Wall Street Pushing Back Against Labor Department’s Fiduciary Rule

• Posted on: Jul 18 2016

What are the ramifications of the new fiduciary rule?

Earlier this year, the Department of Labor unveiled a new fiduciary standard regulation that will require financial advisors who provide investment recommendations for retirement accounts to meet a fiduciary standard by putting clients’ interests before their own (discussed here).  The Obama administration claims the new standard will protect retirement investors and save them $17 billion in advisory fees.

Now, a consortium of Wall Street and business lobbyists are fighting back saying that the new standard is “deliberately unworkable.” A lawsuit was filed in Dallas federal court in late June by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Insured Retirement Institute alleging that the Labor Department does not have jurisdiction to create a new fiduciary rule. According to the lawsuit, only the Securities and Exchange Commission has the jurisdiction to do so.

The lawsuit comes as no surprise since financial firms have been battling with the Labor Department since it first started crafting this rule 6 years ago. The parties to the suit said in a statement that their action was an effort “to prevent the Labor Department from exceeding the authority that was assigned to it by Congress.”

While the goal of the new fiduciary rule is to eliminate incentives for brokers to steer clients into retirement products with higher fees and commissions, some observers argue that the new standard will hurt smaller investors when their accounts are dropped by firms seeking to avoid additional compliance costs.

“The rule will shackle Main Street financial advisers with extensive new requirements and constant liability, forcing them to limit the options and guidance they provide to retirement savers,” the group said.

In addition to this legal action, the National Association for Fixed Annuities has filed a separate suit seeking to block the new measures. They contend the Labor Department changed course by including fixed annuities in its definition of applicable retirement investments and the new rule will force firms to stop offering these products. Meanwhile, Congressional lawmakers have floated legislation to block the rule from becoming effective, but it is sure to be vetoed by the president if it makes it to his desk.

Whether or not these lawsuits will prevail remains to be seen, however, given the tenor of the times in the wake of the financial crisis and the public’s lack of trust in Wall Street, the era of enhanced regulatory oversight by federal authorities is likely to continue. While establishing and implementing compliance programs can be costly, the costs of litigation and a regulatory enforcement action may turn out to be far steeper. By engaging the services of an experienced attorney, securities firms can be proactive in adhering to the pending fiduciary rule that is slated to become effective in 2017, and retirees can be assured that their financial advisors are acting in their best interests when recommending retirement products.

Tagged with: Securities Arbitration