The Federation of Americans for Consumer Choice v. Department of Labor case was the first case challenging the Department of Labor’s 2024 retirement security rule defining who is an investment advice fiduciary. It was followed quickly by American Council of Life Insurers v. Department of Labor, filed by nine insurance trade associations. The plaintiffs in both cases filed in federal district courts within the Fifth Circuit and contended that the 2024 fiduciary rule exceeded the DOL’s authority and flew in the face of the Fifth Circuit ruling in Chamber of Commerce v. Department of Labor, which rejected a previous version of the fiduciary rule finalized in 2016.
The 2024 fiduciary rule:
- Seeks to broaden the definition of who is considered an "investment advice fiduciary" under the Employee Retirement Income Security Act and the Internal Revenue Code; and
- Adds significant restrictions and complex requirements to prohibited transaction exemption (PTE) 84-24 and additional requirements to PTE 2020-02 (collectively, the “amended PTEs”).
The 2024 fiduciary rule, by broadening the definition, would make more producers investment advice fiduciaries. Once fiduciaries, any receipt of commissions or other third-party compensation by these producers would be a prohibited transaction. This would require that an exemption be used to avoid potential fiduciary liability and/or excise taxes being levied.
Amended PTE 84-24 can only be used where independent producers receive commissions and other third-party compensation in connection with the sale and purchase of non-security annuities. Amended PTE 2020-02 covers commissions and third-party compensation received in connection with the sale or purchase of a wide variety of financial products. Both amended PTEs require that producers (i) comply with the impartial conduct standards and (ii) give a written fiduciary acknowledgment to purchasers of products. There is also a litany of disclosures, processes, and procedure requirements for financial institutions, insurance companies, and producers.
The plaintiffs in both cases argued, among other things, that the new rule is a rebranded version of the 2016 fiduciary rule, which the Fifth Circuit vacated in the 2018 Chamber of Commerce case. The plaintiffs claimed that the 2024 fiduciary rule and amended PTEs overreach the DOL’s authority by adding prudence and loyalty requirements to Title II (Section 4975 of the Internal Revenue Code), create unnecessary costs and confusion because they don’t distinguish between sales activity and advice, and contradict the Fifth Circuit’s prior ruling. From the orders in these cases, it is clear the district courts believe the 2024 fiduciary rule contains the same fatal flaws as the 2016 fiduciary rule, namely, that there is simply no statutory authority in ERISA or the Internal Revenue Code to expand the definition of “investment advice fiduciary” beyond the common law definition of fiduciary and that a person becomes a fiduciary only when relationships of trust and confidence are developed over time.
On July 25, 2024, the judge in Federation of Americans for Consumer Choice v. Department of Labor stayed the rule and the amended PTE 84-24. The next day, on July 26, 2024, the judge in American Council of Life Insurers v. Department of Labor stayed the entirety of the 2024 fiduciary rule package, including the amended PTEs.
As a result, where we stand today is that the original definition of “investment advice,” with the five-part test to determine who is a fiduciary, is in effect. Also, the original PTE 84-24 and the original PTE 2020-02[1] are in effect and none of the other related PTE amendments are effective until courts indicate otherwise.
However, we are nowhere near a conclusion to the challenges to the 2024 fiduciary rule. The last similar litigation took multiple years to resolve. The DOL is likely to appeal both decisions, as it has an automatic right to an interlocutory appeal of the stays. Beyond that, it is clear the DOL will continue to defend the amended regulation. Having seen three proposed rules, two final rules (2016, which was overturned in 2018, and 2024, which is the subject of this litigation), along with the issuance of PTE 2020-02 and amendments to all the related PTEs, the DOL seems to have built a hill on which the agency is willing to die. Stay tuned for more information as these cases develop.
[1] Amendments to related PTEs 75-1, 77-4, 80-83, 83-1 and 86-128 that would have eliminated additional options for relief for “investment advice fiduciaries” similarly will not go into effect.
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