DOL is overreaching its authority again, fiduciary rule critics tell Texas federal court

A coalition representing life insurance and annuity issuers told a federal court in Texas that the US Department of Labor's new fiduciary rule overreaches its authority and flouts previous court rulings.

In a filing submitted Friday, the coalition – which includes the American Council of Life Insurers, several chapters of the National Association of Insurance and Financial Advisors, the Insured Retirement Institute, the National Association for Fixed Annuities, and Finseca – argued that the DOL's new rule, unveiled in April, disregards a 2018 Fifth Circuit Court of Appeals decision that vacated its previous 2016 rule.

The group initially launched its legal action against the DOL in May, roughly one month after the new fiduciary rule was approved and finalized.

"DOL devotes the bulk of its opposition attempting to defend the rule on the merits, barely contesting the other preliminary-injunction factors," the filing stated. "In doing so, DOL merely relitigates, rather than faithfully abides by, the Fifth Circuit’s 2018 decision to vacate its previous 2016 attempt at imposing a fiduciary standard."

That decision in the landmark legal challenge Chamber of Commerce v. U.S. Department of Labor established that ERISA codified the common law understanding of fiduciary relationships based on trust and confidence. The coalition argued that DOL’s new rule ignores this distinction, transforming insurance agents and brokers into fiduciaries without considering whether their relationships meet the common law definition.

"The rule seeks to transform virtually all insurance agents and brokers who recommend retirement products in compliance with existing state and federal laws into fiduciaries without regard to whether those relationships actually are or would be ‘fiduciary’ at common law," the filing asserted.

The coalition also contended that the rule turns a blind eye toward the Fifth Circuit’s differentiation between investment advisers, who are fiduciaries, and stockbrokers and insurance agents, who are not typically deemed fiduciaries in product sales.

"The rule does precisely what Chamber forbids: it ignores the core distinction between investment advice paid for by a client and sales speech engaged in by insurance agents, brokers, and others incidental to the sale of retirement products," the filing said.

In defending its new rule, the DOL pointed to ERISA's “expansive” standard, with a "functional" test that the labor department said grants it the authority to create fiduciary relationships even when the common law doesn’t necessarily do so.

However, the coalition pointed out that the Fifth Circuit has previously rejected this interpretation, emphasizing that ERISA’s definition of a fiduciary must align with the common law understanding.

"DOL’s efforts to revisit these claims are baseless," the coalition argues. "The Fifth Circuit decisively rejected that entire line of argument."

In its defense of the 2016 rule, and now the new rule, the DOL pointed to the Fifth Circuit’s determination that ERISA's reference to "advice for a fee" – a major hallmark of fiduciary relationships – could include commissions under certain conditions.

The coalition, however, highlighted that the new fiduciary rule omits two crucial elements of the five-part test defined under ERISA in 1975, which the Fifth Circuit deemed necessary for commissions to qualify as fiduciary compensation.

"The rule jettisons the ‘mutual agreement’ and ‘regular basis’ prongs of the five-part test, with the impermissible result that virtually any commissioned sale of a retirement product triggers fiduciary status," the coalition stated.