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Fiduciary Rule Guidance Prompts Lawsuit Against Biden Agency (1)

Feb. 9, 2022, 4:03 PMUpdated: Feb. 9, 2022, 7:05 PM

Guidance the U.S. Department of Labor issued last year clarifying its stance on investment advice under a 2020 fiduciary rule violates the Administrative Procedure Act, a trade organization representing financial services firms said in a federal lawsuit filed Wednesday.

The American Securities Association objects to the Biden Labor Department’s frequently asked questions, issued in April 2021, because it said the guidance interpreted the Trump-era rule to mean that first-time advice to transfer retirement assets can constitute fiduciary advice, which the rule subjects to a strict standard of care.

The group filed suit in the U.S. District Court for the Middle District of Florida, marking the second time this month the Labor Department was sued over the fiduciary rule.

In what are known as “rollovers,” federally regulated retirement assets are transferred into self-directed retirement vehicles, and financial advisers usually earn a commission on such transactions. The department’s updated guidance threatens to sap those resources from the industry, because a fiduciary under the rule is legally obligated to act solely in a client’s interest and can’t receive increased compensation because of their advice.

The Trump rule broadened the kinds of retirement plan investments from which financial advisers can profit by reinstating a five-part test establishing the definition of a fiduciary. The test includes a caveat limiting fiduciary advice to the kind made “on a regular basis to the plan.” The Biden Labor Department allowed parts of the rule to take effect, using the guidance to flesh out the regulation.

The department said in the guidance that first-time advice can qualify as fiduciary advice if the financial professional and investor later establish an “ongoing advice relationship” or intend to do so.

In its suit, the American Securities Association alleged that the department’s guidance “rewrote” the rule altogether. In so doing, the group said, the department imposed burdensome documentation and investigation requirements on businesses—changes that it believes should have been subject to public comment according to the regulatory process outlined in the Administrative Procedure Act.

“If the Department wanted to change its rules, it needed to do so through the required notice-and-comment process—not through guidance documents,” the suit states.

Earlier this month, the Federation of Americans for Consumer Choice Inc. filed a similar suit against the DOL, arguing the fiduciary rule itself was a violation of the Administrative Procedure Act for expanding the definition of a fiduciary in violation of federal law. The group, which represents insurance and annuity distributors, said Congress never gave the department the authority to change the definition of a fiduciary under the Employee Retirement Income Security Act of 1974.

Causes of Action: Violation of the Administrative Procedure Act.

Relief: Declaration vacating and setting aside guidance, injunction blocking agency from acting on guidance, costs incurred in litigation, and other damages.

Response: The Labor Department didn’t immediately respond to a request for comment.

Attorneys: Consovoy McCarthy PLLC represents the American Securities Association.

The case is Am. Sec. Ass’n v. U.S. Dep’t of Labor, M.D. Fla., No. 8:22-cv-00330, complaint filed 2/9/22.

(Updated with additional reporting throughout.)

To contact the reporter on this story: Austin R. Ramsey in Washington at aramsey@bloombergindustry.com

To contact the editors responsible for this story: John Lauinger at jlauinger@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com