Fiduciary

Trump-appointed judge will hear lawsuit against DOL fiduciary rule

By John Hilton

Judge Jeremy D. Kernodle, a Trump appointee, will hear the first lawsuit to the Department of Labor’s fiduciary rule.

Assigned Friday to hear the lawsuit filed by the Federation of Americans for Consumer Choice, Kernodle has a staunch limited-government conservative background.

FACC is joined by several independent insurance agents in the lawsuit filed Thursday in the Eastern District of Texas. Technically known as the Retirement Security Rule, the rule would extend fiduciary status to most producers selling annuities and other financial products.

Plaintiffs present a familiar argument from DOL foes: that the department exceeds its authority granted by Congress and runs afoul of precedent set by the Fifth Circuit Court of Appeals in its 2018 decision to overturn a previous fiduciary rule.

FACC seeks a preliminary injunction to stop the new rule from taking effect while the case is being heard. Analysts and financial professionals alike say the injunction is crucial. Otherwise, the industry will have no choice but to comply with rule obligations that take effect starting Sept. 23.

If an injunction is denied, it will likely be appealed, said David Macchia, founder and CEO of Wealth 2k, a consulting and software company. If ultimately unsuccessful, the industry will have little choice but to accept the initial rule mandates, he added, stressing he is speaking just for himself and not any organization he is involved with.

The court case “could take an extended period of time,” Macchia said. “That means we will have been forced into complying with the PTE 84-24 changes as far as insurance people go. And those new systems will probably become the standard operating practices by default.”

Federalist Society member

President Donald Trump nominated Kernodle to fill a vacant Eastern District seat in January 2018. Kernodle had no bench experience to that point. He actively participated in the Dallas Republican Party and applied for a judgeship through a committee set up by Texas Sens. John Cornyn and Ted Cruz.

He has also been a member of the conservative Federalist Society for Law and Public Policy Studies since 2006. At the time he was nominated, Kernodle was a partner in the Dallas office of Haynes and Boone.

According to Kernodle’s biography there, “[h]e has successfully litigated cases against various federal agencies, including bid protests in the U.S. Court of Federal Claims.”

As a judge to date, Kernodle’s rulings reveal little wiggle room for expansion of federal powers.

Kernodle sided with the Texas Medical Association, at least in part, in four different cases challenging Department of Health and Human Services' regulations under the No Surprises Act. The act bans surprise out-of-network medical bills and details procedures to resolve payment disputes between providers and payers.

In Kernodle’s two most-recent rulings from August 2023, he accepted the TMA argument that HHS provisions under the act, “unfairly disadvantaged physicians in payment disputes with health insurers.”

Northern District lawsuit

FACC is familiar with Texas courts, with a separate, active lawsuit against the DOL over its 2021 guidance on who is considered a fiduciary when giving rollover advice. That lawsuit is in the Northern District of Texas.

The industry and the DOL are mainly at odds over two exemptions, which allow annuity sellers to collect a commission: Prohibited Transaction Exemption 84-24, which dates to 1977, and PTE 2020-02, an alternative created by the Trump administration in 2020.

Amended several times over the years, PTE 84-24 allows producers to receive commissions when retirement plans and IRAs purchase insurance and annuity contracts. Under PTE 2020-02, if an "investment professional” gives fiduciary advice to a retirement investor, the “financial institution” is also considered a fiduciary.

The new Retirement Security Rule update applies the DOL’s “impartial conduct standards” to both exemptions and producers must meet the standards by Sept. 23. They include: give advice that is in the best interest of the participant, the agent receives no more than reasonable compensation, and makes no materially misleading statements.

In April 2021, the DOL published guidance to spell out the circumstances in which financial institutions and advisors who provide fiduciary investment advice to retirement investors can receive otherwise prohibited compensation under PTE 2020-02.

A pair of lawsuits

The American Securities Association sued the DOL in Florida, while FACC filed its lawsuit on similar grounds in Texas.

A ruling came first from a Florida court, with Judge Virginia M. Hernandez Covington ruling that a portion of the department’s guidance illegally widened its regulatory lane and failed to comply with the agency’s own regulations.

The FACC lawsuit remains active, but with little activity in the months since the DOL ramped up work on its Retirement Security Rule.

The crux of the legal fight is whether a one-time sale of a financial product can be construed to be an “ongoing relationship” of trust and confidence. DOL, which eventually dropped its objections to Judge Covington’s ruling, claims that it has it right with the new rule.

"What this rule does is to say that in those circumstances [of a one-time sale], we have this trusted advice professional that is providing individualized advice that is purported to be in a customer's best interest,” explained Ali Khawar, deputy assistant secretary for the Employee Benefits Security Administration. “That kind of is the hallmark of this relationship of trust and confidence."

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.