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US Department of Labor fidcuiary rule Copyright Alex Wong, Getty Images

FSI Preps for Court Battle With DOL Over Fiduciary Rule

The Institute will again take the Labor Department to court if it does not withdraw or “substantially improve” the rule governing advisors to retirement accounts, according to CEO Dale Brown.

The Financial Services Institute will be back in court to fight the Labor Department’s revised fiduciary rule unless the government regulator withdraws it or "substantially" improves it, said President and CEO Dale Brown.

During opening remarks and a subsequent discussion at the Institute's annual OneVoice conference in Orlando, Fla., Brown said the organization was waiting to see the final details of the rule, expected to be released in the next few months. 

But as it stands, if the department doesn't withdraw it in its current form or “substantially improves” it, FSI will sue to stop its implementation, just as it did with a previous version of the fiduciary rule released during the Obama administration.

“Our efforts to influence their thinking and influence the outcome, the final rule, as best as I can tell, fell on deaf ears, and therefore our final option was to participate in litigation in 2016,” Brown said. “They’ve proposed a new version that largely will have the same overreaching, unworkable, negative outcomes for small investors who need retirement advice.”

The Labor Department’s latest take on a fiduciary rule was released last Halloween, with President Joe Biden framing the proposal as a way to curb "junk fees" (high and potentially unsuitable commissions) in the retirement advice industry.

Some, including FSI, objected to the terminology, while investor advocates, including the Consumer Federation of America, were buoyed that the proposed rule ended the exclusion of rollover recommendations from fiduciary protection. The DOL held a public hearing on the proposed rule in December, and the industry is waiting to see the final version.

Brown said the industry would prefer the DOL withdraw the rule altogether, given the context of skirmishes brokerage lobbyists had with previous administrations (the Trump administration also released its own version of a fiduciary rule in 2020, and it was allowed to go into effect as the Biden-era rule developed). 

Brown said the DOL has left the organization little choice but to rely on litigation.

“Agreeing that a rule is needed is not required in my mind in order for us to be constructively engaged,” he said.

The latest fiduciary proposal isn’t the only DOL rule in FSI’s sights. Recently, the institute signaled it intended to revive a lawsuit in Texas federal court against the department over its independent contractor rule. 

The lawsuit was originally filed in May 2021, shortly after the Biden administration withdrew an independent contractor rule finalized in the last weeks of the Trump administration (which FSI supported). That rule was set to take effect in March 2021, but the DOL under Biden argued it was inconsistent with the Fair Labor Standards Act. 

FSI (with several other co-plaintiffs) successfully argued in Texas’ Eastern District that the DOL violated federal law in the manner in which they delayed the Trump-era rule. Judges agreed, which bumped a potential appeal from the DOL up to the Fifth Circuit. In October 2022, the DOL proposed a new version of the rule, with the final version released this month. 

In the interim, the Fifth Circuit agreed to a pause on FSI’s suit, but FSI wants that suit continue in Texas’ Eastern District. Brown has called the rule “vague, amorphous and context-dependent.”

FSI also continued its longstanding fight against what they deem “regulation by enforcement” from the SEC, claiming the commission is not providing a pathway for firms to get guidance and recommendations to ensure compliance with vague rules. The FSI released a white paper this week with detailed suggestions for how the commission could change its approach.

The report recommended the commission should consider whether there’s been evidence of prior notice or reasonable alternatives to enforcement before proceeding with an enforcement action, as well as “fairness audits” by the commission’s Inspector General.

“We don’t believe regulation itself is regulation by enforcement,” said Robin Traxler, a senior vice president, policy and deputy general counsel with the Institute.

FSI’s frustration with the SEC’s so-called regulation by enforcement goes back years, preceding the tenure of current SEC Chair Gary Gensler. The report includes several dissents from current and former SEC commissioners and examples of ‘best practices’ from SEC’s recent history to use as models when crafting rules. However, the report does note the dissents came exclusively from commissioners chosen by Republican presidents. Additionally, one of the rules used as a model is Reg BI, which has been criticized by investor advocates for being a weak version of a fiduciary standard and too friendly to the brokerage industry.

Brown said that the white paper offered “clear actionable recommendations," though he wouldn’t go as far as to offer a prediction on how the white paper would land within the commission.

“I can only see their actions and hear their words, and give them the benefit of the doubt, if you will, or assume the best of intentions and their willingness to engage in a dialogue,” he said.

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