DOL Fiduciary Rule Should Be Upheld—Just Not the Class-Action Part

DOL Fiduciary Rule Should Be Upheld—Just Not the Class-Action Part

Last summer, the U.S. Chamber of Commerce and SIFMA filed a lawsuit to block the Department of Labor’s fiduciary rule. Texas Chief Judge Barbara Lynn ultimately ruled in favor of the Department of Labor (and not to stay the rule), the case was appealed, and now the U.S. Justice Department has filed its 135-page court brief to defend itself in the Appeals Court. In its brief, the Federal government continues to stand behind the fiduciary rule, but explicitly stated that it would not defend the provision of the rule that requires Financial Institutions to allow consumers the right to file a class action lawsuit when advice is provided to rollover IRAs. The shift is consistent with President Trump’s recent positioning in a separate case, NLRB v. Murphy Oil USA (which is currently pending before the Supreme Court)… although if the Trump Administration loses, it could become even more difficult for fiduciaries (and even FINRA) to require mandatory arbitration at all. For the time being, though, and in the context of the DoL fiduciary rule, the unwillingness of the government to defend that section raises the possibility (though it does not ensure) that the court could agree with the plaintiffs and ultimately strike down the class action requirement of the BIC exemption (and allow Financial Institutions to once again force consumers into mandatory arbitration, even in cases of alleged fiduciary breach). Given the string of legal losses that fiduciary opponents have faced thus far, the fact that the Department of Justice has pledged to continue to defend the fiduciary rule makes it likely that it will remain. However, the potential that the class action provision even could be struck down in court raises serious concerns about the overall enforceability of the DoL fiduciary rule with respect to IRAs, given that the Department of Labor has the right to set fiduciary rules for IRAs but not enforce them, and without the risk of a class action suit looming, Financial Institutions may simply decide that occasionally losing one-off mandatory arbitration cases against individual brokers is an acceptable “cost of doing business” while pushing the line on the fiduciary rule. And of course, in the meantime, the Department of Labor has already separately begun the process of potential further changes to the fiduciary rule with its recent Request for Information, suggesting that while the rule may “stick”, there is still substantial uncertainty about exactly what will remain in the final version next year.

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