Opponents of a Labor Department investment advice regulation that went into force this week hope history will repeat itself in Texas, where they’re trying to strike it down. The Federation of Americans for Consumer Choice filed a lawsuit in a Dallas federal court Wednesday challenging the fiduciary rule approved by the Trump administration in late 2020 and put into force by the Biden DOL on Tuesday.
The Trump administration wrote its rule after the 5th Circuit Court of Appeals vacated the Obama regulation in 2018 after the Dallas district court upheld it. The new suit has been filed in the same circuit and cites the 2018 appellate ruling in arguing that the current rule should also be killed.
The architect of the Obama DOL fiduciary rule, former assistant secretary of Labor Phyllis Borzi, criticized the FACC’s complaint for misstatements about the current fiduciary rule and what the 5th Circuit held. But she didn’t offer a prediction about its prospects.
“It’s hard to tell what the courts will do in Texas,” Borzi said.
In the suit, the FACC argues that the DOL lacks the authority to broaden the definition of financial advisers who must act as fiduciaries for retirement savers. The agency did so in the preamble to the regulation.
“The question is, can you bring a lawsuit challenging the agency’s views before the agency has brought an enforcement action,” said Michael Kreps, principal at the Groom Law Group. “It’s a wild case. It’s fascinating. [It] has a better chance [in the 5th Circuit] than it would if filed elsewhere.”
The current DOL fiduciary rule provides an exemption under federal retirement law allowing fiduciaries to retirement accounts to take otherwise prohibited compensation, such as commissions and 12b-1 fees, as long as they act in the best interests of their clients and meet other requirements.
In the preamble, the DOL interpreted a five-part test for determining fiduciary status so that a fiduciary standard of care would be triggered for rollover advice and increase the number of advisers who are fiduciaries.
“This new interpretation carries forward the core problem the Fifth Circuit identified in vacating the fiduciary rule the first time: DOL’s impermissible effort to rewrite and expand the definition of fiduciary under [federal retirement law] and the code,” the FACC complaint states. “Pouring the same old wine into a new bottle does not change the result.”
The FACC represents independent life insurance agents and firms selling annuities and other insurance products. It said its members would be hurt by the DOL’s rule.
“The final interpretation adopted by the Labor Department places an unfair burden upon independent insurance agents who serve Middle America thereby limiting access by lower and middle income Americans to important guaranteed retirement products as well as retirement advice more generally,” Kim O’Brien, chief executive of FACC, said in a statement.
The DOL fiduciary rule leaves in place what is known as the prohibited transactions exemption 84-24, which applies to insurance sales professionals. The fiduciary rule requires advisers to declare their fiduciary status, while 84-24 does not.
Borzi acknowledged that independent insurance agents would have a more difficult time complying with the fiduciary rule that investment advisers and brokers working for financial firms. But she said that conflicts of interest often crop up in the independent insurance model.
“They don’t see a problem, and they don’t want to be regulated,” Borzi said. “They think the status quo is perfectly fine, but that’s not what the objective data show.”
The insurance industry has been promoting a National Association of Insurance Commissioners’ model rule to strengthen consumer protections around annuity sales. The measure requires disclosure of a salesperson’s compensation but not mitigation of potential related conflicts of interest.
“To date, 19 states have adopted a best interest standard modeled after the enhanced NAIC Suitability in Annuity Transactions Model," James Szostek, vice president and deputy for retirement security at the American Council of Life Insurers, said in a statement. "Unlike a fiduciary-only approach that limits access to information or consumers, these measures offer strong protections while making sure savers, particularly financially vulnerable middle-income Americans, can access information about options for long-term security throughout retirement.”
ACLI hasn’t signed onto the FACC suit but it does back one of its arguments. The DOL’s interpretation of the five-part test “does not comport with the 5th Circuit ruling," Szostek said.
Observers are waiting to see what the Dallas court thinks about a suit based on language in a rule preamble.
“It opens a Pandora’s box if people are allowed to sue because agencies provide their nonbinding opinions,” Kreps said.
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