By: Richard Luna
On July 25, 2024, Judge Jeremy Kernodle of the U.S. District Court for the Eastern District of Texas temporarily blocked the US Department of Labor’s (“DOL’s”) new fiduciary rule, and one of the concurrently published amendments to a prohibited transaction exemption (“PTE”), which had an effective date of September 23, 2024.*
DOL’s new fiduciary rule would have expanded the class of retirement advice providers who would be fiduciaries under ERISA by including those who provide one-time recommendations. However, the Federation of Americans for Consumer Choice and other stakeholders sued to block the rule and amendments to a prohibited transaction exemption that DOL published concurrently with the new fiduciary rule, alleging that "DOL has exceeded its authority under ERISA, the Code, and the APA" by expanding the definition of an investment advice fiduciary to include sales relationships that were not trust and confidence relationships.
Judge Kernodle concluded that the plaintiffs’ claims satisfied all four criteria for a stay in stating, “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,” and specifically mentioned that the rule conflicts with ERISA by treating advisors who made recommendations to rollover assets from an ERISA-covered plan to an individual retirement arrangement (“IRA”) as fiduciaries.
The judge referred to a 2018 U.S. Court of Appeals for the Fifth Circuit decision that invalidated the previous iteration of DOL’s fiduciary rule in explaining, “Chamber held that ERISA codified the common law understanding of fiduciary—which is based on a ‘relationship of trust and confidence’ between the fiduciary and the client… Chamber also held that ERISA incorporated the financial service industry's distinction between mere sales conduct and investment advice.” On this basis, he stayed the effective date of the new fiduciary rule and PTE 84-24, and did not limit the stay to the parties before the court. The stay will remain effective until the further order from the court. The stay prevents the DOL from enforcing the rule as the lawsuit proceeds.
The next day, on July 26, 2024, Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas also stayed the effective date of DOL’s new fiduciary rule and prohibited transaction exemption amendments on the grounds that it eliminates the distinction between insurance agents and investment advisors.** His order “agrees with and fully incorporates” the reasoning of Judge Kernodle’s order. It stays the effective date of the new rule as well as the amendments to PTEs 2020-02, 75-1, 77-4, 80-83, 83-1, and 86-128.
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*Fed’n of Americans for Consumer Choice, Inc. v. United States Dep’t of Labor, No. 6:24-cv-163-JDK (E.D. Tex. July 25, 2024).
**Amer. Council of Life Insurers, Inc. v. United States Dep’t of Labor, No. 4:24-cv-00482-O (E.D. Tex. July 26, 2024).
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