A lawsuit filed by a trade group representing insurance agents and agencies yesterday challenging the Department of Labor’s fiduciary rule and exemptions has come as a surprise to many in the insurance, brokerage and advisor industries.
The legal challenge was filed by the Federation of Americans for Consumer Choice, which seeks to overturn the DOL’s interpretation of who is required to act as a fiduciary. A number of other independent insurance agents and agencies joined the suit, which was filed in federal court in the Fifth Circuit in Dallas—the same court that struck down the Labor Department’s previous fiduciary rule three years ago.
Meanwhile, executives at other major trades groups in the insurance, brokerage and advisor space, said they were blindsided by the lawsuit.
“This is not our lawsuit and the group didn’t tell any of the other trade groups out there until after they did it,” one senior policy executive at a Washington, D.C., insurance trade group said.
At the heart of the matter is the sweeping rule which requires every financial professional who invests client money that is rolled over from a retirement plan or IRA to act as a fiduciary and document and disclose the rationale why the rollover is in the client’s best interest. Professionals accepting commission-based compensation must also meet a number of requirements to mitigate any conflicts of interest. Company CEOs must also sing off on an annual report that details how they’ve implemented the rule and supervised sales professionals and advisors.
Independent agents, however, don’t have this supervisory relationship since they work with numerous insurance companies, which is one of the issues driving the FACC lawsuit.
The rule officially went into effect last February, but enforcement was delayed by the agency until this week. The FACC maintains that the new rule inappropriately broadens the agency’s interpretation of who is considered a fiduciary, contrary to a 2018 decision by the U.S. Fifth Circuit Court of Appeals, which overturned a similar DOL rule in 2018.
Adding to the confusion is the fact that the Biden administration DOL released an agenda in 2021 that said they planned to possibly revise or replace the rule. This has created many unknowns and significant compliance vendor bills for multiple industries, which have worked to meet the requirements of the this rule.
“The DOL has on their regulatory agenda that they’re introducing a new fiduciary rule soon and so we’re waiting for that proposal to appear. Then we’ll go through the regulatory process. If it’s something we don’t like we’ll file comments and talk to the agency about it and improve it,” said the insurance trade group executive, who requested anonymity.
“But a lawsuit now?” he asked. “Why are they suing now, when the DOL hasn’t enforced anything yet. There are no damages yet.”
While some organizations or companies may feel the need to file a lawsuit pre-emptively because they know their members will be harmed, “courts can be finicky. You don’t want to start something and then have the court say ‘this case doesn’t have any merit yet because you haven’t been harmed,'” an attorney with a securities trade group told Financial Advisor magazine.