The fiduciary rule that was finalized at the end of April has been hit with its first lawsuit.
The Federation of Americans for Consumer Choice, an advocacy group for independent insurance agents, filed a lawsuit May 2 challenging the U.S. Department of Labor’s (DOL’s) new fiduciary rule, alleging it is “contrary to law and arbitrary and capricious.”
The lawsuit came shortly after the DOL on April 23 finalized the long-awaited regulation, which aims to modernize and increase investment advice standards for retirement accounts.
The rule, called the Retirement Security Rule: Definition of an Investment Advice Fiduciary, updates the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code so that providers adhere to “high standards of care and loyalty” when recommending investments. It ensures that financial advisors, brokers, and insurance agents are held to the fiduciary standard on rollover individual retirement accounts.
SHRM Online rounded up more news about the fiduciary rule and the challenge.
Fiduciary Rule Details
The fiduciary rule, which was originally proposed in October, will take effect on Sept. 23.
“The final rule and related amended prohibited transaction exemptions require trusted investment advice providers to give prudent, loyal, honest advice free from overcharges,” the DOL said in a statement last month. “These fiduciaries must adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the investment advice providers’ interests—financial or otherwise—at the retirement savers’ expense.”
The rule applies a best-interest standard to advice that plan sponsors receive about which investments to include in 401(k) and other employer-sponsored plan lineups. The rule also clarified that human resource professionals will not be interpreted as giving professional advice when they discuss general aspects of the retirement plan a company provides.
It also “ensures investment professionals can compete for business on a level playing field, instead of being hindered by a skewed system in which different standards exist for advice providers based on the products they recommend,” the DOL said.
Acting Labor Secretary Julie Su said the rule “protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions.”
Details of the Suit
The Federation of Americans for Consumer Choice, which represents annuity and life insurance firms, along with other independent insurance agents and firms collectively filed the lawsuit against the new fiduciary rule in U.S. District Court in Tyler, Texas, claiming that it exceeds the Labor Department’s authority and is in violation of the Administrative Procedure Act.
The plaintiffs are seeking a preliminary injunction, asking the court to stop the rule from taking effect during the pendency of the case.
They claimed the new rule is similar to a 2016 rule that was struck down in 2018 by a three-judge panel at the 5th U.S. Circuit Court of Appeals in New Orleans.
“The interpretation of fiduciary provided in the 2024 Fiduciary Rule is fundamentally inconsistent with Congress’ intent as expressed in the text of ERISA and the Code, as well as the historical and common law understanding of the term,” the lawsuit stated. “The 5th Circuit flatly rejected the DOL’s attempt to rewrite the meaning of fiduciary and usurpation of regulatory authority in Chamber of Commerce v. U.S. Department of Labor. The DOL has now thumbed its nose at the court in promulgating the 2024 Fiduciary Rule which is analytically indistinguishable from the 2016 Fiduciary Rule.”
DOL Says the 2024 Rule Is Different; More Lawsuits Expected
DOL officials, though, have stressed the differences between the fiduciary rule just finalized this year and the one that was vacated in 2018. Su, testifying before the House Committee on Education and the Workforce, explained that this rule takes “into account what the court said about why the prior rules could not stand." For example, “the definition of a fiduciary is different, what is covered is different,” she said.
Still, many expect that other lawsuits over the fiduciary rule will occur, considering it has received pushback from numerous insurance and financial services firms.
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