It’s unlikely the Department of Labor’s latest proposed fiduciary rule, which seeks to make essentially all rollover recommendations fiduciary advice, will escape the fate that derailed the agency’s Obama-era rule, a former DOL official said.
Brad Campbell, former assistant secretary of labor for employee benefits, said he believes the federal court that struck down the Obama-era rule will do the same with the new proposal.
“Personally, I don’t believe the Fifth Circuit, if it gets the chance to review this, is going to find that this is actually any different than what they found in the last case—which is that Congress had specifically ordered there be a distinction between sales and advice," he said during a webcast hosted by the law firm Faegre Drinker.
Campbell, currently a partner at Faegre Drinker, was appointed DOL assistant secretary during the Bush administration and held the post from 2007 to 2009.
The proposed fiduciary rule would dramatically expand the definition of who is a fiduciary under the under the Employee Retirement Income Security Act, including for the first time those who make one-time rollover advice, including reps, insurance companies, independent brokers, agents and even plan administrators.
In 2018, the Fifth Circuit vacated the 2016 DOL fiduciary rule in its entirety on multiple grounds, including the DOL’s failure to treat advisors who “render advice” differently than stockbrokers and insurance agents who primarily “complete sales.” The panel found the DOL had ignored 40 years of regulatory and court interpretations surrounding the fiduciary principles.
The latest proposed rule “has the same problem the Fifth Circuit ruled against previously, which is the DOL is not recognizing that there are recommendations incidental to sales and there are recommendations that are investment advice,” Campbell said.
“I don’t think the latest approach solves the Fifth Circuit’s objections. DOL obviously thinks it does. Litigation down the road is probably how we find out,” Campbell added.
The DOL’s move, which also eliminates most exemptions that commissioned-based producers have used in order to accept “conflicted” compensation, would have far-reaching consequences for IRA rollovers and the products that advisors and brokers recommend, Faegre Drinker partner Fred Reish said during the webcast.
Beyond finding that the DOL had acted beyond its authority in 2016, the Fifth Circuit found the DOL rule mandated an “arbitrary and capricious treatment” of variable and fixed indexed annuities—which the DOL has repeated, albeit with slightly different verbiage, in its latest proposed rule, Reish said.