The new Department of Labor's fiduciary rule is more vulnerable to being overturned than the Obama-era rule that was rejected by a federal court in 2016, a law firm that represents the financial industry said in a new report.

“In our judgment, DOL will have more exposure in litigation than it did in the Rule 2.0 litigations,” the law firm of Eversheds Sutherland said, referring to the vacated 2016 rule as Rule 2.0, the original 1975 fiduciary rule as Rule 1.0 and the latest fiduciary rule as Rule 4.0.

Because the new rule preserves the core of the vacated 2016 proposal—the extension of "investment advice" fiduciary status broadly to investment and insurance professionals—and used a prohibited transaction exemption as relief for conflicted investment advice, “it remains vulnerable to claims of regulatory overreach in litigation challenging the rule,” said the law firm, which represents broker-dealers, registered investment advisors, investment banks and other financial institutions.

The latest rule greatly expands the definition fiduciary standard to anyone providing rollover investment advice, including bank and trust officers and potentially tellers, broker-dealer representatives, certified financial planners, CPAs providing financial planning, commodities brokers, insurance agents and brokers, investment advisory representatives, real estate investment professionals and swaps dealers, the law firm said.

From a rulemaking perspective, Rule 4.0 “is even more audacious” than the DOL’s last vacated rule because it oversteps its congressionally mandated authority beyond ERISA, the law firm said.

Reactions to the new rule have been split, with consumer and fiduciary advocate groups lauding the new regulations, and industry groups representing broker-dealers, insurance companies and other companies calling it a government overreach that will cost companies billions.

Opinions about the ability of the new rule to survive a legal challenge have likewise been divided.

DOL officials have expressed confidence that the new rule is sufficiently changed from the Obama-era rule to pass court muster.

In a recent press conference, Ali Khawar, deputy assistant secretary for the DOL’s Employee Benefits Security Administration, said he believes the new rule is different than the previously-vacated rule because it focuses on what the Fifth Circuit wanted to see with regard to “relationships of trust and confidence.”

According to the Eversheds Sutherland, the next steps for Rule 4.0 are “entirely and drearily predictable” and center around legal challenges citing regulatory overreach.

“DOL has effectively rechristened itself as the Department of Labor and Financial Services, claiming authority to act as the most universal ‘standard of conduct’ regulator with the broadest (but least informed) jurisdiction of any financial services regulator in the country," the report stated. "Final Rule 4.0 is potentially as disruptive for financial services providers as was vacated Rule 2.0 in 2016-2018, notwithstanding the other ‘best interest’ regulatory regimes providers are already observing."

The first lawsuit against the new rule was filed earlier this month by the Federation of Americans for Consumer Choice (FACC), a lobbying group for the insurance industry, and several insurance agents, who filed the lawsuit in U.S. District Court for the Eastern District of Texas.

The plaintiffs have asked the court to vacate the rule and provide a temporary and permanent injunction against its enforcement on the grounds that it violates Congress’s intent in passing the Employee Retirement Income Security Act (ERISA) of 1974 and oversteps the DOL’s authority. 

“If the courts do not grant a preliminary injunction, financial services providers will face very difficult choices about costly and disruptive compliance efforts before and after the effective date, while the litigation is pending,” the law firm said.

“Compliance entails billions of dollars of expense, disruption of existing relationships and expectations, dislocation of business methods and practices, and loss of service for smaller accounts, none of which will be required if Rule 4.0 is retroactively vacated,” the firm predicted.

Because the DOL will be asked for further clarification and guidance as the rule is digested by the various industries it’s been extended to, “DOL’s timely response will be impeded by litigation considerations, further complicating the compliance efforts of affected persons,” Eversheds Sutherland said.

The DOL should stay compliance with the rule while the litigation is pending, “but that is likely too much to ask,’ concluded the firm, which said the costs and disruption from the rule are “entirely disproportionate to any benefit to retirement investors. To the extent DOL’s policy concerns have merit, it is past time for those concerns to be addressed to Congress and sorted out through the bipartisan legislative process,” Eversheds Sutherland added.