As previously discussed in our client alert “Department of Labor Issues Final Regulation on Investment Advice Fiduciaries,” the Final Rule describes the circumstances under which a person will be considered a “fiduciary” under ERISA and related excise tax provisions of the Internal Revenue Code as a result of providing investment advice with respect to assets of an ERISA-covered employee benefit plan (an ERISA Plan) or individual retirement account (IRA). The Final Rule expands both the types of investment recommendations that constitute investment advice as well as the circumstances under which persons providing such advice will be subject to fiduciary requirements. The regulatory changes in the Final Rule, should it stand, may significantly impact brokerage firms, insurance companies, and other financial institutions that make professional investment recommendations to investors, including ERISA Plans and IRAs, on a regular basis as part of their business.
The DOL issued the Final Rule in April 2024, and the rule was scheduled to take effect on September 23, 2024. These two lawsuits, Federation of Americans for Consumer Choice v. Department of Labor in the Eastern District of Texas and American Council of Life Insurers v. Department of Labor in the Northern District of Texas, were filed in response. The lawsuits seek to overturn the Final Rule under the Administrative Procedures Act (“APA”), arguing that the rule conflicts with the statutory text of ERISA and is arbitrary and capricious. The plaintiffs in each case moved for a stay to block the implementation of the Final Rule while the cases are ongoing, and the courts both issued stays just one day apart, on the 25 and 26 of July, 2024.
The plaintiffs argued that proceeding with implementation while the Final Rule is being challenged would result in irreparable injury for the plaintiffs, as the costs of implementation and any penalties for noncompliance would not be returned to them should the rule ultimately be overturned. In addition to evaluating the claim of irreparable harm that is at the center of a motion for a stay, each court had to also consider whether the balance of those harms weighed in favor of the plaintiffs, whether the plaintiffs had a substantial likelihood of success on the merits, and whether granting a stay would disserve the public interest.
Because issuing a stay requires finding that the plaintiffs are likely to succeed on the merits, the stays not only temporarily stop the implementation of the Final Rule, but demonstrate that the courts are each ultimately likely to overturn the rule. In each case, the court found that the rule conflicts with the ERISA statutory text and is overbroad and unreasonable. First, the rule conflicted with ERISA by (1) eliminating regulatory requirements that an investment advice fiduciary furnish investment advice to a plan on a regular basis and that the advice be relied on as a primary basis for investment decisions, (2) conflating fees for investment advice with sales commissions, and (3) regulating IRA service providers and Title I fiduciaries together in the same manner. Second, the Final Rule was found to be so expansive in its definition of “investment advice fiduciary” that its overbreadth qualified as arbitrary and capricious.
According to both district courts, the Fifth Circuit Court of Appeal’s decision in Chamber of Commerce v. US Department of Labor weighed in favor of a stay. In that case, the appeals court determined that a 2016 rule improperly extended fiduciary status to what had historically been viewed as mere sales conduct. The court found that the statutory definition of “fiduciary” incorporated the common law understanding of the fiduciary relationship as a relationship of trust and confidence between an adviser and client, and preserved the distinction recognized under the common law between non-fiduciary sales recommendations and fiduciary investment advice. Thus, the 2016 rule “fell far short” by disregarding “the essential common law trust and confidence standard” as it improperly swept into fiduciary status nearly any broker or insurance salesperson who deals with IRA clients.
While it may not have ultimately impacted the outcome of these motions, it is worth noting that both district courts referenced the United States Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, which formally ended the practice of deferring to administrative agency interpretations of federal statutes. The courts here emphasized that they would apply their own analysis without having to defer to the DOL’s interpretation of ERISA.
The stays that each court issued now prevent the implementation of the Final Rule until the courts make final rulings on the merits or otherwise lift the stays. The DOL has sixty days to bring an appeal of these orders, though it is unclear whether they will do so, or if they will instead turn to the merits sooner in an effort to get to the heart of the issues. Given the district courts’ determinations that the plaintiffs are likely to succeed on the merits, and because the Fifth Circuit Court of Appeals (which would hear any appeals of either the stays or a final judgment from the Texas district courts) vacated a similar rule in the Chamber of Commerce case, the DOL faces an uphill battle in its attempts to preserve the Final Rule regardless of what strategy it takes.
