On July 8th, the public got its first view into how the U.S.Department of Labor will defend its fiduciary rule when it filed a crossmotion for summary judgment, asking the U.S. District Court for theDistrict of Columbia to dismiss a law suit brought by the National Association for FixedAnnuities.

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The first hearing in that case, NAFA v. Thomas Perez, etal., has been scheduled for Aug. 25. NAFA is seeking aninjunction to stay Labor Department's rule, which is slated for afirst round of implementation in April 2017.

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Related: See more of our DOL fiduciary rulecoverage

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In its suit against the Labor Department, NAFA, a Washington,D.C.-based trade organization representing insurance carriers andindependent insurance agents that account for 85 percent of fixedannuity sales, alleges the LaborDepartment rule is “impermissibly vague, and otherwise promulgatedin violation of federal law,” according to language in its suitagainst Labor Department.

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NAFA’s suit challenges the Labor Department rule on six counts,ranging from questions of the Labor Department's statutoryauthority to redefine the term “fiduciary,” to the rule’srequirement that any advice to roll over 401(k) assets to an IRArises to the level of a fiduciary recommendation, to the rule’sallegedly vague definition of reasonable compensation, and to thequestion of whether fixed indexed annuities can legally beregulated under the rule’s Best Interest Contract Exemption.

Private right of action

NAFA also alleges that the Labor Department rule creates a newprivate right of action in crafting the fiduciary rule.

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So, too, does the lawsuit brought in U.S. District Court for theNorthern District of Texas, on behalf of the U.S. Chamber ofCommerce, the Securities Industry Financial Market Association, theInsured Retirement Institute, and several other insurance andfinancial industry trade groups. That suit has been consolidated with twoothers brought in the same court, which also allegethe Labor Department created a new private right of action in itsrule.

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That question — whether the Labor Department rule creates a newprivate right of action — figures to factor significantly in howcourts decide the cases, say attorneys expert in securities law andthe Employee Retirement Income Security Act.

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In laymen’s terms, a private right — or cause — of action is theright for people to sue, as individuals or as a class, under anexisting law.

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Related: 5 things to know about the DOL fiduciaryrule

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Only Congress can create that right. In a 2001 Supreme Courtdecision, Alexander v. Sandoval, the high court wrote:“like substantive federal law itself, private rights of action toenforce federal law must be created by Congress.” That case iscited in the lawsuits brought against the Labor Department.

DOL denies it created a 'new' private right of action

In its defense against NAFA’s lawsuit, the Labor Departmentdenies that the rule “creates” a new private right of action.

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Under the rule’s Best Interest Contract Exemption, advisors to401(k) plans and IRAs are allowed to receive commission-basedcompensation that the rule otherwise prohibits, so long as thecontractual terms of the Best Interest Contract Exemption aremet — namely, that an advisor is operating as a fiduciary andselling products only in the best interest of investors.

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A provision in the Best Interest Contract Exemptionincludes language articulating investors’ right to sue if they findan advisor is not acting in their best interest.

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That right is vital for the Labor Department and the agency’sproponents hoping to see the rule fully implemented, andenforced.

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At a recent gathering of fiduciary proponents in Philadelphia,Phyllis Borzi, assistant secretary of labor and head of thedivision charged with crafting, implementing and enforcing theat-issue rule, said the question of how the rule would be enforced was the“most difficult” challenge regulators faced.

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That’s because the Employee Retirement Income SecurityAct does not give the Labor Department “direct enforcementauthority” over IRAs, said Borzi in comments at the symposium.

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To enforce a new fiduciary requirement on advisors to IRAs, regulators at theLabor Department are relying on the power of private legal action,she said.

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“The consumer has to enforce the rules through state contractactions,” added Borzi.

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In its brief calling for NAFA’s lawsuit to be dismissed,attorneys at the Labor Department and the U.S. Department ofJustice argued that NAFA “mischaracterizes” the provision in theBest Interest Contract Exemption that makes insurance and financialservices companies subject to lawsuits if the contract’s fiduciaryrequirements are breeched.

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While the Best Interest Contract Exemption expands ERISA’sfiduciary requirements to advisors in the retail market, andcreates new prohibited transactions, and exemptions to thosetransactions, the right to sue is not new, but exists “under thelaws already in existence governing such contracts,” according tothe brief filed by the Justice Department.

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The brief continues: “Because the [Labor] Department has not, infact, created any new private right of action, this claim fails.”

Dissenting expert opinions

The question of whether or not the Labor Department rule createsa new private right of action, or merely relies on existing rightsto sue, is certainly not the only weighty legal question courtswill have to parse in coming months.

