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Compliance June 20, 2024
DOL Files Counter-Brief to Retirement Security Rule Challenge
The DOL counters an insurance industry lawsuit by arguing that the new rule is lawful, consistent with case law and will protect investors.
Reported by Paul Mulholland
The Department of Labor answered one of two open lawsuits in the federal courts challenging the Retirement Security Rule on June 14. The regulator’s first response in court argued that the new rule is compliant with existing case law and is substantially different from a 2016 regulation that was vacated by the U.S. 5th Circuit Court of Appeals.
The Retirement Security Rule, finalized in April, expands the definition of fiduciary such that a financial professional who holds themselves out as acting in their client’s best interest and providing advice that can be relied on is a fiduciary under the Employee Retirement Income Security Act. This remains the case even if the advice is applied on a one-time basis, as is often the case with retirement plan rollover recommendations, plan menu design and annuity sales.
The first lawsuit, led by the Federation of Americans for Consumer Choice, an insurance industry group, was brought before the U.S. District Court for the Eastern District of Texas on May 2 and is the lawsuit that the DOL filed a responsive brief in. The other suit, filed in the Northern District of Texas by the American Council of Life Insurers and other insurance trade groups is also open and was filed May 24.
The FACC complaint, which was filed alongside other independent insurance agents, argued that the current rule is much like the vacated version, covers the same professionals and the same transactions and on substance is all but the same as the 2016 fiduciary rule.
The DOL answered in its brief that “the Retirement Security Rule is far more modest in scope than the 2016 Rule vacated by the Fifth Circuit, and lacks the features that led to that rule’s vacatur.” The regulators argued, among other points, that:
- The new rule focuses on the relationship between the adviser and the investor and how the adviser presents themselves, rather than “every financial professional in every transaction will be deemed a fiduciary.”
- There are no contractual requirements in the new rule, and therefore no new private right of action created by exposing advisers to contract violation liability under state law.
- There are no limits on mandatory arbitration.
Further, the DOL argued that it is not limited to the original five-point test, first promulgated in 1975 and the predecessor the Retirement Security Rule and can continue to make rules consistent with ERISA. The regulator also noted that the text of ERISA does not say that professionals offering one-time advice cannot be fiduciaries.
In its complaint, the FACC had also argued that the rule would be damaging to annuity markets, which are currently booming due in part to higher interest rates.
In its response, the DOL wrote that: The plaintiffs’ “arguments are largely grounded in policy concerns about the insurance industry that cannot override the clear text of the statute passed by Congress. Contrary to Plaintiffs’ wishful thinking, ERISA does not inherently exclude investment advice about plan assets when insurance agents are involved. Instead, ERISA adopted a fiduciary standard focused on function.”
The brief expressed the concern, in defense of the rule, that in the absence of its implementation: “Insurance agents providing professionalized investment advice are free to hold themselves out as acting in their clients’ best interest while prioritizing lucrative commissions from sales of annuities and rollover recommendations that may involve a retiree’s life savings—so long as they are not on a monthly retainer nor providing recurring investment advice.”
The DOL pointed out that one plaintiff, ProVision Brokerage LLC, states on their website that it “is driven by making a difference in the financial health of people’s lives,” and “[t]he needs/goals/wants of those we serve are the only thing that matters; period.”
The brief then notes that “insurance professionals selling annuities can make these sorts of representations to retirement investors, but then make annuity recommendations regarding ERISA plan assets with no accountability to actually act in their clients’ best interest as ERISA requires.”
The lawsuit was brought by the FACC and independent insurance agents James Holloway, James Johnson, TX Titan Group LLC, ProVision Brokerage and Eric Couch versus the DOL and Julie Su in her role as acting secretary of labor.
