Fiduciary Rule Lawsuit Leans on Prior Court Rebuttal

The first of what are expected to be multiple lawsuits seeking to strike down the Retirement Security Rule partly on the grounds that it is reprising a similar attempt from about a decade ago was filed Thursday in the U.S. District Court for the Eastern District of Texas.

The complaint was led by the Federation of Americans for Consumer Choice Inc., an advocacy group for independent insurance agents that has been fighting the Department of Labor proposal in court since 2022, along with other independent insurance agents. The plaintiffs, being represented by law firm Figari & Davenport, are seeking a preliminary injunction from the court to “stop the new rule from taking effect during the pendency of the case.”

The suit comes a little over one week after the DOL’s Employee Benefits Security Administration posted the final Retirement Security Rule in the Federal Register and reiterated on a call with reporters that it differed from a proposal made under the Obama administration that was struck down by the U.S. 5^th Circuit of Appeals in 2018. EBSA officials also noted some changes the regulator made to the rule in response to industry and public comment.

“The complaint can be compared to the opening moves of a chess game,” said Bonnie Treichel, founder and chief solutions officer of Endeavor Retirement, via email. “The plaintiffs don’t address all of the arguments for the DOL Authority to engage in this rulemaking. That will happen later on when the DOL moves to dismiss, and the plaintiffs respond. That will be when we understand more how the substantive arguments will play out.”

Seeking a Stop

The plaintiffs are seeking to halt the new standard for what constitutes fiduciary advice, along with amendments to exemptions known as PTE 84-24, which allows insurance agents to receive commission for the sale of annuities, and the inclusion of requirements from PTE 2020-02, which holds insurance agents to a fiduciary standard when making annuity sales.

Plaintiffs call those moves “arbitrary and capricious” in the lawsuit, alleging that they are “just the latest salvos by the DOL in its almost 15-year quest to re-define what it means to be an ERISA fiduciary in contravention of the will of Congress.”

The plaintiffs argue that the final rule has the same issues as those raised by the DOL in the past when trying to put one-time rollover advice, small business plan recommendations and retail annuity sales under the same rules as the Employee Retirement Income Security Act with the goal of protecting consumers from conflict of interest related to commissions and fees.

“The 2016 Fiduciary Rule replaced the longstanding five-part test for defining investment advice fiduciaries that was set forth in a rule adopted by the DOL in 1975 and had been in place for over four decades,” plaintiffs’ attorneys wrote. “The new Interpretation carried forward the core problem the Fifth Circuit identified in vacating the 2016 Fiduciary Rule: DOL’s impermissible effort to rewrite and expand the definition of a fiduciary under ERISA and the Code.”

Carol McClarnon, partner, Eversheds Sutherland, agrees with the sentiment that the new rule does not differ enough from the past.

“The DOL uses different words but at its core, the final rule’s definition of ‘fiduciary’ is not the same as the common use and understanding of that word,” she said via email. “The DOL is imposing ERISA fiduciary duties on IRA fiduciaries, which is without question contrary to the intent of Congress in enacting ERISA. The DOL can issue conditional prohibited transaction exemptions, but there are limits to how far they can go.”

DOL officials, for their part, have emphasized the key differences between this rule and the one that was vacated. Acting Labor Secretary Julie Su, testifying before the House Committee on Education and the Workforce on Wednesday, explained that this rule takes “into account what the court said about why the prior rules could not stand,” for example: “The definition of a fiduciary is different, what is covered is different.”

In an interview as the rule was being finalized, Tim Hauser, the deputy assistant secretary for program operations at EBSA, explained that “any communication to a retail investor would have been covered,” by the previous rule, but the one in question here focuses on whether there is a relationship of “trust and confidence” and how the professional presents themselves to the investor. Additionally, the new rule does not prohibit binding arbitration agreements nor make insurance companies legally responsible for independent agents selling their products, two provisions that the court faulted the DOL for, according to Hauser.

The DOL referred to the Department of Justice for response regarding the lawsuit; the DOJ declined to comment on the pending litigation.

First Out of the Gate

The rule has received pushback from numerous insurance and financial services firms, including threat of litigation from organizations including the U.S. Chamber of Commerce.

Both McClarnon and Endeavor Retirement’s Treichel said their firms expect to see more lawsuits filed.

“Each will seek to vacate the rule as well as attempt to stay its enforcement,” Treichel said. “In some respects, a stay would be helpful because it would take the ‘guess work’ out of it for some firms trying to figure out if they should prepare and implement or not – without a stay, firms have to implement, train advisers, etc.”  

Treichel also noted that, if the White House switches parties from Democrat to Republican after the November election, the DOL will “absolutely be instructed in the same way they were in 2018 to not support enforcing the new rule.”

McClarnon wrote that a new administration “could choose not to challenge the injuction.”

The proposal has also received support from many in the industry as a step forward in protecting retirement savers from conflicts of interest. Those proponents include the AARP, Morningstar and the American Retirement Association, with a particular focus on bringing retirement plan advisement for small businesses under ERISA.

Beyond arguing the merits of the new rule, plaintiffs brought up a common note from opponents that the finalization was done on a rushed timeline that did not give the industry appropriate time to review and respond.

The complaint alleges that “in its zeal to reach the desired result of turning every financial product salesperson who deals with a retirement investor into a fiduciary, the DOL has rushed this latest rule package through at extraordinary speed and without any substantial consideration of the consequences or the effect it will have on the insurance industry in particular.”

EBSA officials have argued on this point that ample time was given and comments were reviewed and incorporated as pertinent in the final rulemaking.

The suit was brought by the FACC and independent insurance agents James Holloway, James Johnson, TX Titan Group LLC, Provision Brokerage LLC, and Eric Couch.