Court order puts DOL fiduciary rule on ice

The future of the DOL’s fiduciary rule became uncertain on Thursday, after a US district court judge ordered a stay on the controversial regulation.

In court documents, Judge Jeremy Kernodle stated that “the plaintiffs are likely to succeed on the merits of their claim that the 2024 fiduciary rule conflicts with ERISA’s text” and that they “would suffer irreparable harm in the absence of relief.”

The rule and its accompanying prohibited transaction exemptions, which were set to be phased in beginning in September, redefine investment advice and would make many brokers – particularly insurance agents – fiduciaries. The insurance industry has staunchly opposed the rule, as many one-time annuity sales made via rollovers from retirement plans would become fiduciary acts.

“The rule is not DOL’s first attempt to expand the meaning of fiduciary under ERISA. The Fifth Circuit vacated an earlier, similar rule because it ‘conflict[ed] with the plain text of [ERISA],’ was ‘inconsistent with the entirety of ERISA’s ‘fiduciary’ definition,’ and unreasonably treated numerous financial services providers ‘in tandem with ERISA employer-sponsored plan fiduciaries,’” Kernodle wrote. “The 2024 fiduciary rule suffers from many of the same problems.”

The stay raises questions about whether the rule will ever go into effect.

“The stay of the fiduciary regulation means that the DOL’s definition of one-time advice will not be effective this Sept. 23. As a result, the current regulation, with its five-part test, will continue in effect until the stay is lifted, and if the courts ultimately determine that the regulation exceeds the DOL’s authority, the new regulation will never come into effect,” said Fred Reish, partner at Faegre Drinker Biddle & Reath, in an email. “However, it could take years of litigation and appeals before we will know. It is even possible that this could be ultimately be decided by the Supreme Court.”

The stay pertains to the rule itself but only one to one of the prohibited transaction exemptions, PTE 84-24, which affects non-security annuity recommendations.

It’s notable that the DOL is facing a separate suit over all aspects of the new rule and revised exemptions, said Jason Roberts, CEO of the Pension Resource Institute. In that case, which is filed in US District Court for the Northern District of Texas, there is an active request by a group of insurance trade groups, the plaintiffs, for an injunction that would apply to all facets of the rule and exemptions, Roberts noted.

On Friday, the plaintiffs in that lawsuit cited the stay issued in the other case and asked the court to grant an injunction on the other prohibited transaction exemption, PTE 20-02. That exemption is the main one on which advisors would rely for receiving commissions or other compensation in connections with product recommendations.

“We’re in this weird limbo,” Roberts said. “Amended PTE 20-02 is unscathed and set to go into effect Sept. 23 … It’s this odd state of affairs that I’ve never seen.”

It’s likely that the DOL will appeal the stay and would do so as well if another is granted in the other case, he said. And the agency might opt to issue guidance for how PTE 20-02 is applied if that exemption is not stayed, he noted.

“This particular judge wasn’t really buying that the new rule or the methodology behind it was materially different from the old one,” he said.

Until there is more certainty about the fate of the rule, firms should still be preparing for PTE 20-02 to go into effect, he said. That means having the right policies, procedures, and training in place, he said.

The development in the case represents at least the second setback the DOL has faced in court over new rules it passed. Those are being affected by a recent Supreme Court decision that limits how much federal agencies can interpret their authority under laws passed by Congress.

In two combined lawsuits that challenged fishing-boat regulations, the Supreme Court reversed a 40-year-old decision that had established what is known as the “Chevron deference,” in which courts deferred to regulators’ expertise in drafting rules.

“It’s a significant factor, a significant hurdle for DOL,” Roberts said. “Even with the [Chevron] deference, the prior rule was vacated in that same circuit.”