DOL brief calls investment advice rule lawsuit claim ‘downright bizarre’

Government attorneys filed a lengthy response Friday asking a Florida federal judge to toss one of two lawsuits challenging the Department of Labor investment advice rule.

The rule took effect on Feb. 1 and two lawsuits were immediately filed, one by the American Securities Association (ASA) in the Middle District of Florida. The ASA lawsuit 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, which are required to go through a notice-and-comment period.

The government dismissed the argument in  its response.

"However unclear Plaintiff’s injuries may be in this scenario, its proposed remedy of enjoining or setting aside two of the Department’s FAQs without challenging the underlying, substantive policy that those FAQs embody is downright bizarre," the court brief said.

"This Court lacks jurisdiction over this challenge because Plaintiff has failed to identify an injury arising from the two FAQs, and its proposed remedy—aimed only at the FAQs while ignoring the actual Exemption—would do nothing to redress any injury."

DOL attorneys cite 64 court cases, nine federal statutes and five regulations in making its arguments. The government has yet to respond to a second lawsuit filed in Texas by the Federation of Americans for Consumer Choice, joined by a number of independent insurance agents and agencies.

Two parts

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 opted to leave the rule in place upon taking office.

It replaces the Obama administration fiduciary rule, which imposed substantial regulations on commission-based sales of annuities. A federal appeals court sided with industry plaintiffs and tossed out that rule in 2018.

ASA touts itself as "the only trade association that exclusively represents the wealth management and capital markets interests of regional financial services firms." The group is chaired by Paul C. Reilly, CEO of Raymond James Financial.

The trade group claimed the DOL 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."

'Harmless error'

The DOL brief asks the court to dismiss for lack of jurisdiction, or for a summary judgment if the court deems it has jurisdiction.

Filed on behalf of Secretary of Labor Marty Walsh, the brief goes on to claim that even if the court found procedural problems with its rule, "it would be harmless error given that Plaintiff participated in the notice-and-comment process that led to the publication of the identical guidance in the Exemption’s preamble."

The FACC lawsuit is in a Dallas federal court, which is within the Fifth Circuit, where the appellate court three years ago struck down the DOL’s prior fiduciary rule.

The Investment Advice Rule broadens the agency interpretation of who is considered a fiduciary, which the FACC lawsuit contends is contrary to the Fifth Circuit decision.

The lawsuit asserts the Labor Department’s latest rule “carries forward the core problem the Fifth Circuit identified in vacating the Fiduciary Rule the first time,” adding that “pouring the same old wine into a new bottle does not change the result.”

In 2018, the Fifth Circuit Court of Appeals tossed out the fiduciary rule, ruling that the DOL exceeded its authority by creating a new regulatory scheme for the retirement plan space.

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.

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.

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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.