Seyfarth Synopsis: Orders issued by the Eastern District of Texas on Thursday July 25 and the Northern District of Texas on Friday July 26 indefinitely delayed the September 23, 2024 effective date of the Department of Labor’s revised regulation defining when a party becomes an “investment advice” fiduciary (the “New Fiduciary Rule”) and amendments to seven related prohibited transaction exemptions (“PTEs”).

In Federation of Americans for Consumer Choice v. Department of Labor (the “FACC Case”), the plaintiffs, a trade group representing the insurance industry, whose mission is “to promote a level playing field for independent insurance professionals by advocating and influencing practices, regulations, and legislation that foster consumer choice” and certain insurance professionals who are members of FACC, challenged the New Fiduciary Rule and amendments to PTE 84-24 (“PTE 84-14 Amendments”) under the Administrative Procedures Act (the “APA”). The plaintiffs moved for a stay of the effective date of New Fiduciary Rule and the PTE 84-24 Amendments, or a preliminary injunction prohibiting enforcement of the New Fiduciary Rule and PTE 84-24 Amendments, while the FACC Case is pending.

Following a hearing on July 23, 2024, the Eastern District of Texas Court ordered that the effective date of the New Fiduciary Rule and the PTE 84-24 Amendments be stayed until further order of the Court. The Eastern District’s 45-page Memorandum Opinion and Order concludes that the Plaintiffs are likely to succeed on the merits of their claim because the New Fiduciary Rule conflicts with ERISA in several ways, including by treating as fiduciaries those who engage in one-time recommendations to roll over assets from an ERISA plan to an IRA and by ignoring the distinction between receiving commission compensation for “sales” and fees for “advice.” The Court also determined that related amendments to Prohibited Transaction Exemption 84-24 were unreasonable and arbitrary and capricious.  The Court indicated that while the DOL had attempted reconcile its rule with the Fifth Circuit’s decision in Chamber of Commerce v. Department of Labor(“Chamber”), ultimately it argued that Chamber was wrong and unduly limited the DOL’s authority (which the Court indicated was an argument for the en banc Fifth Circuit or the Supreme Court). The Court went on to conclude that the remaining factors necessary to issue a stay all weighed in the plaintiffs’ favor, and that the stay should not be limited to the plaintiffs in the FACC Case.

In American Council of Life Insurers v. Department of Labor (the “ACLI Case”), the plaintiffs, trade groups representing the insurance and securities industries, also challenged the New Fiduciary Rule, as well as amendments to PTEs 75-1, 77-4, 80-83, 83-1, 84-24, 86-128 and 2020-02, under the APA. The plaintiffs in the ACLI Case moved for a preliminary injunction and stay of the New Fiduciary Rule’s (and the related PTEs’) effective dates, and requested relief by July 26, 2024 to avoid irreparable injury. The Northern District of Texas Court concluded, as did the Eastern District Court in the FACC Case, each factor in determining whether to grant a stay favored the plaintiffs concluding, in particular, that the plaintiffs “are virtually certain to succeed on the merits,” and noting that “. . . Defendants arguments are nothing more than an attempt to relitigate the Chamber decision” that should be made to an en banc Fifth Circuit or the Supreme Court.

Similar to the FACC Case Court, the ACLI Case Court ordered that the effective date of the New Fiduciary Rule (and in this case amendments to all seven of the PTEs at issue instead of just PTE 84-24) be stayed during the pendency of the ACLI Case and any appeal. 

Ominously for the DOL, the Court in the ACLI Case noted:

“there may be times where remand to the promulgating agency can be an appropriate remedy when a rule is set aside as being arbitrary and capricious….  But that is not the case here. The Court finds the Plaintiffs are virtually certain to succeed on their claims that the Rule exceeds the DOL’s statutory authority, making remand inefficient and a potential waste of judicial resources. All parties deserve a prompt resolution.”

As in the FACC Case, the Court determined the stay should apply universally, and not just to the plaintiffs in the ACLI Case.

In our May 6 Legal Update, we noted that “[t]he DOL went to great lengths to make a case for why [the New Fiduciary Rule] (and the related amendments to the prohibited transaction exemptions) . . . should survive the Fifth Circuit’s analysis that supported its vacating the DOL’s attempt to amend the fiduciary rule in [Chamber]” but that “it [remained] to be seen whether the DOL [had] done enough to survive . . . a challenge.” The Orders in the FACC Case and the ACLI Case raise a serious question as to whether the DOL’s New Fiduciary Rule and PTE amendments will suffer the same fate as its 2016 fiduciary package.