators “arbitrarily and capriciously assessed the rule’s benefits, consequences, and costs.”

DOL analysis of the rule’s benefits – saving retirement savers up to $4 billion a year – would outweigh the costs are “thoroughly flawed,” as the analysis ignores and underestimates the costs of class action lawsuits, lost access to retirement help, the plaintiffs allege.

* Count Eight: The BIC violates the free speech guarantees in the First Amendment because it “impermissibly burdens speech.”

The rule “improperly abridges” the right of advisors to engage in truthful, non-misleading speech related to their products and services since the rule sets parameters as to what advisors may or may not discuss with their clients.

Plaintiffs in the dispute include the U.S. Chamber of Commerce, the Financial Services Institute, the Financial Services Roundtable, the Greater Irving-Las Colinas Chamber of Commerce, Humble Area Chamber of Commerce, the Insured Retirement Institute, the Lubbock Chamber of Commerce, the Securities Industry and Financial Market Association and the Texas Association of Business.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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