Plaintiffs' attorneys argue that DOL is using its statutory authority to lift regulatory burdens through exemptions as a means of imposing a new regulation, resulting in "the most sweeping change in retirement planning since the adoption of ERISA" in 1974.

In doing so, DOL has assumed for itself regulatory power that is vested in the SEC in ways that will harm retirement savers, according to court papers.

The DOL's rule, finalized in April, makes any recommendation to rollover assets from a 401(k) plan to an IRA a fiduciary act. As a result, the DOL has overturned its own guidance issued in 2005, which said that a recommendation to rollover plan assets was not fiduciary advice, note the plaintiffs.

The rule does not outlaw transaction, or commission-based compensation for investment advice, but it does consider them to be prohibited transactions. To receive sales loads on mutual funds, commissions on the sale of annuities, or 12b-1 fees, brokers and advisors will have to operate under the BIC exemption.

That will mean incurring significant burdens and liability risk, the complaint says.

The commission-based transactions prohibited under the rule are instrumental to the financial services industry, and serve the best interest of retirement savers pursing a buy-and-hold investment strategy, or investors with low trading activity in their retirement accounts. In either case, investors could end up paying more for the fee-based model of compensation that the rule favors, argue the plaintiffs.

Moreover, the commissions paid on annuity sales — which are a one-time transaction fee — can better serve an investor's best interests because on-going advice on the product may not be required, making the on-going charge of a fee on those assets unnecessary, and potentially unreasonable.

An industry-wide shift to fee-based compensation models "would have serious adverse effects on consumers and the financial services and insurance industries," the argument claims.

Because fee-based compensation models have generally been available only to consumers with sizable portfolios, many investors will lack the financial means to open a fee-based account, and will suffer from a loss of investment options and advice under the rule, allege plaintiffs' attorneys.

In its final rule, DOL deemed recommending fee-based compensation on accounts with low-trading activity abusive conduct, notwithstanding the rule's prohibition on commission-based accounts, note the attorneys.

Regulating through the back door

In crafting the BIC exemption, DOL is extending its authority over IRAs through the back door, plaintiffs' attorneys said.

"The Department knew and intended that banning all transaction-based compensation would force financial services providers to accept the terms of the BIC exemption and agree, among other things, to be sued in class action litigation under the vague new standards," according to the complaint.

The creation of a private right of action is an impermissible end-run around the remedial scheme enacted by Congress, the argument said. "An agency cannot create a cause of action that Congress did not."

Plaintiff, industry reaction

Last week, Phyllis Borzi, head of DOL's Employee Benefit Security Administration, told an audience of fiduciaries that the DOL does not have direct enforcement authority over IRAs.

Because it doesn't, DOL can't enforce the new rule as it pertains to IRAs. That is why the private action provision was built into the BIC exemption, explained Borzi. "The consumer has to enforce the rules through state contract actions."

In a statement accompanying news of today's suit, David Hirschmann, CEO of the Chamber of Commerce's Center for Capital Markets, addressed the consequences of the BIC exemption's private action provision.

He said it will permit meritless litigation based on subjective interpretations of the rule, and will only serve to encourage frivolous class action lawsuits and undermine ERISA's goal of creating a uniformed (fiduciary) standard.

Barbara Roper, director of investor protection at the Consumer Federation of American and a leading advocate for DOL's rule, said the prospect of a legal challenge to the rule from industry was expected.

"Firms that have profited handsomely under the current system find it (the rule) threatening," Roper said in a statement. "Despite their oft-professed concern for low and middle income savers, it is those billions in excess profits that this lawsuit is intended to protect."

Dale Brown, president of the Financial Services Institute, addressed Roper's and other industry critics who have claimed the fight to stop the rule was only about protecting revenues from conflicted advice.

"Contrary to what supporters of the rule will claim, this legal challenge is solely about ensuring the rules governing retirement advice work for all retirement investors. This rule does not pass that test," Brown said in a press call.

"As we have said since day one, there is no compelling evidence this rule is necessary to achieve a uniform fiduciary standard, and DOL's own analysis fails to make the case," he added.

The long way forward to the Supreme Court?

Seth Safra, a partner in the employer benefits practice at Proskauer Rose, thinks both sides of this case have sound legal merit.

No one is expecting a quick legal resolution, he said.

"I would not be surprised if more than one suit against DOL emerges," Safra told BenefitsPro. "That raises the potential for a circuit split when decisions in the lower court are appealed."

And a potential circuit split among appellate courts could be a deciding factor in a Supreme Court decision to ultimately hear the case.

Safra, like other ERISA experts, is not willing to handicap how lower courts will decide. "Both sides have presented serious arguments," he said.

The 5th Circuit

Joining the U.S. Chamber of Commerce and industry groups as plaintiffs are three Texas Chamber of Commerce affiliates and the Texas Association of Business. Court papers say the Northern District of Texas court is the proper venue, given the local interests of the Texas-based plaintiffs.

That court resides in the 5th Circuit Court of Appeals, which has long had a business-friendly reputation: Republican presidents appointed 10 of the 15 active judges that make up the Circuit.

As a legal outcome is likely to involve several years of litigation, one strategy plaintiffs could deploy is to seek an injunction of the rule's implementation before an ultimate decision is rendered in the case.

In the complaint filed today, plaintiffs' attorneys argue that regulators rushed finalization of the rule, echoing industry complaints throughout the rulemaking process that President Obama's administration was rushing to finalize a rule by the end of his final term.

Between the close of the comment period and date the rule was finalized, DOL allowed itself only 200 days to review and respond to the thousands of comments from stakeholders.

"By contrast, in other recent rulemakings under ERISA, the DOL has often taken a year or two to review comments — even when those comments ranged in number between 50 and 100," court papers said.