A federal judge temporarily blocks the Department of Labor’s fiduciary rule, finding that the latest regulation doesn’t resolve the same legal issues that sank a similar effort under the Obama administration.
Judge Jeremy Kernodle of Texas’ Eastern District cites the successful challenge by the U.S. Chamber of Commerce and others against the 2016 rule, stating that the latest effort “suffers from many of the same problems.”
Portions of the regulation had a compliance deadline of Sept. 23, with the entire regulation set to take effect on the same date next year.
The DOL rule would expand the definition of who qualifies as a fiduciary under the Employee Retirement Income Security Act, extending those responsibilities to retirement advisors who make one-time recommendations, such as rolling over a 401(k) account.
The plaintiffs, the insurance trade group Federation of Americans for Consumer Choice and three individual agents, argue that the rule is an overly expansive interpretation of Erisa, which they believe shouldn’t apply to one-off advice. Kernodle agrees, arguing that the plaintiffs are likely to succeed on the merits of their argument and issuing a stay.
The Department of Labor proposed the rule to protect investors from conflicted advice and the high fees associated with some annuities and other retirement products.
A spokesman for the department reiterates this point following the court ruling.
“When investors get advice from a trusted financial professional about their retirement savings, they expect that advice to be in the customer’s best interest, not the financial professional’s. This rule makes that a reality,” the spokesman says. “The department continues to believe that this rule is essential to ensuring that retirement investors are protected.”
The Labor Department argues that its new fiduciary rule addresses the deficiencies the Fifth Circuit Court of Appeals found with the 2016 rule in Chamber of Commerce v. Department of Labor. Kernodle is unmoved.
“For its part, DOL attempts to reconcile the rule to Chamber but fails,” he writes. The Labor Department argues that the ruling unduly limits its authority, but Kernodle says that would be an argument properly heard by the Fifth Circuit or the Supreme Court, both of which have shown skepticism about executive-agency power.
The earlier ruling vacating the previous fiduciary rule distinguishes between the “special relationship of trust and confidence” that investment advisors have with their clients and the more transactional relationship clients have with insurance agents and many stockbrokers, which the court describes as “mere sales conduct” that falls short of fiduciary status under Erisa.
The DOL maintains that its new definition of fiduciary is narrower than the 2016 rule and applies only when a financial professional provides advice tailored to the investor’s specific situation, which it calls “a relationship of trust and confidence.”
The plaintiffs argue that the department exceeds its statutory authority and that provisions of the regulation are arbitrary and capricious.
Kernodle finds that the plaintiffs demonstrate every criterion for granting a stay, including a likelihood their case will succeed on its merits and that they could suffer “irreparable harm” without court intervention.
He opts for a stay rather than an injunction as a “less drastic remedy,” but the ruling blocks the rule from taking effect until the court decides the merits of the case.
