Late Thursday, a federal judge in Texas put September implementation of the Department of Labor’s controversial new fiduciary rule on ice.
“In sum, the Court finds that Plaintiffs are likely to succeed on the merits of their claim that the 2024 Fiduciary Rule conflicts with ERISA’s text by redefining ‘investment advice fiduciary‘ to include non-trust-and-confidence relationships.“
Ruling from U.S. District Judge Jeremy Kernodle
U.S. District Judge Jeremy Kernodle, of the U.S. District Court for the Eastern District of Texas, issued a preliminary injunction to freeze the DOL’s Retirement Security Rule, which had been scheduled to take effect on Sept. 23.
It was widely speculated earlier this week that the court in Tyler, Texas would grant the preliminary injunction after hearing oral arguments in the case on Tuesday. The preliminary injunction had been requested by the Federation of Americans for Consumer Choice, which brought the suit along with several independent insurance agents. The FACC, an advocacy group for independent insurance agents, is represented by Dallas-based law firm Figari and Davenport.
In making Thursday’s ruling, Judge Kernodle said the 2024 Fiduciary Rule suffers from many of the same problems as the DOL’s previous attempt to expand the meaning of fiduciary under ERISA, noting that the Fifth Circuit vacated an earlier, similar rule because it “conflict[ed] with the plain text of [ERISA],” was “inconsistent with the entirety of ERISA’s ‘fiduciary’ definition,” and unreasonably treated numerous financial services providers “in tandem with ERISA employer-sponsored plan fiduciaries.”
From the ruling:
The Court grants Plaintiffs’ motion. As explained below, Plaintiffs are likely to succeed on the merits of their claim because the 2024 Fiduciary Rule conflicts with ERISA in several ways, including by treating as fiduciaries those who engage in onetime recommendations to roll over assets from an ERISA plan to an IRA. DOL’s related amendments to Prohibited Transaction Exemption 84-24 are also unreasonable and arbitrary and capricious. For its part, DOL attempts to reconcile the Rule to Chamber but fails. Ultimately, DOL contends that Chamber is wrong and unduly limits the agency’s authority. But that is an argument for the en banc Fifth Circuit or the Supreme Court. The balance of the factors necessary to issue a stay, moreover, weigh in Plaintiffs’ favor here. Accordingly, the Court ORDERS that the effective date of the 2024 Fiduciary Rule and amended PTE 84-24 is STAYED until further order of the Court.
From the ruling’s conclusion:
In sum, the Court finds that Plaintiffs are likely to succeed on the merits of their claim that the 2024 Fiduciary Rule conflicts with ERISA’s text by redefining “investment advice fiduciary” to include non-trust-and-confidence relationships. Additionally, the Court finds that Plaintiffs are likely to succeed on the merits of their claim that the amendment to PTE 84-24 is an arbitrary and capricious exercise of DOL’s regulatory power. The Court also finds that Plaintiffs would suffer irreparable harm in the absence of relief—as Defendants concede—and that the equities and public interest weigh in favor of a stay here. Accordingly, the Court hereby GRANTS Plaintiffs’ motion and stays the effective date of the following regulations until further order of the Court:
(1) Retirement Security Rule: Definition of an Investment Advice Fiduciary, 89 Fed. Reg. 32,122 (Apr. 25, 2024) (to be codified at 29 C.F.R. part 2510). Case 6:24-cv-00163-JDK Document 32 Filed 07/25/24 Page 41 of 42 PageID #: 417 42
(2) Amendment to Prohibited Transaction Exemption 84-24, 89 Fed. Reg. 32,302 (Apr. 25, 2024).
The 42-page ruling also made it clear that it applies not only to the plaintiffs in this case but nationally for three reasons:
1) Because the 2024 Fiduciary Rule is likely unlawful as to Plaintiffs, it is also likely unlawful as to all other similarly situated investment professionals.
2) DOL promulgated the 2024 Fiduciary Rule to “establish a uniform definition for all persons giving investment advice to retirement investors under Title I and Title II of ERISA,” but DOL seeks “piecemeal enforcement” of this stay, where some investment professionals are exempt from the Rule and others are not. “The Department’s protests against nationwide relief are incoherent in light of its use of the Rule to prescribe uniform federal standards.”
3) Plaintiffs—including, as Defendants concede, FACC’s members—“do not need relief only for themselves but also for the [businesses] that engage with them.” The ruling went on to state that “permitting the 2024 Fiduciary Rule and new PTE 84-24 to take effect could cause non-parties to this suit to withdraw from the investment market altogether—as happened when the 2016 Rule took effect.” The Court ruled limiting a stay to only the parties involved in the lawsuit “would prove unwieldy and would only cause more confusion.”
The Department of Labor has yet to issue a comment or statement regarding the preliminary injunction, and it is likely the DOL will appeal the ruling. FACC has also not commented on the ruling as of yet.
“This is an early step in what will likely be a long fight,” noted ERISA attorney Fred Reish Esquire, Partner at Faegre Drinker, posted to LinkedIn on Friday, promising to post more about the ruling in the coming days.
SEE ALSO:
• DOL Fiduciary Rule Hit with First Lawsuit
• FACC Files Second Lawsuit Against DOL Fiduciary Rule
• Republican Congressmen Rail Against Biden Administration’s Fiduciary Rule
• FSI, SIFMA Join Lawsuit Against Fiduciary Rule; CFP Board Backs It in Separate Suit