USA Fights Chamber|Over Financial Advisers

DALLAS (CN) — A new rule imposing fiduciary duties on financial advisers closes loopholes for conflicts of interest and will save retirement investors up to $404 billion in the next 20 years, the Department of Labor told a federal judge.

The Department of Labor on Friday asked U.S. District Judge Barbara M.G. Lynn to toss a lawsuit filed in June by the Chamber of Commerce's national and Texas branches. The chamber claims the 1,023-page rule exceeds the Labor Department's authority and will hurt retirement savers.

Announced in April, the rule imposes fiduciary duties on brokers and registered investment advisers for people who have individual retirement accounts and 401(k) plans.

The chamber claims the higher costs and liability will force advisers to stop serving such plans for small businesses.

Several insurance groups that sell annuities filed their own lawsuit against the Labor Department a week later, claiming the rule infringes on "protected commercial speech."

The Department of Labor says it merely executed its "broad authority" under the Employee Retirement Income Security Act. It says that under previous regulations, loopholes allowed those "acting like fiduciaries to disclaim fiduciary status" and dodge the responsibilities and restrictions that come with such status.

"DOL sought to mitigate the inherent conflicts of such transactions by conditioning these exemptions on safeguards so that they would nevertheless be in the interest, and protect the rights, of retirement investors, as statutorily required," the government says in its 130-page memorandum in support of a cross-motion for summary judgment, filed Friday.

"In these cases, three sets of plaintiffs challenge the rulemaking, but the bases of their challenge are inapposite legal authority and mischaracterizations of the rulemaking. For instance, plaintiffs would have the court disregard the functional test Congress adopted to determine fiduciary status and supplant it with a standard purportedly based on the common law of trusts, despite Congress' express departure from the common law. Similarly, plaintiffs urge the court to rely on the distinctions and approach taken in securities laws, rather than look to ERISA. But it is ERISA, not the common law of trusts or securities laws, that is the source of the rulemaking at issue."

The Department of Labor acknowledges that the changes will impose costs on advisers, but says they "will be significantly outweighed" by the "enormous benefit" to retirement investors.

The Labor Department says the rule change is necessary because "(t)he paradigm has shifted with the rise in IRAs, created through ERISA in 1974," which sent retirement savings into IRAs and 401(k)s rather than employer-based defined benefit plans.

"As a result of this shift, plan participants are increasingly responsible for managing their own retirement assets," the motion states. "Due in part to these shifts, as well as the application and manipulation of the 1975 regulation's five-part test, much of the retirement investment advice given today is not protected by fiduciary duties and restrictions."

The Labor Department adds that pay arrangements in the industry have "created incentives" for financial advisers to recommend products that pay them more money rather than products that best serve their clients' interests, creating a conflict of interest.

"Product providers compensated entirely or primarily on a commission basis have a strong incentive to aggressively maximize sales, and when commissions vary depending on the product, the provider has a further incentive to recommend the product paying the highest commission," the motion states.

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