Are District Court Rulings the ‘Final End’ For DOL’s Fiduciary Rule?

The passage of a new fiduciary rule, called the Retirement Security Rule, had the commensurate fanfare of major regulation designed by the administration of President Joe Biden and his Department of Labor to protect consumers.

But slightly more than three months after the ruling was finalized, experts say its likelihood of surviving recent federal district court losses is dim.

“The standard for a stay is relevantly significant here, and at this point, it seems like the courts are very dubious, to say the least, [of the rule],” says David Levine, a principal and ERISA defense attorney with the Groom Law Group. “The most likely attempt by the DOL would be to appeal [to the U.S. 5th Circuit Court of Appeals], and with the history and comment of those courts, I don’t see much potential upside for this succeeding.”

The DOL, after the rulings, is so far standing its ground, saying in an emailed comment that the “rule is essential to ensuring that retirement investors are protected” by revising fiduciary standards for those giving retirement investment-related advice, including plan sponsor menu design, one-time individual retirement account rollovers and annuity sales. It is also, according to reports from a National Association of Plan Advisors session with DOL officials, working with the Department of Justice on a defense, with action coming soon.

The regulator had pulled out the stops to return to a discussion started by the administration of former President Barack Obama in 2010, passed in 2017, and eventually undone by the 5th Circuit in 2018.

In September 2023, the DOL submitted the rule to Office of Management Budget for review, followed shortly by a public comment period that received some 400 “substantive comments” and 20,000 petitions, according to the DOL’s Employee Benefits Security Administration. Biden, speaking about the new Retirement Security Rule from the Rose Garden in October 2023, tied it to the administration’s push against “junk fees” and told financial advisers: “I just want you to know: We’re watching.”

Throughout this process, the DOL’s EBSA faced industry pushback, particularly from insurance firms selling annuities. Many arguments against the rule cited the 2018 5th Circuit ruling that struck down a prior attempt to amend fiduciary standards set by the Employee Retirement Income Security Act of 1974.

EBSA officials frequently and consistently made the case that the regulator had taken into account that ruling and that this version was different, in particular when it came to defining when an adviser was “selling” a service, as opposed to acting as a fiduciary in giving retirement advice. Officials also spoke openly about the fact that lawsuits would be on the way—and they were, filed in two Texas district courts within weeks of the final rule being issued.

At the end of last week, however, those courts made what felt like relatively swift work of the buildup. Both judges, noting the need to stay the rule nationally ahead of its September 23 implementation, made clear there would be little hope for the DOL to win in their courts and expressed doubt of its chances to successfully appeal to higher courts.

‘Final End’

John Schuch, a partner in Dechert LLP, had experience working on compliance at a financial services firm amid the first fiduciary rule changes. He highlights the large amount of work and resources required to meet the new requirements and notes the Texas courts’ decisions’ noted the need to pause that work as quickly as possible before a final verdict.

“The stay is to give the courts more time to consider the merits of the case itself, but also not to cause those in the industry to have to comply with the rule while that litigation is pending,” Schuch says. “We can’t predict what the courts would rule on the merits, but each of them had pretty strong language of predicting the outcome.”

In commentary on the rule, Dechert pondered by email statement whether the rulings “could mark the conclusion of a 14-year-long effort by the DOL,” and if another circuit court decision “might indicate the final end.”

Schuch notes that the DOL, once again, faces the option of appealing to the 5th Circuit, which hears appeals from federal cases in Louisiana, Mississippi and Texas, assuming the DOL will not get a favorable result in the district courts. That appeal would require a different result—in each case, unless they were merged—from the 2018 decision that struck down the previous rule.

“They would have to win each of those at least to have the fiduciary rule go into effect,” he says. “Their immediate action is to decide whether or not to appeal.”

5th Circuit

“There can be an appeal of the stay itself to the 5th Circuit, should the DOL and DOJ want to do that,” explains Allie Itami, a partner in Lathrop GPM LLP. “However, the review should only be of the stay and not the merits [of the cases] at this point.”

A three-judge panel on the 5th Circuit might “decide in a matter of weeks” on the stay, shipping the case back to the district courts with advice to look again. Or the court could take longer and “might totally surprise everyone with a statement on the merits.”

Daniel Aronowitz, who works on behalf of plan fiduciaries, agrees with the decisions based on the argument that the “regulation goes outside of the DOL’s jurisdiction.” Even so, the president of Encore Fiduciary is “very sympathetic” to the DOL’s concerns about retirement savings not getting fiduciary care when rolling money into an IRA or an annuity.

He believes the DOL should be working on that change with policymakers.

“The DOL is in a very difficult position—they have a Hobbesian choice of either litigating and losing on appeal or appealing and returning to an unreceptive 5th Circuit,” he says. “Congress needs to take care of this, and the DOL needs to follow the proper protocol and work through them. … It’s a legislative point, the way I look at it.”

Meanwhile, with the rule stayed, financial services firms will be operating—as many detractors of the rule have pointed out—under the prior standards of ERISA, the Securities and Exchange Commission’s Regulation Best Interest and the National Association of Insurance Commissioners’ best interest standards for annuity sales, which vary by state.

Levine, of Groom, agrees that firms will now operate as they had been before the rule, but not without some confusion as to where things go next.

“My very personal view is that I think this leaves us back in flux, and we’ll see how the Department of Labor responds yet again from here,” he says.

That waiting period, according to Schuch, can be difficult for some firms who may have already started the process of meeting the requirements of the stayed rule.

“A lot of resources can get spent unnecessarily if this rule is not going to go through,” he says. “Each firm is going to be different as to what their risk tolerance is and where they are in the building of their compliance program today.”