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Government takes break from trying to kill fiduciary rule to defend it

Joe Mont | July 5, 2017

The Labor Department finds itself in the awkward position of defending its controversial “fiduciary rule” in court even while a repeal-minded public comment period is underway.

In April 2016, the Department of Labor finalized a new rule that creates a fiduciary duty for brokers and registered investment advisers who offer retirement advice. While prohibiting conflicts of interests, the rule also provides exemptions that, if applied for and granted, would allow these advisers to maintain fee-based arrangements.

In general, fiduciaries are prohibited from receiving commissions, which are considered to present a conflict of interest. The new rule, however, creates a Best Interest Contract Exemption for fixed index annuities and variable annuities. It allows fiduciaries to receive commissions only if they adhere to certain conditions, including signing a written contract with the consumer that contains enumerated provisions intended to protect their interests.

In February, President Trump ended his second full week in office by ordering the Labor Department to review the rule and prepare an updated economic and legal analysis. If it concludes that the rule is “inconsistent” with Administration priorities, it was instructed to rescind or revise the rule as appropriate.

In an opinion piece published in the may 22 edition of the Wall Street Journal, Labor Secretary Alexander Acosta said that any repeal of the rule, or comprehensive revisions, would need to conform with requirements of the Administrative Procedures Act.

The first phase of compliance obligations began on June 9. A public comment process began on June 26 with the labor Department’s “Request for Information Regarding the Fiduciary Rule and Prohibited Transaction Exemptions.”

Amid these moving parts is a legal brief filed by the government to defend the rule against critics. The one exception: it agrees with plaintiffs in that class action lawsuits under the best interest contract exemption should not be permitted.

Proponents of the rule, as it currently stands, see private right of action as an added deterrent for non-compliance. Others argue that firms could be besieged by frivolous and costly lawsuits.

Among those suing the government over the rule are the U.S. Chamber of Commerce, Financial Services Institute, Texas Association of Business, and the Securities Industry and Financial Markets Association. Among other reasons, they say the rule should be repealed because it is arbitrary and capricious. They also asserted that the Labor Department lacked authority to revise its interpretation of the statutory definition of investment-advice fiduciary and condition relief from the prohibited-transaction provisions on the terms that it did.

The plaintiffs also argued that imposing fiduciary-conduct standards on investment advisers is an impermissible restriction of speech.

After hearing those arguments, the U.S. District Court for the Northern District of Texas upheld the Labor Department rule. An appeal is now being heard in the U.S. Court of Appeals for the Fifth Circuit. The latest of the government’s brief was filed on July 3 through Justice Department attorneys.

“The plaintiffs’ First Amendment arguments are not properly before this Court and, in any event, rest on the discredited and radical premise that investment advisers can evade regulation of conflicts of interest in the conduct of their business simply because that business is conducted with words,” it says. “In sum, plaintiffs have failed to identify any reason why the fiduciary rule, including its associated exemptions, should be vacated in full, and the judgment of the district court should be affirmed in all but the one narrow respect [private-right-of-action].”