Fiduciary rule prompts second legal challenge


Last week, a group representing advisors who sell annuities challenged the legality of the fiduciary rule in federal court — and now a second lawsuit filed in another federal court accuses the Department of Labor of legislating with a series of FAQs.

This lawsuit was filed in the United States District Court for the Intermediate District of Florida by the American Securities Association[1] against the United States Department of Labor and Marty Walsh, “in his official capacity as Secretary of Labor, for declaratory and injunctive relief” because, in their view, “…the Department violated its obligations under the Labor Act. the administrative procedure (APA)”.

FAQ ‘verified’?

Specifically, the plaintiff says here that it has members who, “due to the Department’s statements in FAQ 7,[2] prohibit their investment advisors from recommending that an investor transfer assets from an employee benefit plan” – members who they believe would otherwise allow their advisors to recommend transferring assets from a qualified plan “even though this was the adviser’s first contact with the investor.

Similarly, the lawsuit claims that it has members who would comply with the rule, but that under the terms of FAQ 15[3] would be subject to requirements that they claim are “onerous, costly and time-consuming” – costs and burdens that their members “would not bear” without the Ministry’s “declarations on the documentation required to comply with the exemption”. And beyond that, they claim they also have members who will not commit to making these recommendations “because of the Department’s statements in FAQ 15.”

APA “Of course”?

The suit (A m. Second. Ass’n v. US Department of Labor, MD Fla., No. 8:22-cv-00330, complaint filed 02/09/22) recalls that Congress passed the Administrative Procedure Act to ensure that agencies adhere to constraints in exercising their powers , and that the requirement that agencies engage in notice-and-comment rule-making is “one of the law’s most important checks on agency power.” The lawsuit continues that “by requiring advance notice and an opportunity to comment, the APA ensures that the agency’s regulations are tested through exposure to various public comments” and that there is “fairness to affected parties.” “.

The FAQs (frequently asked questions) in question were published about a year ago to provide “guidance” on the requirements of its existing rules. “In reality, however, the Department issued these FAQs to impose new obligations that have no basis in the agency’s underlying rules,” the suit continues.

Specifically, the lawsuit alleges that, through FAQ 7, the Labor Department has established that a financial professional’s first advice to transfer assets from one retirement plan to another may be the act of a fiduciary,” even though the Department’s regulations state that a person is not a fiduciary unless they regularly provide advice to the plan. They also state that in FAQ 15, “the Department imposes a host of ‘onerous documentation and investigative requirements on financial institutions when making rollover recommendations, despite the fact that the exemption promulgated by the Department contains none of these requirements’.

The suit cites as “a critical flaw in the rule” is that it removed the “regular basis” component of the five-part test, and that “…by eliminating this component, the fiduciary rule had improperly sought to define as trustees virtually all finance and insurance professionals who deal with ERISA plans and IRA holders.

“Thus, under FAQ 7, a finance professional may be considered an investment advisory fiduciary when making a rollover recommendation even if they have not provided any advice on a regular basis to the plan. ” As a result, according to the lawsuit, FAQ 7 “transforms countless unique rollover recommendations into fiduciary acts, despite the ordinary meaning of the five-part test, the Department’s prior interpretation of its rules, and the common understanding of law of a “fiduciary”, which “is based on the existence of a relationship of trust between the fiduciary and the client”.

Documenting ‘Ed’?

And while the suit acknowledges that PTE 2020-02 states that financial institutions must “document[] the specific reasons for any recommendation to renew the assets. . . is in the best interest of the retirement investor”, this exemption “does not prescribe any specific manner in which financial institutions must comply with this documentation requirement”, and that FAQ 15 “significantly expands the requirements for documentation and investigation of financial institutions under the exemption. He continues that “even though the exemption requires financial institutions to do no more than document their ‘specific reasons’ for recommending a rollover, FAQ 15 subjects financial institutions to numerous documentation and disclosure requirements. ‘investigation which is nowhere to be found in the exemption’.

The lawsuit asserts that the policies referenced in FAQ 7 and FAQ 15 are “unlawful and violate the APA.” The FAQs should be revoked and the Department should be prohibited from implementing or enforcing them in any way.

The lawsuit concludes that the APA “prohibits agencies from regulating in this manner. If the Department wished to change its rules, it had to do so through the required notice and comment process, not through regulatory documents.” ‘orientation.

Second, “Quote”

Less than a week earlier, the Federation of Americans for Consumer Choice Inc., joined by several advisers and consulting firms that sell annuities as part of their practice(s), filed a lawsuit in court Texas Federal, arguing that “agent plaintiffs often make rollover recommendations for the purchase of annuities to IRA owners and participants in employer-sponsored 401k and similar employee benefit plans, for which they receive Commissions or other compensation from annuity issuers, so nominee applicants will be directly and negatively affected by the new interpretation of the DOL suddenly categorizing their status as investment advisory fiduciaries under ERISA or the Code, as the case may be.

Stay tuned.


[1] Described in the lawsuit as “the trade association that represents the retail and institutional capital markets interests of regional financial services firms that provide Main Street businesses with access to capital and advise hard-working Americans on how to create and preserve wealth.

[2] FAQ-7 discusses the “regular basis” aspect of the five-part test, noting that “a single, low-key example of advice to transfer assets from a benefit plan to an IRA would not meet the prong. regular basis of the 1975 test.” However, the guidelines go on to point out that “plan asset rollover advice may also arise in the context of an ongoing relationship or as the beginning of an anticipated future ongoing relationship that an individual has with a pension advice provider. investment”, and that where the provider of investment advice has given advice to the person on the investment, purchase or sale of securities or other financial instruments through tax-advantaged retirement vehicles subject to the ERISA or the Code, advice to withdraw assets from the employee benefit plan is part of an ongoing advisory relationship that satisfies the regular basis component.

[3] FAQ-15 outlines factors that financial institutions and investment professionals should “consider and document” in their disclosure of why a rollover recommendation is in the best interest of a retirement investor, including ( but not limited to):

  • alternatives to rollover, including leaving money in the investor’s employer’s plan, if permitted;
  • fees and expenses associated with both the plan and the IRA;
  • whether the employer pays some or all of the administrative costs of the plan; and
  • the different levels of services and investments available under the plan and the ERI.

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