ACLI files brief in support of lawsuit challenging DOL advice rule

By John Hilton

The American Council of Life Insurers filed an amicus brief supporting one of the two lawsuits that seek to overturn the investment advice rule that took effect in February.

If allowed to stand, the package of rules known as the investment advice rule will essentially return the sale of financial products to a fiduciary standard, ACLI states in its brief. The Fifth Circuit Court of Appeals tossed out the Obama-era fiduciary rule in a 2018 decision.

ACLI was one of the lead plaintiffs in that case. The February lawsuit was filed by the Federation of Americans for Consumer Choice just days after the investment advice rule took effect.

FACC, a trade group representing independent life insurance agents and agencies selling annuities and other insurance products, contends that the latest DOL rule will harm average consumers even though promoted as increasing consumer protection.

Trade group says ruling ignored

In its lawsuit, FACC argues that the DOL ignored the Fifth Circuit ruling when interpreting the new rules.

ACLI supported that position with its brief.

"Under DOL’s final interpretation, investment sales professionals are deemed to function as investment advice fiduciaries even in the absence of any pre-existing relationship with an ERISA plan or participant, as long as there is 'an intended future ongoing relationship,' " the brief reads. "This directly contravenes the Fifth Circuit’s Chamber of Commerce decision."

The rules violate the Fifth Circuit decision in two ways, ACLI maintains:

• First, DOL is using “the beginning of an ongoing relationship” to render a financial professional a fiduciary, even though the Fifth Circuit held that the “relationship must exist prior to, and apart from” the subject transaction, the brief states.

• Second, given that most financial professionals seek to develop an ongoing relationship with a new client, DOL is including “ordinary buyer-seller interactions” as fiduciary in nature, the brief states, even though the Fifth Circuit held that ERISA investment advice fiduciary status requires a “relationship . . . beyond ordinary buyer seller interactions.”

Second lawsuit

The American Securities Association also filed a February lawsuit against the DOL in U.S. District Court for the Middle District of Florida. It claims the DOL overstepped its bounds with guidance issued in April 2021.

The guidance indicates that first-time advice to transfer retirement assets out of a federally regulated plan can constitute fiduciary advice, which the rule subjects to a strict standard of care. Issued as a series of Frequently Asked Questions, the guidance essentially created new rules, the ASA claimed in the lawsuit.

The trade group claimed the guidance essentially “rewrote” the regulation, in the process, imposing burdensome documentation and investigation requirements on their members.

"The [Administrative Procedures Act] prohibits agencies from regulating in this manner," the lawsuit reads. "If the Department wanted to change its rules, it needed to do so through the required notice-and-comment process—not through guidance documents."

While ACLI has not filed an amicus brief in the ASA lawsuit, spokesman Whit Cornman said the trade association is "closely watching all developments" around the DOL rule and related court activity.

Created by the Trump administration, the investment advice rule has two main parts: a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" from 1975 to determine what constitutes investment advice.

The Biden administration allowed the investment advice rule to take effect Feb. 16, 2021.

Neither lawsuit has progressed very far through their respective courts. Meanwhile, the DOL is working on further rulemaking to redefine what "fiduciary" means. That definition could come out by the end of the year and further disrupt the industry, experts say.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected] Follow him on Twitter @INNJohnH.