The Department of Labor isn't likely to back away from pushing for tougher fiduciary standards on the sale of retirement products, a pair of experts agreed Thursday, despite significant losses in court.
The DOL is in the midst of a fiduciary rule rewrite that seemingly has no timeframe. In 2018, the Fifth Circuit Court of Appeals struck down a previous fiduciary rule published by the Obama administration.
A portion of a replacement rule published by the Trump administration was also struck down by a Florida judge earlier this year.
Fred Reish and Bradford P. Campbell, partners at Faegre Drinker Biddle & Reath, warned financial professionals not to expect a lesser regulations from the Labor Department.
"I can't see the current Department of Labor walking away from regulating rollovers," Reish said during a webinar. "I just have a hard time thinking that after all the effort of the Obama administration and now in the Biden administration to regulate rollovers that they would say, 'Well, we lost. We're out of here.' This doesn't make any sense to me."
The DOL is running out of time to complete all the steps required to get a fiduciary rule on the books, Campbell said.
"It takes time to propose a regulation, get comments on it, consider the comments, send the regulation you finalized back to the White House, have them approve it, then publish it, then have it go into effect," he noted. "There's less than two years effectively left in the current term of the Biden administration."
Controversial rules not completed, or completed too near the end of an administration, are often scrapped by an incoming administration. However, as Campbell pointed out, the Trump administration produced a very tough set of rules of its own.
"There is some continuity across both administrations for wanting to do greater regulation of rollovers," he explained. "Now, I don't think anyone's ever quite understood exactly why the Trump administration took that position. But they did."
The investment advice rule was created by the Trump DOL and allowed to take effect by the Biden team. It created a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and reinstated the "five-part test" to determine what constitutes investment advice.
Upon taking effect in February 2022, the rule was immediately sued in Texas by the Federation of Americans for Consumer Choice, and in Florida by the American Securities Association.
Judge Virginia M. Hernandez Covington sided with the ASA in striking down a portion of guidance the DOL issued in 2021 that expanded the definition of a retirement plan fiduciary.
In the Feb. 13 decision, the judge ruled that a portion of the department’s frequently-asked-questions guidance illegally widened its regulatory lane, and failed to comply with the agency’s own regulations.
When recipients retire and the money is "rolled" out of those plans, many advisors earn a commission. Regulators consider that a conflict of interest and want to expand the definition of fiduciary. The fiduciary standard is based on the "five-part test" established in 1975, in which one of the prongs is whether the advisor and client are in an "ongoing relationship."
In order to satisfy that prong, the DOL claims a one-time rollover contains the expectation of future advice rendered.
'Inconsistent with the law'
The judge reminded the DOL with her decision that the agency does not have jurisdiction over Individual Retirement Plans (IRAs). The DOL has enforcement authority over workplace retirement plans.
So the DOL "can't count advice that's given to an IRA owner as a continuation for the regular-basis test of ERISA fiduciary advice to someone who's in a plan," Campbell said. The judge "essentially determined the DOL guidance in this regard was inconsistent with the law."
Briefs are due by May 24 in the DOL's appeal. In the Texas case, both sides are just waiting for the judge to issue a ruling, Campbell said. The FACC lawsuit includes similar arguments that the DOL overstepped its authority.
"I think a lot of folks are assuming that the Texas court will reach a decision similar to the Florida court," Campbell said. "But we don't know until we know."
As for financial professionals, it is best to stick with the tougher policies and procedures put in place to comply with the full impact of the rules on the books, the analysts said.
"We don't know if DOL is going to win or lose," Campbell said. "Right now, DOL is able to continue enforcing based on the interpretation it has. So we would say keep the course with the policies procedures you've adopted, keep doing what the home office tells you to if you're an advisor for compliance, and we'll see if there's any actual change when either of these court cases are decided at the final level."
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.