DOL retirement advice rule faces a bleak legal outlook

Federal court decisions putting the Labor Department's new retirement advice rule on hold during industry lawsuits challenging the regulation have set it up for a highly uncertain fate.

Orders on successive days last week out of two district courts in Fort Worth and Tyler, Texas placed the "retirement security rule" in a stay that will — at the very least — push back the regulation's effective date past the scheduled September rollout. The orders may ultimately lead to the rule's demise. Citing the 2018 decision by the Fifth Circuit Court of Appeals that vacated Labor's last attempt to expand the fiduciary duty to one-time recommendations by financial advisors and other industry professionals to 401(k) plan participants and other retirement savers on rollovers to individual retirement accounts and certain insurance sales, the stay orders suggest the outlook is bleak for the new rule ahead of the presidential election later this year.

Labor will probably appeal the decisions to the same Fifth Circuit court, according to Chris Kang, co-chair of the Employee Benefits and Executive Compensation Practice Group with the Haynes and Boone law firm. However, the "likelihood of success for the DOL seems slim, just based on the judges' opinions" in their orders last week, Kang said in an interview. As the two cases filed by the Federation of Americans for Consumer Choice and the American Council of Life Insurers play out in court, the country will pick between four more years with a Democrat in the White House under Vice President Kamala Harris or to bring back Republican control of the executive branch with the election of former President Donald Trump.

"Certainly a Harris administration is likely to keep folks in place at the department who would keep pushing for this," Kang said. Trump's team "might scale back the regulations" or "introduce something different," he added. "The approach by the administration would likely be different, depending on the outcome of the election."

READ MORE: Did the Chevron ruling kill the new DOL rule? It's not that simple.

Asked whether the agency is appealing the court decisions, representatives for the Labor Department referred questions to the Justice Department, where officials declined to comment. 

After the first stay order last week, the agency reiterated its commitment to the rule, which had won support from the CFP Board, the National Association of Personal Financial Advisors, the Public Investors Advocate Bar Association, AARP, Better Markets and the Consumer Federation of America.  

"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," Labor spokesman Grant Vaught said in a statement. "This rule makes that a reality. The Department continues to believe that this rule is essential to ensuring that retirement investors are protected."

In contrast, the opponents of the rule argue Labor went further than the agency is allowed to under the Employee Retirement Income Security Act in imposing new consumer-protection requirements on the sale of fixed-income annuities and other products to retirement savers. Those opponents include the Financial Services Institute, the Securities Industry and Financial Markets Association, the National Association of Insurance and Financial Advisors, the Insured Retirement Institute and the National Association for Fixed Annuities — trade groups that are all part of the Council of Life Insurers case. They issued statements praising the court orders.

The stay in the implementation of the retirement advice rule and its accompanying amendments to Prohibited Transaction Exemption 84-24 was "extremely significant for us" as an organization representing independent insurance agents, agencies and marketing organizations, Kim O'Brien, CEO of Americans for Consumer Choice, said in an interview. "Everybody was going to have to comply with what we believe is an unworkable and draconian rule, as well as a newly revised 84-24."

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But backers of the regulation contend that many current industry sales practices harm retirement savers and say there is a need for such disruption. The lawsuits by insurance and wealth management trade groups follow a pattern that had become the norm even before Supreme Court decisions in this year's term added greater judicial scrutiny of any type of regulations, Benjamin Schiffrin, the director of securities policy with Wall Street reform group Better Markets, said last week at a webinar held by the Institute for the Fiduciary Standard.

The legal tactics raise "the issue of forum shopping" as a "standard industry run towards specific district courts and the Fifth Circuit itself, any time it doesn't like a rule" and "know that the court isn't going to agree with it simply because the court has a certain ideological perspective," Schiffrin said. "That seems like a big problem."

To district judges Jeremy Kernodle and Reed O'Connor, though, the Labor Department and the rule itself are the problematic factors in the equation. 

Kernodle and O'Connor each ruled that the findings of the 2018 decision in the Fifth Circuit, which vacated the prior Labor rule, mean that plaintiffs are likely to be able to block the new regulation through their lawsuits, with the latter judge writing that they are "virtually certain to succeed on the merits" of their arguments. 

As if to drive home further punches to the rule, Kernodle's order added citations of the Supreme Court decision that ended the so-called Chevron deference and a 2022 ruling from the high court that embraced the legal principle expected to replace Chevron, the "major questions" doctrine. That was after finding in favor of the stay in the rule simply based on the 2018 decision in Chamber of Commerce v. U.S. Department of Labor.

"The 2024 fiduciary rule — like the 2016 rule — will capture transactions that do not satisfy the established 'relationship of trust and confidence' contemplated by ERISA," Kernodle wrote. "One example: the 2024 rule will treat one-time recommendations to roll over assets from a Title I plan to an IRA, 'even if not accompanied by a specific recommendation on how to invest assets … as fiduciary investment advice.' But as Chamber held in setting aside the 2016 rule, 'it is ordinarily inconceivable that financial salespeople or insurance agents will have an intimate relationship of trust and confidence with prospective purchasers' when making a one-time rollover recommendation. The 2024 rule fails for this reason alone."

READ MORE: Closing loopholes or blocking access? Reactions to the final DOL rule

Advocates for the regulation "hope that the rule won't be overturned" by the legal challenges, Institute for the Fiduciary Standard founder Knut Rostad said at the organization's event. Since the industry has shown that "that they could not find anything, a single thing, that they could say positively about the DOL rule," the debate needs input from figures respected by stakeholders, such as former Securities and Exchange Commission Chairman Jay Clayton, Rostad said.

"In terms of the DOL fiduciary rule, we urgently need leaders to come forward," he said. "And I know that some will say that my invitation to Chairman Clayton to come forward and have this discussion may be overly ambitious — and maybe it is — but God, I hope that we see some people, someone come forward and recognize how divisive it has become, and recognize how much it reflects the larger political environment. And it should concern them hugely." 

To opponents, the rule "takes away choice" that is "best given to consumers" about the "right products that fit their needs and their unique objectives," O'Brien of Americans for Consumer Choice said. The next step in the cases over the rule will come with the possible appeal from the agency of the decisions for the stay.

"We don't have any information in terms of specific timelines," she said. "We do think that there is likely going to be an appeal process. There's likely going to be more activity in the courts, and it's probably going to carry on and into 2025."

The continuing legal saga over the rule and its requirements may not affect a lot of financial advisors who "are already incorporating a lot of this into their practices," according to Kang of Haynes and Boone. 

Brokers, insurance agents and others who have been operating in a non-fiduciary capacity for decades view the decisions for a stay in the rule as "a step in the right direction," and they "may be able to take some comfort that the courts are pushing back against what they perceive as regulatory overstepping," Kang said. "For a lot of financial professionals, I think there is a bit of a reprieve from the effectiveness of the rules."