Opponents and analysts of the Department of Labor’s controversial fiduciary rule long predicted litigation would greet its publication.
Now that the final rule is out, insiders are even more convinced that lawsuits are on the way.
“While the Department of Labor addressed many of the concerns expressed during the comment period, the final regulation still constitutes a dramatic expansion of fiduciary status and creates a lot of uncertainty,” said Patrick DiCarlo, a lawyer specializing in employee benefits and ERISA litigation for Alston & Bird.
“There will almost certainly be a wave of expensive and unpredictable litigation.”
In an ideal world for opponents, a litigation effort would be able to convince a judge to issue an injunction. That would effectively halt the regulation in its tracks.
Of course, judges do not freely grant injunctions. They are usually issued only in cases where irreparable injury to the rights of an individual would result otherwise.
Jack Marrion, CEO of the consulting firm Advantage Compendium, is confident the rule will never go into effect.
“I sincerely believe the final outcome is that based on the lawsuits that will be filed that the entire rule will be stayed and returned to the DOL to redo their economic analysis - which they are unlikely to do in the next administration,” Marrion said. “So I think it will die before it goes into effect.”
The Unfunded Mandates Act of 1995 required extensive economic analysis for all rules, he noted. Marrion cited a pair of precedents to bolster his point: one being the MetLife victory last month against the federal government’s “Too Big to Fail” designation. In addition, Rule 151A, a 2008 Securities and Exchange Commission effort to regulate all indexed annuities as securities was thrown out by a U.S. Court of Appeals.
‘Only Need to Win One’
FIAs have a better case against the DOL than either of those examples, Marrion said.
“Although DOL toned down the requirements enough to avoid some lawsuits, there are still enough groups to launch several suits and we only need to win one," he added.
Marrion co-authored a 2015 study that concluded the DOL relied on inappropriate or unknown data, and failed to acknowledge that financial advisors are already regulated by the states.
Marrion’s study points out those broker-dealers are already stringently regulated by the states, or the Financial Industry Regulatory Authority (FINRA).
They can be denied registration if they have committed a felony related to a financial crime. Furthermore, insurance agents, who are not only registered but also licensed at the state level, can be denied a license if they have been found to have violated the “moral sentiment” of their community.
While the DOL did some type of economic analysis on insurers, Marrion said, they “completely ignore” the effects on marketing.
“My interpretation is it would cause them severe economic damage,” said Marrion, adding that IMOs and FMOs have standing to sue.
Marrion’s report was authored for the Americans for Annuity Protection, a nonprofit group headed by industry veteran Kim O’Brien. InsuranceNewsNet Publisher Paul Feldman is chairman of AAP.
Chamber to Lead the Way?
To date, the most litigious rumblings have come from the offices of the U.S. Chamber of Commerce.
“I think we have to at least consider the need to go to court," David Hirschmann told reporters last month. He is president of the business group's Commerce’s Center for Capital Markets Competitiveness.
A Chamber spokesman said the group is “reserving judgment” until it completes a review of the rule.
“Unless we see fundamental changes, this rule will remain unworkable and we will consider every approach to address our concerns,” Hirschmann said in a statement this week.
Mark Smith, partner at Sutherland Asbill & Brennan in Washington, D.C., is a longtime ERISA lawyer and an expert in financial services regulatory matters. Litigation was always inevitable from the day the DOL released its tentative rule, he said.
"The reasons companies might challenge the validity of these rules follows from the department’s decision to regulate more expansively in this space,” he said. “There’s really nothing the department could do or did do in the final regulation to answer those core objections."
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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