Second court blocks all aspects of DOL's fiduciary rule

A group of insurance industry groups has succeeded in getting the DOL’s new fiduciary rule and prohibited transaction exemptions temporarily blocked.

On Friday, a federal district court issued a stay in the effective date of the Department of Labor’s regulation and the amended exemptions. That added to a similar order in a separate case a day earlier that applied to the rule itself but only one of the exemptions, PTE 84-24, which applies to commissions on non-security insurance products recommended in IRA rollovers. Friday’s order applies to the rule, PTE 84-24, PTE 20-02, and all of the other exemptions associated with the new rule, including PTE 75-1, 77-4, 80-83, 83-1, and 86-128.

Both courts, which are in different districts in Texas, sided with the plaintiffs, citing a high likelihood that they would prevail in their cases against the rule.

“Plaintiffs are virtually certain to succeed on the merits,” the order issued in the Northern District of Texas Fort Worth Division read. “Not only is the rule likely unlawful, it [is] also likely to cause irreparable harm to the plaintiffs.”

That alleged harm includes increased compliance costs and higher regulatory burdens, as many insurance agents who never have had to comply with the Employee Retirement Income Security Act would become fiduciaries in connection with one-time annuity sales in IRA rollovers, according to the court records.

The new rule and its amended exemptions are intended to bring a higher level of protection to retirement savers, as fiduciary status isn’t mandatory for one-time recommendations given as part of a rollover. The rule was slated to begin taking effect in September, with aspects of it being phased in until April 2025.

Currently, there is a five-part test used to determine whether recommendations are fiduciary in nature, which dates to the 1975 definition of investment advice. The DOL has been working to revise its fiduciary rule since at least 2010, with iterations passed during the Obama and Trump administrations. The 2016 rule was shot down in court two years later, and the district court judges noted that the newest version suffers from some of the same legal shortcomings.

Adding to the DOL’s difficulty in defending the rule is a recent decision by the Supreme Court overturning what is known as the “Chevron deference,” which for 40 years had given federal regulators significant leeway to make regulations based on their interpretations of laws passed by Congress.

While the Texas courts are more sympathetic to the plaintiffs in the two lawsuits, the outcome of the cases will almost certainly be appealed to higher courts.

“It could take years of litigation and appeals before we will know,” Fred Reish, partner at law firm Faegre Drinker Biddle & Reath, told InvestmentNews Friday. “It is even possible that this could be ultimately be decided by the Supreme Court.”

In statement on Saturday, the insurance trade groups suing the DOL praised the court’s decision.

“If allowed to take effect, this rule would deprive millions of consumers access to much needed retirement financial guidance and protected lifetime income products, replicating the considerable harm suffered under a similar 2016 DOL regulation vacated by a federal court in 2018,” the groups stated. “The stay of the effective date provides consumers with a needed reprieve from these devastating consequences as the court considers the substantial legal issues we have raised regarding this ill-advised rule.”

Those groups include the American Council of Life Insurers, National Association of Insurance and Financial Advisors, Finseca, Insured Retirement Institute, and National Association for Fixed Annuities.

Two other groups that filed briefs supporting the plaintiffs – the Financial Services Institute and Securities Industry and Financial Markets Association – said the DOL was “arbitrary and capricious” in passing the rule.

“The finalized rule unlawfully expands the definition of a ‘fiduciary’ and jeopardizes investors’ access to advice and education,” those groups said in a statement.