Fiduciary

Trade group files first lawsuit against the DOL fiduciary rule

Image shows a court scene and the words, "Department of Labor." — The Department of Labor will have to defend its new Retirement Security Rule in court.

By John Hilton

The Federation of Americans for Consumer Choice filed a lawsuit in a Texas federal court Thursday to stop the Department of Labor fiduciary proposal from taking effect.

The Retirement Security Rule was published April 25 in the Federal Register. It extends a fiduciary standard of care to most annuity transactions, with the initial requirements taking effect Sept. 23.

FACC is joined by several independent insurance agents in the lawsuit filed in the Eastern District of Texas. The court is noteworthy for being within the Court of Appeals for the Fifth Circuit, known for its conservative opinions, including a 2018 decision to vacate the previous fiduciary rule put forth by the Obama administration.

FACC is represented by Figari & Davenport, which also represents FACC in its existing lawsuit against the DOL challenging the department’s 2020 guidance on who is considered a fiduciary. As part of the current lawsuit, FACC seeks a preliminary injunction asking the court to stop the new rule from taking effect while the case is being heard.

Reached by phone, Kim O'Brien, CEO of FACC, said the group is "coordinating with the other trades" on litigation strategy. She declined further comment.

A familiar argument

The FACC lawsuit repeats a familiar, and successful, argument from DOL foes: that the department exceeds its authority granted by Congress and runs afoul of precedent set by the Fifth Circuit in its 2018 decision.

"The 2024 Fiduciary Rule is inconsistent with the intent of Congress as expressed in ERISA, and the DOL has exceeded its authority and acted arbitrarily and capriciously in promulgating both the 2024 Fiduciary Rule and amended [Prohibited Transaction Exemption] 84-24," the lawsuit reads.

"Plaintiffs have therefore brought this action requesting that the Court vacate the 2024 Fiduciary Rule and amended PTE 84-24 in their entirety, and to preliminarily and permanently enjoin the DOL from enforcing either of them."

Acting Labor Secretary Julie Su defended her department's work in finalizing the RSR before members of the House Committee on Education & the Workforce during a Wednesday hearing.

Su told lawmakers this retirement security rule is "different" and addresses the reasons the last rule did not hold up in court.

"We are very confident that the rule is not only within our authority but [takes] into account existing case law," Su said.

A tough rule

The new RSR is the latest of DOL's ongoing attempts to bring all retirement plans and individual retirement accounts under Employee Retirement Income Security Act law. The 1974 law only permits "reasonable compensation" to service providers, including advisors.

While the rule takes effect on Sept. 23, a one-year grace period will follow before full compliance is required, DOL officials said.

The exception is the “Impartial Conduct Standards” established by the DOL in a 2020 rule update. They include: give advice that is in the best interest of the participant, the agent receive no more than reasonable compensation, and make no materially misleading statements. The ICS requirements take effect in September, Labor officials said.

Fred Reish is a partner at Faegre Drinker and a longtime expert on ERISA law. He declined to comment on the specifics of the FACC lawsuit, but said the insurance industry should not be relying on lawsuits to stop the DOL.

If the injunction is not granted quickly, broker-dealers, investment advisers, banks, and insurance companies will need to start work on the compliance issues in order for the training, processes, data, and documentation are in place by Sept. 23, Reish explained.

"For example, where insurance companies sell through independent producers, those producers will need to be trained on the rules, the processes for compliance, the information that needs to be evaluated for a prudent process, the disclosures, and so on," he added. "That is a big job even if it were started today."

InsuranceNewsNet Senior Editor John Hilton 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.

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.