(ASPPA - American Society of Pension Professionals & Actuaries) -
FIDUCIARY RULES AND PRACTICES
A lawsuit challenging the Labor Department’s subsequent guidance/application of the so-called fiduciary rule has some support from the American Council of Life Insurers (ACLI).
As noted in the filing, the ACLI was one of the lead plaintiffs in the Fifth Circuit decision that vacated the 2016 Fiduciary Rule—a rule that the brief alleges “copiously conferred fiduciary status on the basis of sales recommendations.” The amicus brief[1] notes that “DOL, which ‘continues to believe’ the Fifth Circuit’s decision ‘was in error,’ refuses to abide by several key aspects of the decision.” The ACLI supports its interests[2] in filing the so-called amicus brief by asserting that it “has a substantial interest in ensuring that consumer access to annuities and other retirement products through traditional insurance sales channels is not disrupted by DOL’s efforts to undermine the Chamber of Commerce decision.”
The original suit was filed by the Federation of Americans for Consumer Choice Inc.—as well as several advisors and advisory firms that sell annuities as part of their practice(s)—in March 2022, claiming that “the Agent Plaintiffs oftentimes make rollover recommendations for purchase of annuities to IRA owners and participants in employer-sponsored 401k and similar benefit plans, for which they receive commissions or other compensation from annuity issuers. The Agent Plaintiffs will thus be directly and adversely affected by the DOL’s New Interpretation suddenly categorizing their status as investment advice fiduciaries under ERISA or the Code, as applicable.”
‘Apples and Oranges’
The filing[3] here asserts that, “if allowed to stand, DOL’s new “final interpretation” of its investment advice fiduciary regulations would achieve the same functional outcome sought by the 2016 Fiduciary Rule that the Fifth Circuit rejected and invalidated”—that “DOL’s new interpretation once again “mixes apples and oranges” by “[t]ransforming sales pitches into the recommendations of a trusted adviser.”
The pushback here is focused on a key element of the so-called five-part test[4]—the on-going relationship between the advisor and the advisee. “Under DOL’s final interpretation, investment sales professionals are deemed to function as investment advice fiduciaries even in the absence of any pre-existing relationship with an ERISA plan or participant, as long as there is “an intended future ongoing relationship”—something that the filing says “…directly contravenes the Fifth Circuit’s Chamber of Commerce decision in at least two fundamental ways.”
First, the filing claims that “DOL is using ‘the beginning of an ongoing relationship’ to render a financial professional a fiduciary, even though the Fifth Circuit held that the ‘relationship must exist prior to, and apart from’ the subject transaction.” Second, it argues that “given that most financial professionals seek to develop an ongoing relationship with a new client, DOL is including ‘ordinary buyer-seller interactions’ as fiduciary in nature, even though the Fifth Circuit held that ERISA investment advice fiduciary status requires a ‘relationship . . . beyond ordinary buyer seller interactions.’”
The filing goes on to assert that “DOL’s refusal to follow Fifth Circuit precedent is not excused by the agency’s desire to have ERISA’s fiduciary standards apply to ‘advice to roll over [ERISA] Plan assets to IRAs,’” explaining that “DOL unsuccessfully advanced this exact same justification before the Fifth Circuit in Chamber of Commerce, where it claimed that it needed ‘to fill [a] perceived gap’ in the regulation of IRAs.” The brief concludes that “DOL cannot rewrite a statute just because it is dissatisfied with what Congress wrote.” Ultimately, they comment that, “The statute does not permit DOL to merge together a potential future advice relationship with an IRA holder with a one-time ERISA plan rollover recommendation as a basis for finding a fiduciary relationship with both.”
Wrong Application?
Harkening back to the Fifth Circuit’s ruling, the brief comments “In vacating the 2016 Fiduciary Rule, the Fifth Circuit held that DOL was wrong to apply ERISA’s fiduciary obligations to ‘one-time IRA rollover or annuity transactions where it is ordinarily inconceivable that financial salespeople or insurance agents will have an intimate relationship of trust and confidence with prospective purchasers’”—that, in fact, the court there cited that there was expected to be “‘an intimate relationship between adviser and client beyond ordinary buyer-seller interactions’ that ‘must exist prior to, and apart from’ the subject transaction.”
The brief goes on to note that, “having failed at its attempt to ‘supersede’ the Deseret Letter with the that 2016 Fiduciary Rule, DOL issued what Plaintiffs refer to as the ‘Revised Exemption’ in 2020, which sought to effectuate the same result by withdrawing the Deseret Letter and issuing a contrary ‘final interpretation’ in the Federal Register.” Moreover, they note that “DOL now claims that ‘advice to roll assets out of a Title I Plan into an IRA where the investment advice provider has not previously provided advice’ is subject to ERISA’s fiduciary requirements if it ‘mark[s] the beginning of an ongoing relationship’ or ‘an intended future ongoing relationship.’”
“And even though any such ongoing or intended future ongoing relationship, should it arise, would involve solely the IRA and not the ERISA plan from which the rollover was distributed, DOL asserts that a fiduciary advice relationship would apply at the ERISA plan level as well as at the IRA level.” Later on, the brief claims that “DOL now presumes that a financial professional is an ERISA fiduciary in connection with a first-time transaction, unless there are certain disclosures to the contrary….”
Ultimately, the amicus brief asserts that:
DOL’s new interpretation is inconsistent with the Fifth Circuit’s Chamber of Commerce decision.
DOL’s new interpretation improperly seeks to combine separate IRA and ERISA plan relationships to confer ERISA fiduciary status on rollover recommendations—that ERISA plans and IRAs are “legally distinct and separately governed plans,” and that “without improperly combining separate IRA and ERISA plan relationships, ERISA fiduciary status cannot apply to a rollover recommendation where there is no pre-existing relationship."
Stay tuned.
Footnotes
[1] Amicus Curiae is literally translated from Latin—"friend of the court." Plural is "amici curiae." It generally refers to a person or group who is not a party to an action, but has a strong interest in the matter, and who—in filing the brief is attempting to inform/influence the court’s decision. Such briefs are called "amicus briefs."
[2] The brief notes that the American Council of Life Insurers (“ACLI”) is the nation’s largest life insurance trade association, with nearly 300 member companies and representing approximately 94% of industry assets in the United States. ACLI’s member companies provide annuities and other products, including guaranteed retirement income products, that allow American consumers to attain, preserve, and protect financial wellbeing and security.
[3] Groom Law Group, Chartered is counsel for ACLI in filing the amicus brief
[4] Not that NAPA-Net readers are unfamiliar with the five-parts, but just in case, under that test, an investment-advice fiduciary is a person who: (1) renders advice or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property; (2) on a regular basis; (3) pursuant to a mutual agreement between such person and the plan; and the advice (4) serves as a primary basis for investment decisions with respect to plan assets; and (5) is individualized based on the particular needs of the plan.
By Nevin E. Adams, JD
August 31, 2022
