A federal judge in Texas dismissed an attempt by industry trade groups to stop the Dept. of Labor’s pending fiduciary rule for advisors to retirement accounts.
The decision ends what had, until recently, been seen as the last, best chance of opponents to derail the regulatory change.
It also contradicts an agenda set by the new Trump Administration. Last week, President Trump ordered the DOL to again analyze the economic impact of the rule and to delay its April 10 implementation if needed. The Justice Department then asked the Texas court to stop deliberations and not issue a verdict on the rule. Hours later, the Texas court did so anyway.
Chief Judge Barbara M.G. Lynn of the Northern District of Texas sided with the DOL’s arguments over those of the plaintiffs, including the U.S. Chamber of Commerce, the Indexed Annuity Leadership Council and the American Council of Life Insurers.
The plaintiffs argued the DOL exceeded their regulatory authority in imposing the standard on brokers, failed to recognize the undue burden it would put on those firms selling investment products to retirement account holders, and that the DOL’s cost-benefit analysis of the rule was “arbitrary and capricious.” The plaintiffs also argued that the rule violated their first amendment right to free speech.
"The court finds the DOL adequately weighed the monetary and non-monetary costs on the industry of complying with the rules, against the benefits to consumers," Lynn wrote. "In doing so, the DOL conducted a reasonable cost-benefit analysis."
Plaintiffs argued the rule would squeeze out mainly sellers of Fixed Index Annuities, which are usually sold in a one-off transaction therefore not meeting the definition of giving financial advice.
Judge Lynn noted the plaintiffs’ interpretation was “at odds with their own description of the role insurance agents and brokers play” in helping clients find the right investment product for their circumstances.
“Such advice requires significant and detailed analysis, often more than is required to sell other financial products. This fits comfortably within the description of someone who renders investment advice for indirect compensation.”
Much of the plaintiffs’ argument rested on the “unworkability” of the best interest contract exemption, of BICE - the hurdles an advisor would have to meet in order to be compensated by commissions or other traditionally “conflicted” sales models. Those include compensation disclosures, and a contract stating that the investment product was in the best interest of the client.
Judge Lynn said she convinced by the DOL’s oral arguments that since Mass Mutual and Lincoln National, which sell variable annuities, “fully intend to use” BICE, and Morgan Stanley, Ameriprise, and Raymond James have said they intend to do the same “the exemption’s conditions have been deemed workable by many in the industry,” she wrote.
“Although the industry may have less ideal options than before the current rulemaking, the industry has been given viable choices. Therefore, BICE’s affect
on compensation models is not arbitrary or capricious. To the contrary, it is reasonable for the DOL to incentivize certain compensation models over others to protect plan participants and beneficiaries,” she wrote.
In a joint statement, the plaintiffs said they disagreed with the ruling, but that President Trump’s recent directive to the DOL to review the impact of the standard “reflecting well-founded, ongoing and significant concerns about the rule, is a welcome development.”
“This ruling is disappointing but should have no bearing on President Trump's decision to review the fiduciary rule,” said Competitive Enterprises Institute senior fellow John Berlau. “Both Democrats and Republicans have rightly expressed concern about the devastating effects the fiduciary rule could have on access to investment options and advice for poor and middle-class savers.”