Lawsuits, Rules And Money

It has long been assumed that when the Department of Labor tried again to expand a fiduciary standard to common life insurance and annuity sales, a lawsuit would follow.

After all, the courts have been very friendly to industry through the years.
Sure enough, the DOL investment advice rule took effect Feb. 1, and a pair of lawsuits in federal courts quickly followed.

“We’ve already got processes in place to eliminate the rogue advisors,” said Eric Couch, who runs ProVision Brokerage in Flower Mound, Texas. “We don’t have an insane amount of complaints. Advisors do what’s in the client’s best interest. At my agency, that’s the first and last thing and everything in between.”

Couch joined the Federation of Americans for Consumer Choice in a Feb. 2 lawsuit against the DOL in Dallas federal court. That court is within the Fifth Circuit, where the appellate court three years ago struck down the DOL’s prior fiduciary rule.

About a week later, the American Securities Association filed a lawsuit in a Florida federal court.

The lawsuits make a similar claim in slightly different ways: The DOL exceeded its authority with the investment advice rule.

Written 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.

‘Same Old Wine’

The FACC lawsuit claims the DOL’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.

Writing the majority opinion, Judge Edith H. Jones said the DOL rule “fails the reasonableness test” in extending its ERISA authority to one-time IRA rollovers and similar transactions.

Some analysts say the plaintiffs are getting ahead of themselves. For starters, there aren’t any cases yet to show the impact of the rule.

“They haven’t enforced it against anybody yet,” noted Fred Reish, partner with Faegre Drinker.

“Is there a true case or controversy, which is needed to have a lawsuit, if there hasn’t been any action taken by the government to actually enforce rules? That’s a big question.”

Donald Colleluori of Figari and Davenport, a Dallas law firm representing FACC, is unconcerned by the lack of any enforcement actions. Precedent does not require it, he said.

“We think that the legal precedent in the Fifth Circuit and elsewhere is very strong in our favor, and that will carry the day,” Colleluori said. “The court is not going to refuse to consider this simply because the Department of Labor hasn’t yet sought to enforce it against any particular agent.”

More Detail

The ASA lawsuit offers more detail on rule overreach claims. 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 and in the process, imposed 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

Lawsuits aside, there is yet another wild card on the way. The DOL’s spring 2021 Regulatory Agenda confirms that it will be rewriting the definition of fiduciary. The Employee Benefits Security Administration had planned to issue the notice of rulemaking by the end of 2021, but it missed that deadline.

The new fiduciary definition could be out at any point and is expected to replace the investment advice rule. Industry lawsuits are only giving the DOL advance notice of legal strategies, Reish explained.

“These lawsuits will have essentially a basic life expectancy from Feb. 1, 2022, to whatever date 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.” Again, FACC attorney Donald Colleluori demurred.

“Unless they’re going to turn around and just completely reverse course, then any new rule seems likely … to confirm the position that they’ve got in this new interpretation, which basically leaves every annuity agent operating in the space subject to being called a fiduciary,” he said.

For the time being, the only thing for advisors and firms to do is be in compliance, Reish said. And every client he talked to is doing just that.

“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.