Why FSI Decided to Litigate

Since its founding in 2004, FSI has worked diligently to achieve its mission of ensuring that all individuals have access to competent and affordable financial advice, products and services delivered by a growing network of independent financial advisors and independent financial services firms. Our strategy of constructive engagement has allowed FSI to achieve many important advocacy victories, including preservation of 12b-1 fees, the defeat of FINRA’s costly and invasive CARDS proposal, stopping securities transaction taxes in the states and countless improvements to other regulatory and legislative proposals. We believe our numerous victories have moved FSI and its members closer to achieving our mission on behalf of our members and the hard-working Main Street clients they serve.

FSI has a long history of engagement on the fiduciary issue. In fact, we have actively supported an SEC-developed uniform fiduciary standard for broker-dealers and investment advisers since 2009 — before Dodd-Frank became law.

Unfortunately, since the release of its first proposed fiduciary rule in October 2010, the DOL has ignored the expressed will of Congress to have the SEC develop a single fiduciary standard that would apply to all financial advisors and accounts. They have also ignored the well-considered concerns voiced by FSI and its industry trade association peers about the very real consequences this rule will have for small investors and our members. For these reasons, FSI engaged in a coordinated and prolonged advocacy effort to stop the DOL’s Fiduciary Rule. Despite these efforts, the DOL released the final rule on April 6, 2016.

While DOL has attempted to make some operational improvements, their final rule remains extremely burdensome and costly for firms, financial advisors and small investors. The rule dramatically expands the definition of the term “fiduciary” under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). As a result, many services that were historically regarded as non-fiduciary in nature (e.g., executing one-time transactions for IRA owners or advising them with respect to rollovers from 401(k) accounts), are now subject to a bar on “prohibited transactions,” which means that they cannot be provided in exchange for common forms of compensation, including sales commissions.

To receive such compensation after the implementation of the Fiduciary Rule, financial advisors must comply with burdensome and vague Prohibited Transaction Exemptions, which will subject those professionals to unprecedented class action liability and contractual obligations. This new regulatory framework will create complex, overlapping regulations, impose substantial and ill-defined compliance obligations and greatly increase costs and liability exposure on firms and financial advisors.

We remain convinced that these costs and burdens will push desperately needed retirement advice, products and services out of the reach of many investors, placing their goal of a dignified retirement at considerable risk.

Since our members will no longer be able to serve these clients, the rule makes it far more difficult for independent financial advisors and independent financial services firms to thrive in the resulting regulatory environment. For these reasons, we conclude that the DOL’s fiduciary rule is fundamentally incompatible with FSI’s mission of access to quality, affordable advice for all.

We support putting clients’ interests first – but the DOL’s rule is simply unworkable and harms the very same small investors it purports to help. Specifically, the DOL’s fiduciary rule is unworkable for:

  • Investors, many of whom will see an increase in costs, reduction in service and loss of access to the advice, products and services necessary to achieve a dignified retirement.
  • Firms, who have not been provided a clear path to compliance, face numerous new complex requirements, and are now subject to untold liability exposure and class action lawsuits claiming their well-intentioned compliance efforts fell short.
  • Investment advisers, who will now be subject to two different fiduciary standards, the complex and costly requirements of the Best Interest Contract Exemption, the inability to make use of discretionary retirement accounts and are subject to enormous liability exposure.
  • Financial advisors, who will be subject to complicated, confusing and costly obligations, limiting their ability to help investors save for retirement while causing them to live in constant fear of lawsuits – and even class action suits – alleging that they failed to correctly interpret and comply with their obligations.

For these reasons, we have joined our industry partners in bringing a suit challenging the DOL fiduciary rule.  Read our initial complaint here.