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In this article we review developments in opposition to DOL’s recently finalized amendment to the ERISA advice fiduciary regulation: the filing of a second lawsuit challenging the new regulation; the Chamber of Commerce’s amicus brief in the first lawsuit – Federation of Americans for Consumer Choice, Inc. v. DOL (FACC v. DOL) (May 2, 2024); and the introduction in the Senate of a Congressional Review Act (CRA) resolution disapproving DOL’s regulation.
Second lawsuit filed
On May 24, 2024, the American Council of Life Insurers (ACLI) and certain other insurance industry groups filed a lawsuit against DOL (ACLI v. DOL) challenging DOL’s new regulation. As noted, this is the second major lawsuit by industry on this issue.
The ACLI plaintiffs make four broad claims:
1. “The Rule is contrary to law and ‘in excess of statutory jurisdiction, authority, or limitation,’ [thereby violating the Administrative Procedure Act] … because it imposes fiduciary duties on sales transactions that do not involve intimate relationships of trust and confidence.” In this regard plaintiffs argue that the rule:
“[R]edefines all sales speech as fiduciary speech,” thereby “obliterate[ing] the distinction ‘between mere sales conduct, which does not usually create a fiduciary relationship under ERISA, and investment advice for a fee,’” (quoting the Fifth Circuit in its 2018 decision vacating DOL’s 2016 attempt to rewrite ERISA’s fiduciary advice rule).
Treats one-time transactions (e.g., with respect to rollovers or an annuity purchase) as involving a fiduciary relationship and fiduciary advice, even though the Fifth Circuit had found such treatment to be a “key defect” of the 2016 rule.
By not recognizing, e.g., contractual disclaimers, “precludes parties from structuring their own relationships as nonfiduciary through clear contractual language.”
By the use of an “objective standard” for what is fiduciary advice, “establishe[s] effectively an irrebuttable presumption that fiduciary status attaches whenever the Rule’s criteria are met because ‘parties should reasonably understand’ that a relationship of trust and confidence exists.”
By treating “recommendations” incident to a sales/commission-based transaction, “conflicts with ERISA’s ‘advice for a fee’ requirement.” The argument here is that brokers are paid for the sale, not for the advice.
2. The rule “is contrary to law and arbitrary and capricious because it unlawfully creates a private cause of action.” (This was a key issue in the successful challenge to the 2016 rule.) Plaintiffs argue that by requiring that institutions/advisers to “provide clients with a ‘written acknowledgement’ pledging fiduciary status,” (to obtain protection under, e.g., Prohibited Transaction Exemption 2020-02) the rule plus the PTE create potential exposure to “state-law private actions under breach-of-fiduciary or breach-of-contract theories.”
3. The rule is “arbitrary and capricious because it is the product of unreasoned decision making.” In this regard, plaintiffs attack in detail the data and reasoning used to support the rule’s adoption, emphasizing (especially) that much of that data is from periods before the adoption by the SEC of Regulation Best Interest (Reg BI), which imposes a version of impartial conduct standards on brokers. In adopting Reg BI the SEC, based on its own analysis of the data, explicitly rejected imposing a fiduciary standard on brokers.
4. The rule violates the First Amendment to the Constitution, by limiting legitimate sales-related speech by brokers and by imposing a “compelled speech” obligation on them – the written acknowledgment of fiduciary status required by, e.g., PTE 2020-02.
Chamber of Commerce Amicus brief
The Chamber of Commerce has filed an amicus brief in FACC v. DOL. In its brief, the Chamber emphasizes two broad points:
1. The Rule cannot be reconciled with ERISA’s text and structure, or with Fifth Circuit precedent
DOL’s regulation “defies the common law meaning [of ‘fiduciary’] that ERISA incorporated. Specifically: “as used in ERISA, fiduciary ‘investment advice’ requires ‘a substantial, ongoing relationship between adviser and client,’” (quoting the 2018 Fifth Circuit decision vacating the 2016 rule).
DOL has “impermissibly collapsed the distinction between the fiduciary duties imposed by Titles I and II of ERISA.” ERISA Title I is generally applicable to employer-sponsored retirement plans; Title II is generally applicable to IRAs. The general fiduciary duties under ERISA Title I of prudence and loyalty do not apply to IRAs under ERISA Title II – only ERISA’s prohibited transaction rules apply. DOL’s regulation package, however, seeks to apply the Title I prudence and loyalty requirements to IRAs via the applicable prohibited transaction exemptions, e.g., PTE 2020-02.
The regulation “intrudes on turf that Congress assigned to other regulators.” In this regard, critically, the SEC was (under Dodd-Frank legislation) tasked with determining what rules should apply to brokers, including whether they should be subject to a fiduciary standard. The Chamber summarizes the SEC’s review
The SEC adopted a “best interest” standard of conduct for broker-dealers, which is “similar to key elements of the fiduciary standard for investment advisers.” … Yet, critically, the SEC “declined to subject broker-dealers to a wholesale and complete application of the existing fiduciary standard under [the Investment Advisers Act of 1940] because it is not appropriately tailored to the structure and characteristics of the broker-dealer business model.” … The SEC emphasized that it “believe[d] (and [its] experience indicate[d]) that this approach would significantly reduce retail investor access to differing types of investment services and products, reduce retail investor choice in how to pay for those products and services, and increase costs for retail investors obtaining investment recommendations.” [Citing SEC’s preamble to Reg BI] Indeed, the SEC specifically pointed to “the now vacated [DOL] Fiduciary Rule” as a cautionary tale, explaining that its adoption led to “a significant reduction in retail investor access to brokerage services, and [the SEC] believe[d] that the available alternative services were higher priced in many circumstances.”
2. The Rule will significantly harm investors by making important financial services more costly and less available
In this regard the brief reviews data and analysis considered by the SEC, in not applying a fiduciary standard to brokers, and by other analysts of the issue, and emphasizes that not just the compliance cost but the cost of litigation must be accounted for. Applying a fiduciary standard to brokers:
“[W]ould result in fewer broker-dealers offering transaction-based services to retail customers,” … as broker-dealers sought to avoid … compliance costs by shifting to a fee-based advisory model …. Imposing the investment adviser fiduciary duty on broker-dealers, the SEC found, would “significantly reduce retail investor access to differing types of investment services and products, reduce retail investor choice in how to pay for those products and services, and increase costs for retail investors of obtaining investment recommendations.”
The Chamber explicitly requests, as a remedy, that the court “stay the effective date and preliminarily enjoin the Rule.”
Expected: Congressional/CRA disapproval of the rule, with (limited) bipartisan support, followed by a Presidential veto
A Congressional Review Act resolution disapproving the rule has been introduced in the Senate. At least one Democrat (Senator Manchin, D-WV) is co-sponsoring the bill. The CRA allows expedited review of DOL’s rule and requires only a 51 vote majority in the Senate. A successful CRA resolution would effectively revoke the regulation. If, however, this resolution were to be adopted by the current Congress, it would be vetoed by President Biden, and there is (currently at least) not enough support for the resolution to over-ride that veto.
CRA resolutions are on a 60 “Congressional working days” clock. Passage and then veto by President Biden will – on the current schedule and unless something extraordinary happens – all happen this year, before a new administration takes over next January.
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Takeaway – based on where we stand now, for those hoping to frustrate DOL’s effort to re-write ERISA’s fiduciary advice rule, the courts remain the most likely venue.
We will continue to follow this issue.