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.
Whether trade groups will join the lawsuit or file supporting court briefs remains to be seen, but what is clear is that insurance and annuities companies executives are rattled by the DOL’s new rule and it’s expansion of the SEC's investor advice rule, Regulation Best Interest. Executives are also concerned that regulators may use enforcement to expand both DOL and SEC regulations.
“When 100 firms end up being noncompliant, there’s a lack of clarity. You have to go back to the rules and make sure they are clear,” Lincoln Investment President and CEO Ed Forst said of the current regulatory climate at a recent FSI conference in Dallas.
The FACC’s attorney believes the challenge to the DOL rule is a strong one. “We think it is helpful to everyone, including the Labor Department, that a federal court review whether these new rules comport with the Fifth Circuit decision handed down a few years ago, because otherwise a cloud will hang over these rules until there is such a legal challenge,” said Andy Jubinsky, an attorney with the Figari & Davenport law firm, which is representing the trade federation.
The FACC’s lawsuit asserts the Labor Department’s latest rule “carries forward the core problem the Fifth Circuit identified in vacating the fiduciary rule the first time.”
Specifically, the Fifth Circuit court held that the DOL’s fiduciary rule significantly expanded and conflicted with the statutory definition of “fiduciary” in the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, the department therefore lacked the authority to promulgate the fiduciary rule, the court said.
Kim O’Brien, CEO of the FACC, said that the DOL interpretation “places an unfair regulatory burden upon independent insurance agents who serve Middle America, thereby limiting access by lower and middle-income Americans to important guaranteed retirement products as well as retirement advice more generally.”
The regulation “could force agents in small towns across America to close up shop if it is not overturned, leaving many consumers without access to insurance and retirement products,” O’Brien told Financial Advisor.
O’Brien said the independent agents and firms her trade group represents find it nearly impossible to comply with the new DOL rule because as independent agents they lack the assigned supervisor that the rule requires, although they maintain their transactions are strictly regulated and supervised by state insurance regulators.
The DOL’s latest interpretation “places an unfair regulatory burden upon independent insurance agents who serve Middle America, thereby limiting access by lower and middle-income Americans to important guaranteed retirement products as well as retirement advice more generally,” she said.
The regulation “could force agents in small towns across America to close up shop if it is not overturned, leaving many consumers without access to insurance and retirement products,” O’Brien told Financial Advisor.
Eric Couch, president of ProVision Brokerage in Flower Mound, Texas, north of the Dallas-Fort Worth area and a plaintiff in the case, said the lawsuit is necessary to clarify his regulatory framework. “We obviously work hard to provide quality products and services to our clients, but we worry that yet another layer of regulation could impair our ability to stay independent and offer the widest range of products that truly benefit our clientele,” Couch said.