Just days after sending its new fiduciary rule out for review, the Department of Labor alerted a Texas judge that it isn’t done defending the legality of existing rules.
The DOL filed a brief reiterating its defense of investment advice rules published during the Trump administration. Those rules were sued in Florida and Texas upon taking effect in February 2022.
It its new brief, the DOL also endorsed a February ruling striking down a portion of guidance the DOL issued in 2021 that expanded the definition of a retirement plan fiduciary. Florida Judge Virginia M. Hernandez Covington made the ruling in a lawsuit brought by the American Securities Association.
The judge ruled that a portion of the department’s frequently-asked-questions guidance illegally widened its regulatory lane, and failed to comply with the agency’s own regulations.
The DOL initially filed an intent to appeal the ruling, but later abandoned that idea. The judge’s ruling was “reviewed for clear error, and there is none to be found,” the new brief stated.
Included in the investment advice rule is a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the “five-part test” to determine what constitutes investment advice.
Abandoned but not forgotten
Both lawsuits claim that the DOL overstepped its authority in creating the advice rules. In Texas, the Federation of Americans for Consumer Choice, joined by a number of independent insurance agents and agencies, is the lead plaintiff.
When the government abandoned its Florida appeal, FACC took note and asked the court for a wide-ranging summary judgment. FACC asked the judge to fully vacate “the DOL’s five-part test to determine whether financial professionals are acting as ‘investment advice fiduciaries’ under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code in the context of recommendations to roll over assets from an employee benefit plan to an individual retirement account.
“The DOL’s decision not to appeal the ASA Order nullifying and vacating this central feature of the New Interpretation underscores that the DOL’s attempted reimagining of the five-part test is simply unworkable and further supports the relief requested by Plaintiffs in this case,” FACC said in a court document.
In a June 30 decision, Magistrate Judge Rebecca Rutherford ruled similarly to Judge Hernandez Covington to vacate the portions of the rule that consider the following to be fiduciary advice:
Review of a single rollover “can be the beginning of an ongoing advice relationship” to Title II plans;
inclusion of potential “future, ongoing relationships” to Title II plans; and
that “an ongoing advisory relationship spanning both the Title I Plan and the IRA satisfies the regular basis prong” of ERISA’s five-part test on when investment advice is fiduciary advice.
Who is overstepping?
But Judge Rutherford denied FACC’s request for full summary judgment. FACC has appealed and the new DOL brief is its first court response on the matter. FACC is “simply rehash[ing] the same extreme arguments and positions,” the brief said.
In 2018, the Fifth Circuit Court of Appeals vacated the DOL’s revised definition of an investment advice fiduciary to include all financial professionals who give advice to roll assets out of a plan to an IRA. FACC bases much of its arguments on that decision, to which the U.S. Chamber of Commerce was the lead plaintiff.
The DOL accused FACC of misconstruing that decision in what it called a flawed argument.
“Plaintiffs’ objections to [Rutherford’s decision] are not well-taken because they ignore the clear text of ERISA and the Department’s regulations, misconstrue the Chamber of Commerce opinion, and push for a nearly categorical exclusion of insurance agents and stockbrokers from ever being ERISA fiduciaries,” the brief reads.
Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at email@example.com. Follow him on Twitter @INNJohnH.
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