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DOL Rule Assault Comes From All Quarters

By Murray Coleman July 14, 2017

The DOL rule is under assault, and not only from Congress. Department of Labor policymakers are also finding that the new regulation’s full implementation faces a complicated set of conflicting legal precedents and shifting political tides.

At least that’s the view of advisors and industry lawyers who are following a flurry of new developments swirling around a rule that mandates brokers act as fiduciaries in retirement planning.

“The Trump administration thought it was going to just straight out kill the rule,” says Christopher Barnes, managing director of financial services at Cogent in Cambridge, Mass. “But a realization of the grassroots popularity of stronger fiduciary standards is finally starting to set in.”

A growing contingent of industry political and legal analysts are pointing to a ratcheting up by critics of a two-pronged attack on the DOL rule.

In legislative terms, a new bill introduced by Rep. Ann Wagner (R-Mo.) seeks to replace the DOL rule with a “best interest” standard giving advisors broader scope in deciding how to accept third-party payments and charge commissions.

Earlier this week, reports also surfaced that a provision has been tacked onto an appropriations bill in the U.S. House of Representatives to prohibit the DOL from enforcing its new reg.

The DOL itself is also signaling a shift in tactics. In a brief submitted before the U.S. Court of Appeals for the Fifth Circuit, government lawyers say they’ll no longer push to bar fiduciaries from using legal wording designed to keep clients from filing class action suits.

A class action provision has been a controversial part of the rule’s so-called best interest contract exemption, or BICE.

The exemption sets up a path for brokers to work with commission-based products in retirement accounts – namely by presenting clients with written disclosure of such practices. But it also lets investors bring class actions instead of restricting them to arbitration to settle disputes.

“A key point of contention for some advisors is that one of the things they’re not allowed to do as part of the BICE mechanism is restrict class action suits by clients,” says Jason Roberts, an attorney and chief executive of Pension Resource Institute in Redondo Beach, Calif.

The DOL, with its most recent court submission, is “electing not to defend” in an ongoing case under appeal “this particular provision of the rule,” he adds. The result, Roberts predicts, is advisors and their firms will now be able to follow a legal process focused on arbitration hearings.

“This brief portends rule changes in terms of the BICE – my best guess is we’ll see some sort of movement in the next 90 days,” says Roberts, adding such DOL review timetables are likely to remain a “moving target.”

Marcia Wagner, an estate planning and Erisa attorney in Boston, notes the DOL’s filing of a brief over class action suits comes “almost in a simultaneous manner” as putting out a request for information seeking comments on the rule.

Marcia Wagner

The RFI process, which ends Aug. 7, also opens for public debate whether the DOL should extend its deadline for full implementation from early 2018.

“This is a big enough industry where it can’t turn on a dime,” Wagner says. “If there are going to be significant changes – and it looks like there might be – then everyone’s going to need more time.”

The seeming reversal by the DOL to let advisors steer clients through arbitration instead of class action battles also suggests a case of the government’s “right hand starting to realize what its left hand is doing” says Chris Stanley, general counsel at San Jose, Calif.-based investment outsourcer Loring Ward, which manages about $15 billion.

He points out that the department’s brief references a case pending before the Fifth Circuit Court in which the plaintiff is arguing that the Federal Arbitration Act pre-empts what the department was originally trying to do – banning advisors from preventing class actions in BICE contracts.

“In that case administration officials are basically saying they don’t want to take conflicting positions in different cases,” Stanley says. The implication, he adds, is that the Justice Department is “clearly trying to maintain consistent regulatory positions across pending legal cases.”

The unfolding legal realities of slashing industry regulations, Stanley says, “is really helping to swing the pendulum of BICE reform in a more pro-advisor direction.”

The path to political reform, however, could take years to clear up in court. In fact, Cogent’s Barnes sees a high likelihood that the DOL’s defense of its new rule will wind up before the Supreme Court.

In the meantime, he expects the evolving political landscape to keep shifting.

“Since this rule is so narrowly focused on a specific segment of financial services, many of the rule’s opponents thought it’d be fairly painless politically to do a straight repeal,” says Barnes, a former senior policy advisor to the Democratic caucus in the House of Representatives.

But now he’s finding more legislative and legal criticism coalescing around a tactic of scaling back regulation “without raising the sound and fury” of consumer advocates and Democrats in Congress.

“What we’re clearly seeing now on the Hill is implementation of a political strategy that’s attempting a soft repeal of the DOL rule,” Barnes says. “It’s death by a thousand cuts – take it apart piece by piece both in the courts and in Congress.”