DOL’s Hauser ‘Comfortable’ New Fiduciary Rule Addresses Prior 5th Circuit Rebuttal

The Department of Labor’s new Retirement Security Rule was designed with the U.S. 5th Circuit Court of Appeals rebuttal of a prior fiduciary proposal in mind, an official noted to the American Bar Association on Wednesday, a day after an insurance agent advocacy group filed a motion to pause the rule while litigation plays out.

The Federation of Americans for Consumer Choice, an advocacy group for insurance agents, along with other trade groups requested a preliminary injunction Tuesday that would pause implementation of the DOL’s new rule regarding what it means to be a fiduciary when providing retirement-related investment advice. The request follows a May 2 complaint from the FACC in a Texas District Court asking the court to overturn the rule in part because it bears resemblance to a previous version of the rule that was finalized in 2016 and vacated in 2018, alleging that “the DOL has defied Congress and the Fifth Circuit by adopting new rules virtually indistinguishable from a predecessor 2016 regulation that was emphatically struck down by the Fifth Circuit.”

Speaking during a webinar hosted by the American Bar Association, Timothy Hauser, deputy assistant secretary for program operations of the Employee Benefits Security Administration, said that the new rule is different from the previous one in a few respects.

The 2016 rule, according to Hauser, covered “any direct recommendation whatsoever to a retail investor,” whereas the new rule only covers paid recommendations where the professional holds themselves out as “providing individualized advice, based on the best interests of the retirement investor.”

Hauser also noted that unlike the 2016 rule, the new one does not require warranties or contractual terms that preclude binding arbitration.

Speaking of the case in Texas directly, Hauser said “we exercise great care, to fall within the Fifth Circuit decision and to honor its reasoning, and I’m comfortable with where we are.”

The Retirement Security Rule was finalized in April and takes effect in September. It will require financial professionals that provide individualized advice presented as being in the investor’s best interest to adhere to the fiduciary duties of loyalty and prudence. It will apply to one-time transactions that were not previously covered, such as rollover recommendations and annuity sales.

Hauser argued that the previous fiduciary rule, or the five-part test, was inadequate because it omitted one-time transactions. Imagining a recommendation from a hypothetical insurance agent, Hauser said “after looking at all your circumstances, and factoring in your needs and risk tolerance and everything else, you should buy this annuity. Under our definition from 1975, that doesn’t count as fiduciary advice because it wasn’t rendered on a regular basis. That’s not really honoring the customer’s understanding and it’s opening the investor up to a lot of abuse.”

Expanding on this point, Hauser said our concern was that “it’s all too easy under the 5-part test, for somebody to hold themselves out as being an expert adviser who is looking out for your best interests, when in fact, they have no legal obligation whatsoever to do that.”

Hauser also affirmed what EBSA deputy secretary has previously said, that the Securities and Exchange Commission’s Regulation Best Interest is a great starting point for compliance with the Retirement Security Rule as it relates to policies and procedures: “If you’re acting in good faith to build the compliant structures for Reg BI or to comply with the Advisor’s act, you should be way ahead of your game, as far as, your ability to comply with this rule too.”