Though the annuities industry has filed a lawsuit hoping to stay and ultimately overturn the Department of Labor’s final “retirement security” rule, approved just two weeks ago, not all industry or regulatory experts are certain it will succeed.

The rule seeks to expand the fiduciary standard to certain products like annuities and will likely hamper independent insurance agents especially, according to critics. The Federation of Americans for Consumer Choice (FACC), a lobbying group for the insurance industry, and several insurance agents filed the lawsuit in U.S. District Court for the Eastern District of Texas; they 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 of 1974 and oversteps the DOL’s authority. The rule is set to take effect September 24.

“The odds are pretty low” the injunction will be granted, said Duane Thompson, longtime industry lobbyist and president and founder of Potomac Strategies.

Micah Hauptman, director of investor protection at the Consumer Federation of America, agreed.

“I don’t think the motions for injunction will be granted,” he said. He also thought the plaintiffs “are unlikely to show that they will succeed on the merits. In addition, the balance of equities do not weigh in their favor, given the interests of retirement investors receiving high-quality advice.” Hauptman is also the former counsel to SEC Commissioner Caroline Crenshaw.

Thompson noted that the department’s latest rule is little changed from the 2016 version that was overturned by the U.S. Fifth Circuit Court of Appeals. The new lawsuit against the rule, he said, argues that the common law definition of a fiduciary, someone who puts the client’s interest above the advisor’s self-interest, was already legally defined in 1975 under a test that includes five factors to show that somebody is acting in a fiduciary manner, including the fact that the advice is ongoing and regular and that the advice will be individualized according to the needs of the plan.

Thompson said he’s surprised the FACC did not bring up the major questions doctrine, which discusses the limited authority of the executive branch to make rules that ought to be made by Congress. “It might have helped their current argument that the DOL exceeded its regulatory authority, although it could be raised later.” He also said the suit missed an opportunity to raise giving advice as a First Amendment, free speech issue, “which was raised by an insurance group in 2016, but was not addressed in the Fifth Circuit decision.”

Both Thompson and Hauptman expect the plaintiffs to appeal if they lose. FACC’s “entire reason for being is to preserve insurance professionals’ ability to sell low-quality and overpriced products. I assume they will do whatever they can to accomplish that goal,” Hauptman said.

In contrast, David Macchia, president and founder of Wealth 2K, a firm that specializes in compliance for the independent insurance industry, said he believes the court may grant the injunction.

“I’m optimistic that the request for a preliminary injunction will be successful, but one cannot ever predict. If it’s successful, I imagine the DOL will appeal. Until that time, it’s the law of the land, so companies are wrestling with complications of preparing to comply while hoping the legal challenges will be successful,” Macchia said.

Thompson said he thinks it’s possible one or two other groups might file lawsuits, perhaps in another circuit, “although the Fifth Circuit—where this lawsuit was filed—is opponents’ best chance for overturning the rule. In 2016, several lawsuits were filed in the Fifth Circuit and quickly consolidated.”

Appeals Likely
Thompson, who is a former top lobbyist for the Financial Planning Association, noted that for now at least the brokerage industry’s response “has been surprisingly muted compared to the insurance industry, but it’s still early in the process. In 2016 a total of two dozen organizations raced to the courthouse and filed six lawsuits in four different circuits. However, it took them nearly two months to file their first complaint, while it only took a week this time,” Thompson said.

Hauptman said the FACC will likely appeal to the Fifth Circuit if they are defeated in the first round. “Yes, I would expect the plaintiffs to appeal if they lose,” Hauptman said. “Assuming the rule is not enjoined pending a decision on the merits, I assume the rule will go into effect, members of the industry will begin to comply, and the world won’t come to an end.”

He added that many firms were already adapting to comply with the 2016 rule when it was finalized. “They can comply and improve products and services, benefiting investors. That evidence undermines industry opponents’ doom-and-gloom predictions that they often declare,” Hauptman said.

The court case could take “an extended period of time,” Macchia said. As a result, “the insurance industry will be forced into complying with all the changes, and those new systems will probably become the law of the land by default.”

Insurers and agents will have no choice but to comply because the penalties for being found in violation of the fiduciary rule are massive, Macchia added. “There’s a 10-year ban on accepting rollovers, disgorgement of profits and restitution and, on top of that, insurers and agents can be sued. There is no arbitration requirement to protect insurance agents, so I assume the plaintiffs’ bar will be the enforcement mechanism of this rule,” Macchia said.

Hauptman agreed that the insurance industry will be most affected by the rule, but added, “That is a good thing. Insurance markets are markets where products typically compete based on how much they compensate financial professionals. As a result, insurance products often have excessive costs and perverse conflicts baked into them. The rule will change dynamics in insurance markets so that products compete based on cost and quality, which will benefit investors.”