DOL Rule Lawsuits Having Little Impact On Advisors, Panel Says

It is unclear whether a pair of lawsuits filed recently will do anything to slow down the Department of Labor's push to extend the fiduciary standard.

A pair of leading retirement plan lawyers has their doubts.

Written during the Trump administration and allowed to stand by the Biden DOL, the Investment Advice Rule would hamper sales of retirement products, advisors say. Earlier this month, the Federation of Americans for Consumer Choice and the American Securities Association filed separate lawsuits asking courts to block the rule.

During a Faegre Drinker webinar Tuesday, panelists questioned what the lawsuits will accomplish. For starters, there hasn't been any enforcement of the new rules yet, and the rules only took full compliance effect on Feb. 1.

"We expect the DOL as a matter of procedure to take the position that these can't really be litigated yet," explained Joshua Waldbeser, partner at Faegre Drinker, "that you can't really sue based on anticipation of enforcement. That there's actually going to have to be some enforcement of this new interpretation that has an effect on insurance agents before it can actually be litigated."

The FACC lawsuit was filed in a Dallas federal court, while the ASA lawsuit was filed in a middle Florida federal court. No hearings have been scheduled on either lawsuit.

'Millions And Millions And Millions'

Fred Reish, partner at Faegre Drinker and longtime retirement plan expert, gauged client reaction to the lawsuits and found few changes.

"To a person, they came back to me and said, 'We don't know if these lawsuits will fail or not, and we can't afford from February 2022 to whenever they get resolved to be wrong. Because that will be potentially millions and millions and millions of dollars of damages if these lawsuits don't prevail,'" Reish recounted.

As a result, clients are fully complying with the rules and have all the procedures in place to do so, he noted.

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.

To execute a prohibited transaction under the new rules, there are very specific disclosures about any conflicts that must be made, along with detailed evidence that the sale is in the best interest of the client.

Both lawsuits claim the DOL overstepped its authority in writing the rule. For example, DOL 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 FAQs, the guidance essentially created new rules, the ASA claimed in its 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."

More Rules Coming

The DOL’s spring 2021 Regulatory Agenda confirmed that it will rewrite the definition of fiduciary. The Employee Benefits Security Administration is likely to issue the notice of rulemaking by this spring, analysts say.

Further evolution of the rules makes filing a lawsuit now even more suspect, the lawyers said. The new DOL fiduciary definition could be effective by the end of the year, or early 2023, Reish said, and will replace the key Investment Advice Rule exemption.

"These lawsuits will have essentially a basic life expectancy from February 1, 2022, to whatever date that is that the new final regulation becomes effective," he said. "Then there would have to be a lawsuit against that regulation.

"In a way, these lawsuits are alerting the DOL to what the lawsuits against the regulation will be. And I assume the Department of Labor is drafting around that as we speak."

For the time being, the only thing for advisors and firms to do is to be in compliance, Reish said.

"Notwithstanding the lawsuits, I just don't think there are a lot of choices," he said.

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.