Although the court recognizes that it may be difficult and costly for financial institutions to move away from that model of compensation, the prospect of alternative compensation methods is not illusory. The choice may not be pleasant one, but it is real.
Moss continued: “Importantly, there is also a clear nexus between the risk that commission-based compensation will skew investment advice and the condition that advisers paid on a commission basis must provide advice that satisfies the duties of loyalty and prudence.”
The challenges ultimately could lead to a divide among appellate courts about the lawfulness of the rule, creating a conflict that the U.S. Supreme Court is asked to resolve. The regulations were six years in the making.
The National Association for Fixed Annuities, represented by a team from Bryan Cave, argued in court on Aug. 25 in Washington that the fiduciary rule, which requires investment advisers to act in their client’s best interests, is the “embodiment of overreach.” The rule is set to take effect in part next April.
Insurance companies and individual insurance agents make up part of the annuities association’s membership. Bryan Cave partner Philip Bartz said the new standard outlined in the fiduciary rule would effectively put certain certain insurance agents out of business. “I think it’s clear that there’s irreparable injury here,” Bartz told Moss.
Bartz was not immediately reached for comment Friday afternoon.
At the court hearing, Moss asked a series of questions about a provision in the rule that allows investors to file a class action when they believe an adviser has not acted in their best interests. The provision has caused alarm in the financial industry.
“They’re going to get their butts sued off,” Bartz said in court. “We’re talking about extraordinary risk and extraordinary consequences if you do this wrong.”
U.S. Justice Department lawyers Emily Newton and Galen Thorp had urged Moss not to block the new regulations. The increased complexity of the retirement-plan market compelled the Labor Department, they argued, to revisit the 40-year-old regulatory framework for retirement advice.
“The evidence across the board,” Thorp said, showed that “whenever you have a professional adviser and an inexperienced client plus a conflict of interest, it ends badly for the consumer.”
In Topeka, Kansas, U.S. District Judge Daniel Crabtree on Sept. 21 took up insurance agency Market Synergy Group Inc.’s suit against the fiduciary rule. U.S. District Judge Barbara Lynn in Dallas has set a hearing for Nov. 17.
The ruling in NAFA v. Labor Department is posted below.
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