Monday, May 20, 2024

DOL Fiduciary Rule Faces First Threat In The Courts -Dlight News

Opponents of the Labor Department’s newly finalized fiduciary rule fired their first volley to kill it in the courts this week, with a lawsuit filed in Texas.

The plaintiffs include the Federation of Americans For Consumer Choice, an Austin, Texas-based lobbying organization for independent insurance professionals; the group previously filed a lawsuit in Texas federal court in 2022 seeking to void Trump-era DOL fiduciary regulations.

Other plaintiffs included two Texas-based insurance professionals and Provision Brokerage, an “independent insurance marketing organization” out of Denton County, Texas. 

In the suit filed Thursday, the plaintiffs argued the DOL’s new rule wants to “fundamentally reshape” 50 years of settled practices in the insurance industry. The DOL wants any financial professional recommending a product to an investor when rolling over assets from an employer-based plan to an IRA to be deemed a fiduciary.

“The DOL refuses in this relentless policy-driven quest to be constrained by ERISA and clear-cut decisions by the courts,” the plaintiffs argued.

Late last month, the Labor Department released the final version of its fiduciary rule, which was originally proposed last fall. The rule would redefine the definition of fiduciary under ERISA. It would protect retirement investors from “improper investment recommendations and harmful conflicts of interest,” according to Acting Labor Secretary Julie Su (who’s named as a co-defendant in this suit).

The new rule follows previous administrations’ attempts, including an Obama-era fiduciary rule vacated in 2018 and the aforementioned Trump-era iteration FACC opposed in its 2022 lawsuit. Both cases ended up in the Fifth Circuit Court of Appeals in Texas. The new case would also wind up in that venue should there be an appeal.

The plaintiffs allege the new rule largely mirrors the structure of the Obama-era version already vacated in federal court. In particular, FACC called the latest investment advice fiduciary definition “virtually indistinguishable” from the rule the Fifth Circuit vacated.


“Where the Fifth Circuit held that it would ordinarily be ‘inconceivable that financial salespeople or insurance agents will have an intimate relationship of trust and confidence with prospective purchasers,’ the new rule indefensibly provides that even one-time recommendations will be treated as fiduciary investment advice by sweeping within its scope any sale recommendations made in the ordinary course of a broker or agent helping clients,” the lawsuit read.

The FACC suit isn’t the only potential litigation; in January, Financial Services Institute CEO Dale Brown said the group would likely sue the DOL to vacate the rule if it was not withdrawn or “substantially” changed from its proposal. (The FSI said they were continuing to analyze the rule after its’ release last month.)

Immediate responses to the rule varied. Max Schatzow, a partner with RIA Lawyers, said the rule wouldn’t do much to impact investment advisors, as most offer advice to retail clients on an ongoing basis for compensation and thus already fell under the DOL fiduciary definition.

Finseca CEO Marc Cadin argued the new rule was even less necessary than the 2016 version, as in the interim, the SEC passed the Regulation Best Interest rule, and the National Association of Insurance Commissioners released a model rule governing annuity recommendations that dozens of states have taken up.

Others, including Consumer Federation of America Director of Investor Protection Micah Hauptman and Investment Adviser Association General Counsel Gail Bernstein, said the DOL had made minor but significant changes that should make it more palpable to skeptics.

Bernstein lauded the DOL for lightening “the documentation burden” on some rollover recommendations and treating robo advice like other financial advice, which she said was a change from the proposal.

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