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On July 25, 2024, the United States District Court for the Eastern District of Texas, in Federation of Americans for Consumer Choice v. United States Department of Labor (FACC v. DOL), granted plaintiffs’ motion for a stay of the effective date of DOL’s advice fiduciary rule and its related amendment to Prohibited Transaction Exemption 84-24. In doing so, the court found that plaintiffs were likely to succeed on the merits of their challenge to DOL’s new advice fiduciary rule.
In what follows, we discuss the court’s (favorable) view of the merits of plaintiffs’ claims, beginning with some background.
Background – DOL’s amended advice rule
We provide general background on DOL’s amendment to ERISA’s fiduciary advice rule here.
The court in FACC v. DOL identifies as significant “two major regulatory changes” made by the new (2024) rule to the prior (1975) five-part test for what constitutes ERISA fiduciary advice:
“First, the 2024 Fiduciary Rule again seeks to redefine investment advice fiduciary and shed the 1975 Definition. … Under the new rule, a person qualifies as an investment advice fiduciary in one of two ways: (1) he ‘represents or acknowledges that [he] is acting as a fiduciary’ under ERISA; or (2) he
either directly or indirectly (e.g. through or together with any affiliate) makes professional investment recommendations on a regular basis as part of [his] business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation: is based on review of the retirement investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.
“Second, DOL again amends PTE 84-24 [the related insurance agent/broker PTE]. … To qualify for the amended PTE 84-24, an insurance agent must: (1) adhere to “Impartial Conduct Standards” similar to those imposed by the 2016 Fiduciary Rule, including the duties of care and loyalty; (2) make certain disclosures, including of any material conflicts; and (3) operate under a supervisory program established by the insurance company that created the annuity.”
Background on the case
FACC is a nonprofit trade organization representing “independent marketing organizations, insurance agents, and agencies that market fixed insurance products including traditional fixed rate annuities and fixed indexed annuities.” The other plaintiffs are an insurance agent, an insurance agency, and an “independent insurance marketing organization.”
Plaintiffs’ claims
Plaintiffs challenge DOL’s amendment of ERISA’s advice fiduciary rule on two broad bases:
That DOL exceeded its authority under ERISA, the Tax Code, and the Administrative Procedure Act (APA).
That the 2024 rule and related PTE violate the APA as “arbitrary, capricious, and irreconcilable with the text of ERISA and the Code.”
Legal standard
Courts may generally stay a regulation “based on the traditional four equitable factors for injunctive relief: (1) plaintiff’s likelihood of success on the merits; (2) the threat of irreparable harm without a stay; (3) ‘whether other interested parties will be irreparably injured by a stay;’ and (4) the public interest.” Of these four factors, “[t]he first two factors are the most critical.”
In what follows we focus only on issue (1) – the merits of the plaintiff’s case. In that regard, following the Supreme Court’s recent decision overturning the Chevron doctrine in Loper Bright Enterprises. v. Raimondo, the court states that:
In reviewing agency action under the APA, “[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority” and should “set aside any [] action inconsistent with the law as they interpret it.” [Quoting Loper Bright] … A court should no longer defer to an agency’s interpretation of a statute but should decide for itself “whether the law means what the agency says.”
The court’s analysis
Fiduciary rule:The court found “that the 2024 Fiduciary Rule conflicts with ERISA’s text in three primary ways.”
First, DOL’s changes to the five-part test eliminated “criteria that are essential to the meaning of ‘fiduciary’ in ERISA.” In this regard the court specifically identified the elimination of the “regular basis” element of the 1975 five-part test in favor of a requirement that the alleged advisor simply be in the business of giving advice. And the elimination of the “’pursuant to a mutual agreement’ between the fiduciary and plan, and ‘as a primary basis for investment decisions with respect to plan assets’” elements of the five-part test in favor of asking instead whether a ‘reasonable investor in like circumstances’ would view the recommendation as being capable of ‘be[ing] relied upon . . . as intended to advance the retirement investor’s best interests.’”
The court held that, “[w]ith these changes, the 2024 Fiduciary Rule – like the 2016 Rule – will capture transactions that do not satisfy the established ‘relationship[s] of trust and confidence’ contemplated by ERISA. … The 2024 Rule fails for this reason alone.”
Second, the 2024 regulation’s treatment of, e.g., brokerage commissions as compensation for fiduciary advice conflicts with the statutory requirement that the compensation be (actually) paid for advice.
Third, DOL improperly extended its authority under Title I of ERISA (which governs employer plans) to Title II of ERISA (which governs, e.g., IRAs).
PTE 84-24: The court found the program of the expanded fiduciary advice rule plus a PTE that imposes an entire new compliance regime (to avoid application of that rule) to be arbitrary and capricious:
[T]he amendment to PTE 84-24 uses the [Fiduciary Advice] Rule’s overbroad definition to impose “novel and extensive duties and liabilities on parties otherwise subject only to the prohibited transactions penalties” of Title II. [Quoting the Fifth Circuit’s 2018 decision overturning the 2016 fiduciary advice rule.] DOL once again “exploit[s] an exemption provision into a comprehensive regulatory framework,” “impermissibly bootstrap[ping] what should [be a] safe harbor criteria into ‘backdoor regulation.’” … Doing so is “unreasonable and arbitrary and capricious.”
(We note that, even after the Supreme Court’s overturning of Chevron, the (higher) “arbitrary and capricious” standard applies with respect to this claim, as Congress has granted DOL discretion to determine the terms of PTEs.)
* * *
On the basis of this analysis, and further findings with respect to the other three elements required for injunctive relief, the court stayed the effective date of the fiduciary advice rule and the amendment of PTE 84-24.
We note that, in the other case challenging the fiduciary advice rule, American Council of Life Insurers v. United States Department of Labor, on July 26, 2024, the United States District Court for the Northern District of Texas, also entered a stay of the effective date of DOL’s 2024 regulation, stating that “the Court fully agrees with the analysis of the first factor [likelihood of plaintiffs’ success on the merits] in the FACC case and fully adopts that reasoning.” That stay also extends to the effective date of DOL’s amendments to PTE 2020-02, which broadly covers fiduciary issues triggered by the 2024 advice fiduciary rule.
We will continue to follow this issue.