July 26, 2024

DOL unrepentant after fiduciary rule plaintiffs prevail on injunction

For the better part of a decade, the Department of Labor has tried to extend fiduciary status to insurance agents, among others. One day after a Texas judge granted a preliminary injunction freezing its current rule, a DOL spokesperson said regulators continue to believe in the strategy.

“When investors get advice from a trusted financial professional about their retirement savings, they expect that advice to be in the customer’s best interest, not the financial professional’s,” the spokesperson said in a statement. “This rule makes that a reality. The Department continues to believe that this rule is essential to ensuring that retirement investors are protected.”

Judge Jeremy D. Kernodle issued a preliminary injunction Thursday to freeze the Retirement Security Rule from taking effect in September. The ruling means the DOL cannot advance the rule until the court has heard the case.

There are two cases against the RSR. The Federation of Americans for Consumer Choice filed its lawsuit May 2 in the Eastern District of Texas, which was heard by Kernodle. A group of several trade associations filed a similar case in the Northern District of Texas.

FACC ready for more

FACC CEO Kim O’Brien called Kernodle’s quick ruling further evidence of a flawed rulemaking process.

“It is clear that Judge Kernodle examined the issues carefully and found DOL’s new fiduciary rule to be irreconcilable with the Fifth Circuit decision and with ERISA,” she said. “FACC stands ready to ensure the rule is ultimately vacated and upheld as necessary through any appeals.”

During oral arguments Tuesday, FACC attorney Don Colleluori argued that any DOL fiduciary rule must abide by precedent set by a 2018 ruling from the Court of Appeals for the Fifth Circuit.

With that decision, a three-judge panel ruled that the 2016 fiduciary rule strayed too far from the common-law definition of the term fiduciary, which hinges on the existence of a relationship of “trust and confidence” with the client. Agents who merely sell products to their clients do not have this relationship, the court concluded.

Congress passed the Employee Retirement Income Security Act of 1974 and a subsequent “five-part test” was developed to establish fiduciary duty, Colleluori reminded the judge. Insurance agents are regulated by the states and a best-interest standard adopted in 2020 by the National Association of Insurance Commissioners is in place in nearly every state, he added.

‘Likely to succeed’

Kernodle appeared to favor an injunction throughout the hour-long hearing, pausing to query both attorneys on whether the pause should apply strictly to insurance agents, or be a blanket injunction. He opted for the latter in his decision.

“Plaintiffs are likely to succeed on the merits of their claim because the 2024 Fiduciary Rule conflicts with ERISA in several ways, including by treating as fiduciaries those who engage in one-time recommendations to roll over assets from an ERISA plan to an IRA,” Kernodle wrote. “DOL’s related amendments to Prohibited Transaction Exemption 84-24 are also unreasonable and arbitrary and capricious.”

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