Will the Fiduciary Rule Have Its Day in Court?

When the Department of Labor publishes its fiduciary rule, expected in the first half of 2016, lawsuits are likely to follow.

The financial services industry is buzzing with potential scenarios in which DOL officials would have to defend their fiduciary rule under oath.

“I think there will be litigation,” said Fred Reish, a partner at Drinker Biddle & Reath in Los Angeles, adding that the obvious challenge is whether DOL followed the proper procedures in promulgating its rule.

“That is so well known that I can’t imagine that the DOL isn’t doing intensive investigations right now and is going to write a very robust” report in support of its rule, Reish said.

A second possibility would challenge the DOL’s authority to change arbitration rules. Instead of traditional arbitration only, the DOL rule would give investors greater power to seek damages through the courts.

Currently, investors’ claims are heard before Financial Industry Regulatory Authority (FINRA) arbitration panels. Fiduciary rule proponents say Finra is a trade association that favors the industry over the investor.

The DOL rule would ban class-action waivers of participation in arbitration agreements. Industry opponents say the DOL lacks the authority to enforce this aspect.

“I think it’s very hard to handicap because there are arguments on both sides that make sense,” Reish said.

The DOL proposed new fiduciary rules in April, including six proposed prohibited transaction exemptions, governing advice provided regarding qualified retirement employer-sponsored plans and individual retirement accounts.

DOL officials and public interest groups say the proposed rules, which would impose a fiduciary standard of care on financial advisors dealing with retirement accounts, are necessary to protect retirement investors from high commissions.

One industry executive, who requested anonymity, pointed to high-powered lawyer Eugene Scalia’s comment letter for a potential lawsuit clues. Scalia, who did not respond to requests for comment, is Supreme Court Justice Antonin Scalia’s son and has won several prominent financial law cases.

In his July 20 comment letter, Eugene Scalia argues that the DOL’s lawful role is to create rules that regulators enforce. They cannot create rules that form the basis of a private right of action. Only Congress can do that, Scalia wrote.

“To be sure, the Department has authority to interpret the definition of ‘fiduciary’ under ERISA and the Internal Revenue Code,” wrote Scalia, a partner in the Washington, D.C. firm Gibson Dunn. “Its enforcement authority, however, is limited to ERISA.”

The DOL will have an argument for this point as well, Reish said.

“What the DOL will say is we have the right to issue exemptions,” he explained. “There are interesting arguments on both sides.”

The DOL is expected to publish its rule by May 1, so it is officially adopted before President Barack Obama leaves office in January 2017.

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].