Opponents of The Department of Labor's newly finalized fiduciary rule fired the first shot to kill him in the courts this week, with a lawsuit filed in Texas.
The plaintiffs include the Federation of Americans for Consumer Choice, an Austin, Texas-based lobbying organization for independent insurance professionals; the group previously filed a lawsuit in Texas federal court in 2022 seeking to roll back Trump-era DOL trust regulations.
Other plaintiffs included two Texas-based insurance professionals and Provision Brokerage, an “independent insurance marketing organization” from Denton County, Texas.
In the lawsuit filed Thursday, the plaintiffs argued that the new DOL rule wants to “fundamentally reshape” 50 years of established practices in the insurance industry. Under the FACC, the DOL wants any financial professional who recommends a product to an investor when transferring assets from an employer-based plan to an IRA to be considered a fiduciary.
“The DOL refuses in this relentless policy-driven quest to be constrained by ERISA and clear rulings by the courts,” the plaintiffs argued.
Late last month, the Labor Department released the final version of its fiduciary rule, which was originally proposed last fall. The rule would redefine the definition of fiduciary under ERISA. It would protect retiree investors from “improper investment recommendations and harmful conflicts of interest,” according to Acting Labor Secretary Julie Su (who is named as a co-defendant in the FACC lawsuit).
The new rule follows efforts by previous administrations, including an Obama-era fiduciary rule loosened in 2018 and the aforementioned Trump-era iteration FACC challenged in its 2022 lawsuit. Both cases ended up in court of the Texas Fifth Circuit of Appeals. The new case will also end there if there is an appeal.
In the lawsuit, the plaintiffs claim the new rule largely mirrors the structure and intent of the Obama-era version already vacated in federal court. In particular, the FACC called the fiduciary definition of recent investment advice “virtually indistinguishable” from the rule that the Fifth Circuit vacated.
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“Where the Fifth Circuit held that it would ordinarily be 'inconceivable that financial sellers or insurance brokers would have an intimate relationship of trust and confidence with prospective purchasers,' the new rule unguardably provides that even recommendations once be treated as a fiduciary investment. advice including within its scope any sales recommendation made in the ordinary course of a broker or agent assisting clients,” the lawsuit states.
The FACC lawsuit is not the only potential litigation; in January, Financial Services Institute CEO Dale Brown said the group would likely sue the DOL to loosen the rule unless it withdrew or “substantially” changed its proposal (FSI said they were continuing to analyze the rule after its last publication month).
Immediate responses to the rule varied. Max Schatzow, a partner with RIA Lawyers, said the rule would not do much to affect investment advisers, since most provide advice to retail clients on an ongoing basis for compensation and thus already fall under the DOL's fiduciary definition.
Finseca CEO Marc Cadin argued that the new rule was even less necessary than the 2016 version, since in the meantime, the SEC adopted the Best Interest Rule and the National Association of Insurance Commissioners issued a rule model that governs retirement recommendations that dozens of states have. received.
Others, including Consumer Federation of America Director of Investor Protection Micah Hauptman and Investment Advisers Association General Counsel Gail Bernstein, said the DOL had made small but important changes that should make it more tangible to skeptics.
Bernstein praised the DOL for easing the “burden of documentation” on some return recommendations and treating robo-advice like other financial advice, which she said was a change from the proposal.