Financial firms are mulling a possible legal challenge to the U.S. Department of Labor’s controversial fiduciary rulemaking pertaining to the Employee Retirement Income Security Act of 1974, or ERISA.
Trade groups say it’s too early to talk about potential legal action before the final rule is issued––a final version could come early next year––but if the final version doesn’t include significant changes to the current proposal, as many observers expect, a legal challenge would definitely be on the table.
The DOL proposal would extend ERISA fiduciary protections to IRA accounts and small retirement plans. A final round of comments closed last week.
“People are considering a legal challenge [if] the rule is not considerably changed,” said Kent Mason, a partner at Davis & Harman LLP in Washington, D.C., about a coalition of (unidentified) financial services firms he represents.
In comment letters to the DOL this summer, a number of heavyweight industry players left little doubt that a legal challenge could lie ahead.
The industry says that in a number of areas, the rulemaking goes beyond the statutory authority of ERISA.
“Congress expressly decided not to make IRAs subject to ERISA” when the law was enacted in 1974, the Financial Services Roundtable said in a comment letter. “Amending ERISA requires an act of Congress, not an informal rulemaking under the Administrative Procedure Act.”
“The Department is doing what Congress specifically did not do when enacting ERISA,” echoed the American Bankers Association. “Congress refrained from providing a federal fiduciary standard of care or statutory remedy for IRA owners, and it is doubtful that the Department has the authority to do so.”
The DOL didn’t attempt to explain its legal authority in expanding the definition of investment advice and its proposed expansion of fiduciary status to advisors whose activities don’t involve control and discretion of client assets, added John Ryan, a partner at Seward & Kissel LLP.
Ryan, a former Labor Department lawyer who now represents investment managers, hedge funds and private-equity firms, told Financial Advisor that if the rule is challenged in court, “the question of [the DOL’s] overreach in defining investment advice … is going to be the question they’ll have to face.”
The U.S. Chamber of Commerce, which has been active in suing regulatory agencies, calls the DOL’s rulemaking an illegal “jurisdictional land-grab” by imposing a standard of care on IRA advisors directly, and creating a private right of action for investors.
“The Department has no authority whatsoever to create private causes of action not authorized by Congress,” the Chamber wrote.
The Financial Services Institute agreed. “There appears to be no statutory authority under ERISA that would permit the Department to make a failure to comply [with an exemption] subject to a private right of action under state law,” the FSI said in a comment letter.