Wall Street Brokers Claim Fiduciary Rule Is Violation of Their Free Speech Rights

November 23, 2016

A group of lawyers representing insurance and securities brokerages have made a curious argument for why a federal court should kill a rule aimed at protecting retirement savers: It restricts Wall Street’s First Amendment rights.

In front of a packed federal courtroom in Dallas last week, plaintiffs attorneys fighting the Labor Department’s fiduciary rule said it hinders free speech because it restricts what individuals selling retirement products will be able to say.

The rule requires that brokers who give retirement advice act in their clients’ best interest. The Labor Department, which regulates pension funds and other retirement income, devised the rule in order to protect retirement savers from receiving biased advice or being sold products they don’t need.

David Ogden, lawyer for the American Council of Life Insurers, argued in court that the rule would prevent simple sales pitches like, “Buy my product; it’s a good product; here’s what it will do for you.”

The insurance industry would be affected by the rule because insurers sell annuities.

Big business has used similar tactics in cases related to product labeling, pharmaceutical sales and securities disclosures, with mixed success.

Experts said the First Amendment argument may be persuasive in this case, which may eventually come before the Supreme Court, because the burdens of the rule will force even honest salespeople to limit what they say to clients.

“Recent cases have made clear that the First Amendment provides broad protection for commercial speech that is truthful and non-misleading,” said Floyd Abrams, a leading First Amendment rights lawyer with Cahill Gordon & Reindel, who successfully defended The New York Times in landmark litigation. “It’s a close case.”

The fiduciary rule has been a contentious subject for nearly six years, and its release in April led Wall Street to quickly file several lawsuits to block its implementation. It is set to take effect in April next year.

Regulators and consumer advocates have argued that the rule is important and necessary. Financial firms have countered that it is overly burdensome and expensive.

Other lawsuits have largely relied on the notion that the Labor Department overreached in creating the rule. The Dallas plaintiffs also use those arguments, but are the only ones to mention First Amendment obstacles.

Labor Department lawyers argued the fiduciary rule only governs conduct, not speech. Even if it did regulate speech, they said, it only covers misleading and conflicted statements, which are not protected by the First Amendment.

U.S. District Judge Barbara Lynn pressed the government on its position, saying the fiduciary rule appears to regulate more than just misleading speech.

“They can recommend any products they like, as long as they’re not recommending products that aren’t in the investor’s best interest,” Labor Department defense attorney Emily Newton responded.

The agency estimates bad advice will cost investors $95 billion over the next 10 years if the fiduciary rule is not implemented.

Among the lawyers representing the industry is Eugene Scalia, who has successfully argued for corporations and trade groups in other high-profile cases. Earlier this year he convinced a federal judge to strike down MetLife Inc.’s designation as a financial company that is “systemically important,” which would subject it to tougher regulation.

His father was the late U.S. Supreme Court Justice Antonin Scalia, a conservative who often sided with big business in landmark cases that protected or created corporate rights.

Lawyers said the outcome of the various fiduciary-rule proceedings is far from clear. If the judge in Dallas decides in Wall Street’s favor, it could create a split among circuit courts. That might put the case on a path to the Supreme Court, which currently has a vacant seat.

The court may or may not accept the case. Advisers to President-elect Donald Trump have indicated he will appoint a justice who wants to abolish the rule.

(Reporting by Elizabeth Dilts; Additional reporting by Lawrence Hurley; Editing by Lauren Tara LaCapra and Leslie Adler)


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