By Knut A. Rostad
Originally posted on ThinkAdvisor on February 10, 2017 (registration required)
Wednesday’s win in Texas federal court for the Labor Dept.’s fiduciary rule is important and deserves attention. Judge Barbara M. G. Lynn’s extensive review of the industry case against the DOL rule, the fiduciary standard and investors is an unequivocal investor victory.
Lynn’s 81-page opinion carefully refutes key industry positions on the basis, workability, costs and requirements of BICE; defining “reasonable compensation” and the best interest standard. Legal precedent, cogent analysis and pertinent facts and circumstances give short shrift to the unsubstantiated assertions that so often dominate industry political arguments.
(Memo to the Trump Administration: Consider new “alternative facts” to rebuild your case.)
— See ThinkAdvisor’s complete DOL Fiduciary Compliance coverage.
Lynn’s writing is succinct and forceful. Selected highlights are noted here. The (underlined) plaintiff’s claims are followed by the judge’s rebuttal (labeled here, (The court disagrees.)
1. “Plaintiff’s claim … BICE … (is) arbitrary and capricious …
(The court disagrees.) However, the DOL reasonably found that institutions and advisors that are paid on a commission basis may very well make investment recommendations, at the expense of plan participants and beneficiaries…. It is reasonable for the DOL to incentivize certain compensation models over others” (See page 34 of the opinion.)
“The court also finds that the conditions to qualify for BICE are reasonable … BICE’s written contract requirement is reasonable … The imposition of the duties of loyalty and prudence are reasonable given DOL’s findings on the negative impact that conflicted transactions have on retirement investors …” (pp. 35, 36)
2. “Plaintiffs argue there is no meaningful guidance in the rules on what constitutes “reasonable compensation ….
(The court disagrees.) In fact, (however) the DOL has used the same “reasonable compensation” language in BICE in numerous exemptions from prohibited transactions going back to 1977. … Plaintiffs respond and says this provides no clarity. (The court disagrees.) The DOL considered this critique and rejected it … Courts seemingly have had little trouble applying the concept of reasonable compensation and other similar standards over the years, showing it far from unworkable.” (pp. 56, 57)
3. “Plaintiffs argue the “vague” and “ill-defined” best interest standard, along with inconsistent state law enforcement of contracts required under BICE, make those potentially covered by the exemption susceptible to unforeseeable, potentially conflicting and staggering liability from private litigation ….
(The court disagrees.) The best interest standard is not vague; the standard is explained thoroughly in BICE and is drawn from the duties of loyalty and prudence, which are “deeply rooted in ERISA and the common law of agency and trusts.” … Plaintiffs do not articulate why these concerns did not arise before BICE… Further, Plaintiffs cite why courts’ decisions would be expected to diverge widely when applying common law legal principles of contract law.” (pp. 57, 58)
4. “Plaintiffs argue BICE is unworkable for proprietary products …
(The court disagrees.) However, in Section IV of the exemption, the DOL created a check list to provide guidance on how proprietary product providers can satisfy BICE…. It is imprudent to recommend a proprietary product that does not satisfy the “prudence and loyalty standards with respect to the particular customer and in light of the customer’s needs. This requirement is not unclear.”” (p. 59)
5. “Plaintiffs misconstrue the supervisory responsibilities imposed by the rules …
(The court disagrees.) The DOL considered the relevant factors for BICE’s workability, addressed commenter concerns and reasonably justified its conclusions, thereby satisfying the ABA’s requirements.” (pp. 59, 60)
6. “Plaintiffs make four arguments that the DOL overstated the benefits and underestimated the costs of rulemaking …
(The court disagrees.) The DOL’ assessment of mutual fund performance was reasonable … Nor did the DOL ignore criticism made during the comment period of its methodology and its estimates of savings for consumers … the DOL specifically requested the industry provide any and all relevant data for IRA investments, but was told the data either did not exist or would be too expensive to collect. The DOL must make do with the available information and may regulate on the basis of available information.” (pp. 61, 62)
7. “Plaintiffs argue the DOL did not consider the costs … to comply with BICE.
(The court disagrees.) In fact, the DOL considered compliance costs which were quantified based on the industry’s own estimates. … The Court notes that the DOL, “aimed to err on the side of overestimating compliance costs by assuming wide use of” exemptions, even though that is uncertain.” (pp. 64, 65)