(Article from Registered Funds Regulatory Update, October 2024)
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On July 25, 2024, the U.S. District Court for the Eastern District of Texas issued a stay of the effective date of the DOL’s new investment advice fiduciary rule under ERISA, which proposed to redefine when a person would be an “investment advice fiduciary” for purposes of ERISA, as well as associated amendments to prohibited transaction exemption 84-24, which provides exemptive relief to certain transactions relating to the purchase of insurance contracts, annuities, and securities issued by an investment company. The next day the U.S. District Court for the Northern District of Texas issued a separate stay of the 2024 Fiduciary Rule and the remainder of the prohibited transaction exemption amendments proposed as a part of the 2024 Fiduciary Rule. Taken together, these stays put the entire 2024 Fiduciary Rule on hold, pending reversal on appeal or a final decision on the merits by the District Courts, and reinstated the existing definition of investment advice fiduciary and the existing provisions of the currently effective prohibited transaction exemptions. As a result, the 2024 Fiduciary Rule did not take effect in September as scheduled.
The DOL has made multiple attempts to redefine the term investment advice fiduciary, which has been in place since 1975. A rulemaking in 2010 was withdrawn due to industry opposition and a follow-up rulemaking in 2016 was vacated by the U.S. Court of Appeals for the Fifth Circuit in 2018. Under the historical rule, one is not considered an investment advice fiduciary under ERISA unless the investment advice provided was made, in part, on a “regular basis” and “pursuant to a mutual agreement” that the advice would “serve as a primary basis for investment decisions” and such advice was “individualized based on the particular needs” of the recipient of such advice. In contrast, the 2024 Fiduciary Rule provides that, under certain circumstances, a one-time “recommendation” would be sufficient to impute ERISA fiduciary status on the provider of such advice. Consequently, the 2024 Fiduciary Rule imposes fiduciary status on many financial institutions that were not considered fiduciaries under the historical rule, including, for example, institutions providing “one time” recommendations in connection with retirement plan rollovers such as those made to IRAs.
The plaintiffs in both cases, comprised of various insurance agents licensed in Texas, the Federation of Americans for Consumer Choice, and the American Council of Life Insurers, challenged the 2024 Fiduciary Rule by arguing that the new rule abandons the ERISA statutory standard and historical rule for determining the fiduciary status of investment advice and “completely defies” the 2018 ruling by the Fifth Circuit invalidating the 2016 Fiduciary Rule on similar grounds. In granting the stays, the District Courts concluded that the 2024 Fiduciary Rule “suffers from many of the same problems” as the 2016 Fiduciary Rule, including that it “conflicts with ERISA in several ways” and, therefore, “exceeds the DOL’s authority,” and that the plaintiffs would likely succeed on the merits of their claims.
Both opinions are clear that the stays are not limited to the parties to the cases and will instead be broadly applied to all service providers to retirement investors. As such, in the interim “consumers will remain protected by existing state and federal regulations,” including in particular the historical rule and the pre-amendment versions of the prohibited transaction exemptions in effect.
Fed. of Americans for Consumer Choice, Inc., et al. v. U.S. Dep’t of Labor, et al., Case No. 6:24-cv-163-JDK (E.D. Tex. July 25, 2024).
American Council of Life Insurers, et al. v. U.S. Dep’t of Labor, et al., Case No. 4:24-cv-00482-O (N.D. Tex. July 26, 2024).