The Labor Department’s new standard extending fiduciary duties to more retirement advice professionals appears set to encounter tough opponents from Wall Street and Capitol Hill now that it has been finalized.
Legal threats and legislative actions could jeopardize the investment advice rule’s chances of reaching its initial effective date of Sept. 23. Life insurers that sell annuities have vocally opposed the rule, which they say would decimate the market for those products typically marketed as rollover options for retirement savers. Professional groups like Finseca, which counts giants like State Farm and
An Obama-era iteration of the fiduciary rule was vacated by the US Court of Appeals for the Fifth Circuit in 2018, in a case brought by the US Chamber of Commerce and other industry groups. But the new rule isn’t just a “warmed-over” version of the 2016 attempt that got overturned, according to DOL Principal Deputy Assistant Secretary Ali Khawar.
Lawmakers swiftly announced their opposition to the new rule after the final version’s release April 23, citing regulatory overreach and encroachment on Securities and Exchange Commission and state insurance regulators’ jurisdictions. Officials from the DOL’s Employee Benefits Security Administration said they had taken tens of thousands of public comments on the draft rule into consideration in their revision, and intended to further harmonize the rule with the SEC’s Regulation Best Interest standard.
Industry groups representing retirement plan service providers or life insurance companies are also likely candidates to bring lawsuits against the agency, utilizing the Administrative Procedure Act to raise concerns about DOL overreach and the rulemaking process that produced the final regulation after a 60-day notice and comment period that critics have said was too rushed.
1. Who opposes the rule?
The DOL has held that its rule is intended to strengthen investor protections against common conflicts of interest that arise when retirement savers seek advice on how to invest their assets, particularly when rolling over funds into IRAs or annuities.
But not everyone agrees that the new fiduciary rule, which covers even one-time advice, is an appropriate response to these concerns.
Finseca, which plans to work together with a coalition including the Insured Retirement Institute and the National Association of Insurance & Financial Advisors, is seeking board approval to pursue litigation against the Labor Department challenging the final rule, according to CEO Marc Cadin. Other industry groups may follow.
Life insurance groups or companies are likely to come out against the rule in court, while others that have advocated vocally for the rule like Better Markets and the Certified Financial Planner Board of Standards are prepared to support the DOL with amicus briefs in those lawsuits, as they have in past cases.
In Congress, Sen.
This Congress is eligible to put forth its resolution, but the DOL did avoid potential scrutiny from a future administration by finalizing the rule in April, well beyond the 60-day lookback period for CRAs if
Congress is allowed to review major rules issued by federal agencies before they take effect and even overturn final rules, but requires approval in both chambers, followed by a presidential determination to either sign or veto the resolution. This final requirement jeopardizes the chances of a CRA resolution successfully undermining the rule, given the Biden administration’s staunch support of the new DOL standard.
Legislative critics of the rule could also bring a bill intended to neutralize the fiduciary standard, which would be an uphill battle given the current partisan makeup of Congress and the typical time-frame for enacting new laws.
2. What are their arguments against the rule?
The rulemaking process drew criticism from industry and political groups over the length and timing of its comment period on the proposal, which was significantly shorter than the Obama-era iterations at 60 days including several federally recognized holidays.
The DOL has said it provided ample time for comment, citing the high volume of feedback submitted since the rule was proposed in November.
Sifma, among other financial professional advocacy groups, also raised concerns about the DOL’s “rushed” rule, highlighting the lack of a robust cost-benefit analysis during the compressed timeframe between proposal and finalization.
Opponents say the rule itself is too similar to the version that was overturned by the Fifth Circuit due to inconsistencies with the Employee Retirement Income Security Act of 1974 and the common law meaning of a fiduciary, requiring a “special relationship of trust and confidence” with a client. Lobbying groups have claimed that the department is improperly classifying sales conduct as financial advice from a fiduciary, arguing that the new standard will effectively price out low- and moderate-income investors.
Critics point to studies from consulting giants Deloitteand Ernst & Young to support claims that the rule would limit access to life insurance products like annuities, highlighting that advisers’ past efforts to comply with stricter standards prompted them to limit their mix of available asset classes or services for retirement savers.
Four of the 21 firms surveyed in an oft-cited 2017 Deloitte case study, examining the prior fiduciary rule before it was vacated, said they had reduced access to rollover services by restricting their advice to educational information only. The remaining 17 respondents sought additional disclosures from plan participants before making recommendations, which the study cited as deterrents for retirement savers.
3. How would they overturn the rule?
A lawsuit to overturn the final fiduciary rule could pursue two different avenues in court, either seeking to bar the rule’s implementation before the Sept. 23 initial effective date or to vacate the rule once implemented.
If industry groups want to prioritize saving their members what they’ve said will be a costly process of becoming compliant with the new rule, they may seek an injunction that would prevent the DOL from enforcing it at all. But that would amount to extraordinary relief— a “Hail Mary” attempt to scrap the rule before its rollout even begins.
The other option is to seek a remedy from the courts over a longer timeframe, bringing an APA suit that could revert the standard back to the original 1975 five-part test to define fiduciary status. That method could take years to play out in federal court with factual hearings examining whether the DOL engaged in a prudent process consistent with the APA, followed by an almost inevitable appeal.
A CRA resolution spearheaded by Republican lawmakers would require the Labor Department to submit a report to each house of Congress, containing a copy of the rule, a general description of it, and its effective date. After that, Congress has a 60-day period during which members must submit and act upon a joint resolution of disapproval to trigger the CRA’s “fast track” procedures.
If both houses pass the resolution and Biden vetoes it, Congress could still vote to override the veto.
4. Can they stop the rule before September?
So far, the 118th Congress has introduced nearly 50 CRA resolutions, none of which have successfully overturned a federal agency rule, though several of them are still pending. Biden has frequently used his veto power to quash the resolutions, but attempts to hold votes to override those vetoes haven’t succeeded.
Otherwise, seeking an immediate injunction in federal court to prohibit the rule’s implementation would also be a long shot, but isn’t impossible.
The chances that the rule, once implemented, could be overturned down the line are more likely, given the amount of pushback it has received from litigious groups eager to revert to a fiduciary standard more favorable to industry-standard business practices.
To Learn More:
- 401(k) Advice, Overtime Rules Poised to Reprise Obama-Era Fights
- Biden 401(k) Advice Rule Finalized Over Wall Street Pushback (1)
- 401(k) Investment Advice Rule Opponents Ring Lawsuit Alarm Bells
- Regulators Face Daunting Court Precedent With 401(k) Advice Rule
- 401(k) Advocates Gear Up to Fight Wall Street on Fiduciary Rule
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