The US District Court – Northern District of Texas has stopped the implementation of the Department of Labor’s new investment fiduciary rule, which is set to take effect on September 23. The rule should have expanded the definition of the term “fiduciary,” under the Employment Retirement Income Security Act (ERISA).
The court’s order stated that, traditionally, a person is considered a “fiduciary” for ERISA plan purposes if they are paid a fee based on advice given and not products sold.
“However, the Labor Department’s updated definition would go beyond this and include professionals that render advice for a fee as well as “other compensation, direct or indirect, with respect to any moneys or other property of such plan”,” the court decision stated.
The district court said the expanded definition would ensnare insurance agents and brokers and result in costly obligations such as requiring these professionals to provide written acknowledgement that they are providing fiduciary advice, according to the order. It also suggested that this acknowledgement could open agents and brokers to potential breach of contract and fiduciary obligation claims.
The court also stated that the Labor Department had exceeded its authority by departing from the common law set by ERISA.
“If allowed to go into effect, the rule would also irreparably harm insurance professionals by exposing them to increased costs from compliance, changing operational procedures, and the potential for lawsuits,” the court’s decision stated.
It is said that the stayed rule largely tracks with the 2016 rules that the Labor tried to implement, which would have extended fiduciary duty requirements to broker-dealers, including agents and brokers who advise consumers on retirement plans. However, the Labor Department withdrew the proposal due to stiff political and legal opposition.
Meanwhile, the case to stop the implementation of the new investment fiduciary rule was filed by the American Council of Life Insurers (ACLI), National Association of Insurance and Financial Advisors (NAIFA), NAIFA-Texas, NAIFA-Dallas, NAIFA-Fort Worth, NAIFA-POET, Finseca, Insured Retirement Institute and the National Association for Fixed Annuities.
The plaintiffs argued that if allowed to take effect, the rule would have deprived consumers of retirement financial guidance and protected lifetime income products. However, the groups who opposed the new fiduciary rule clarified that they are largely supportive of state-level regulations covering annuity sales that aim to keep consumers’ insurance needs and financial objectives at the heart of all transactions.
“Unlike the ill-advised fiduciary-only approach adopted by the U.S. Department of Labor, the pro-consumer measures being adopted in the states protect retirement savers without limiting their access to information about annuities, the only financial product in the marketplace that can provide guaranteed income for life,” said Whit Cornman, an ACLI spokesperson, in a statement.
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