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Court Upholds the Department of Labor's Conflict of Interest Regulation

The District Court for the District of Columbia issued its decision in Nat'l Assoc. of Fixed Annuities (NAFA) v. Perez, handing the U.S. Department of Labor (DOL) its first victory in the legal challenges to its conflict of interest rule for retirement investment advisers.

Background

NAFA filed a lawsuit in federal district court challenging several elements of a rule released in April by DOL that strengthened consumer protections for all retirement plan investors. First, it challenged the DOL’s decision to replace the five-part test set forth in the 1975 regulation with a new definition of “fiduciary,” and, in particular, the DOL’s decision to discard the “on a regular basis” limitation. Second, it challenged the DOL’s decision to require that financial institutions and advisers who are providing advice regarding investments held in IRAs comply with the duties of loyalty and prudence in order to qualify for the Class Exemptions. Third, it challenged the written contract requirement contained in the Best Interest Contract (BIC) Exemption on the theory that it impermissibly creates a private cause of action. Fourth, it challenged the BIC Exemption on the ground that the “reasonable compensation” condition is void for vagueness. Fifth, it challenged the DOL’s decision to move fixed indexed annuities from one class exemption to the BIC Exemption as arbitrary and capricious. Finally, it challenged the rules on the ground that the DOL’s regulatory impact analysis was inadequate.

The judge rejected each of these arguments in his 92-page decision. He denied NAFA's motion for a temporary block of the rule, and granted the DOL's motion for summary judgment.

What’s at Stake?

Upholding the regulation will require investment advisors working on retirement plan accounts to operate in the “best interest” of customers. This may save individuals a significant amount of money in hidden fees, undisclosed commissions and investment product sales that are not in their best interest, resulting in more money in their retirement accounts.

Case Status

In NAFA v. Perez, the District Court for the District of Columbia upheld the DOL’s conflict of interest rule, holding that the DOL followed the necessary process for issuing its Rule. NAFA announced that it is appealing the decision to the U.S. Court of Appeals for the District of Columbia and seeking expedited review.