Recent court decisions are affecting financial professionals

By Michael E. Gerber

Financial professionals know their work can be affected by all sorts of laws, regulations and rules from legislatures, regulators and the courts. The good news is financial professionals have professional associations — such as NAIFA — to help them navigate an ever-changing legal landscape.

Financial professionals look to NAIFA to engage with state and federal legislators and regulators. Recently, however, it’s the courts that have captured their attention — by scrutinizing the actions of federal agencies.

In May, a group of industry associations, including NAIFA, NAIFA chapters in Texas, the American Council of Life Insurers and others, filed suit challenging the Department of Labor’s fiduciary-only rule. The coalition argued the DOL rule exceeded the agency’s authority under the Employee Retirement Income Security Act and is invalid — and misguided — for multiple reasons. As of this writing, the Northern District of Texas federal court agreed and stayed enforcement of the rule. The court’s July decision reflects a theme in many cases decided in 2024 — judicial skepticism about broad agency rulemaking and a willingness to halt actions deemed beyond a regulator’s authority.

Pushing back on agency rulemaking

Two other northern Texas decisions from 2024 pushed back on agency rulemaking.

In July, the judge who granted a stay in NAIFA’s case stopped enforcement of new rules from the Centers for Medicare & Medicaid Services that would change the compensation framework for Medicare Advantage and Part D plans. In Americans for Beneficiary Choice v. HHS, the court found it likely that association plaintiffs would prevail in challenging the new CMS rules as arbitrary and capricious. As open enrollment looms, financial professionals in the Medicare market will want to follow this development.

The same month, another judge in northern Texas granted a preliminary injunction against enforcement of a Federal Trade Commission rule that makes most noncompete agreements unenforceable. In Ryan v. FTC, the court agreed with a tax services firm and association plaintiffs that the FTC lacked authority to issue the sweeping noncompete rule and blocked its use against the plaintiffs. Again, financial professionals who could be affected by this rule should keep an eye on this case.

The Supreme Court also issued several decisions in 2024 with implications for the financial services industry.

In Loper Bright v. Raimondo, the court decided a case involving New Jersey fishermen who challenged a regulation requiring them to bear the cost of having agency-mandated observers on their boats. Since the agency’s authorizing statute didn’t clearly grant such power, the court revisited — and overruled — the decades-old Chevron doctrine, which had required courts to give deference to permissible agency interpretations of ambiguous statutes.

The Loper Bright case means courts must not simply defer to agencies in those circumstances and must instead use their own judgment to interpret laws administered by regulatory agencies. This may lead to more challenges to administrative rules in every field — including regulations governing the financial services industry.

This may also impact how legislation is drafted, as lawmakers take greater care (and time) to make laws less ambiguous, and how regulations are written and enforced, as regulators adapt to an environment where courts no longer defer to an agency’s statutory interpretation.

Tax treatment of life insurance

Moving from sea to land, in Connelly v. United States, the Supreme Court ruled on the tax treatment of life insurance. Connelly involved two brothers whose St. Louis building supply company owned life policies on both owners. When one brother died, the estate excluded the value of the policy from the value of the company. The IRS objected, and the courts agreed that, for estate tax purposes, the value of a company must include the value of its life policy that will redeem the shares of a deceased owner.

Connelly demonstrates the importance of ensuring that buy-sell agreements and other succession plans are reviewed for compliance with the latest laws that may impact expected tax treatment.

Looking ahead to future tax battles, a third case from the Supreme Court’s 2024 term, Moore v. United States, has implications for potential wealth tax efforts. The court in Moore upheld a tax on undistributed income of American-controlled foreign corporations, as provided for in the 2017 Tax Cuts and Jobs Act.

The Moores argued that taxing undistributed earnings was an unconstitutional tax on unrealized income. The court disagreed, finding the income was realized, and did not address whether the Constitution permits taxing unrealized income, allowing for wealth tax proposals — and challenges against them — to be raised in the future.