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But it is a substantial one, says James Fleckner, a partner andchair of the Employee Retirement Income SecurityAct litigation practice at Goodwin LLP, a Boston-based lawfirm.

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As far as the fate of the lawsuits, Fleckner is reluctant tohandicap the at-issue rule’s ultimate fate.

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“I don’t think anyone knows where the courts are going to comedown,” said Fleckner in an interview with BenefitsPro.com.

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“I can imagine both circumstances — the courts striking down therule or sustaining it,” he added. “The DOL wasn’t surprised by thelegal challenges. They’ve given a lot of thought in advance of thelitigation as to how they would defend this rule — that’s part ofthe reason they took five years to draft a final rule they thoughtwould have the best chance of standing up in court.”

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Notwithstanding the impossibility of predicting how differentcourts will rule on the myriad claims made by myriad plaintiffs,Fleckner is certain of one aspect of the allegations.

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“The DOL has created a new private right of action,” saidFleckner, who led Goodwin’s successful defense of an excessive feeclaim against John Hancock in the 3rd Circuit Court of Appealsin 2014, and was a signatory to an amicus brief filed with theSupreme Court on behalf of the Securities Industry FinancialMarkets Association in Tibble v. Edison.

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Related: DOL fiduciary rule: Great for lawyers, butwhat about advisors?

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Fleckner, who disclosed no legal relationship with any of theparties in the cases against the Labor Department, says two aspectsof the rule’s Best Interest Contract Exemption create what in hisopinion is a new private right of action.

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Under existing securities laws, investors have the right to, anddo sue IRA providers under state law.

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But prior to the finalization of the at-issue rule, thoseproviders were allowed to issue contracts to investors that waivedtheir right to bring class action claims.

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With the Best Interest Contract Exemption, providers can nolonger include a contractual waiver releasing investors from theright to bring class actions.

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That seemingly simple provision is a game changer, saysFleckner.

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“DOL absolutely is intending to rely on private litigation toenforce the new rule,” he said. “They wanted to craft anenforceable regulation, and they want the prospect of class actionsto be a meaningful check. The agency is resource constrained. Theycan’t enforce everything on their own.”

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Beyond prohibiting waivers on class actions, Fleckner says thecore design of the Best Interest Contract Exemption, which requiresall providers of financial advice and investment products toacknowledge themselves as fiduciaries, also constitutes thecreation of a new private right of action.

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Under existing securities law, investment providers have beenable to successfully defend their actions, often in arbitrationhearings, on the grounds that they were not legally required to actas fiduciaries, but were rather beholden only to a suitabilitystandard.

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Related: 5 providers on the DOL fiduciary rule'seffects

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“The DOL has created an enhanced standard, and will make itharder for providers to defend claims,” he said.

Not a new private right of action

Professor Jill Fisch, a securities law expert and co-director ofthe Institute for Law and Economics at the University ofPennsylvania Law School, disagrees with Fleckner on the question ofwhether or not the Labor Department has created a new private rightof action — mostly.

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The Bes Interest Contract Exemption “does not rise to the levelof creating a new private right of action,” said Fisch. “But itdoes change the nature of existing contracts. And that raises somelegitimate concerns.”

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Fisch says that when Congress wrote the Employee RetirementIncome Security Act, which she described as a “fairly decentstatute” relative to other securities laws, lawmakers wererestrictive in creating litigation rights.

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“Congress didn’t create a whole lot of private enforcement,” inERISA, she said. “What the DOL has done does look like a backdoorattempt to create an enforcement mechanism that is the equivalentto a private right of action. The courts are going to have todecide whether that amounts to the creation of a new right.”

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Both Fleckner and Fisch say they think existing case lawprovides some indication on how courts may come down on theat-issue rule. But even on that benchmark their interpretationsvary — evidence, perhaps, of the depth and complexity ofthe legal questions raised with the finalization of the LaborDepartment's new fiduciary standard.

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Related: RIA 401(k) specialists greatly advantaged by DOLfiduciary rule

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“As a general statement, courts approach cases like this withthe instinct that the DOL was within its authority crafting thisrule,” thinks Fleckner. “But there certainly are compellingarguments on the other side.”

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That said, the District of Columbia appellate circuit, where theNational Association for Fixed Annuities case is being heard,has been “critical of administrative agency overreach throughaggressive rule making” in a number of decisions, notes Fisch.

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Moreover, the U.S. Supreme Court’s general attitude towardsquestions of private enforcement has been deferential to the lawsalready on the books, added Fisch.

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“Generally, the Supreme Court has ruled that where Congresslimited private enforcement, they did so for good reason,” sheexplained. Courts can be expected to look closely at a rule thatattempts to change that balance, predicted Fisch.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.