ASA Calls Fiduciary Proposal Unlawful, Anticipates Litigation

The American Securities Association filed a comment letter with the Department of Labor arguing that the fiduciary proposal also known as the retirement security proposal, is unlawful for a variety of reasons.

The letter does not speak directly to the merits of the proposal, but it is a possible preview of many of the legal arguments that will arise in litigation if the rule is finalized. The fiduciary proposal would extend fiduciary status under the Employee Retirement Income Act to certain one-time interactions, including retirement account rollovers, investment menu design and annuity sales.

The ASA’s letter argues that Acting Secretary of Labor Julie Su, who must approve the proposal, lacks the authority to finalize rules because she is serving her post in an acting capacity. The letter reads: “If the proposals are approved by Julie Su, who is purporting to be the Acting Secretary of the DOL, they will be void and unenforceable because Ms. Su was not confirmed by the Senate as required by the Appointments Clause.”

This group’s argument against the legality of the proposal has been largely absent from the debate over the rule. The ASA is a trade association that represents the wealth management and capital markets interests of regional financial services firms.

Senate Republicans in September introduced the Advice and Consent Act, which would force an acting secretary to step down if they had not been approved by the Senate within 210 days of their nomination. President Biden nominated Su in February 2023.

Federal laws in the area are ambiguous, according to Brad Campbell, a partner with Faegre Drinker and a former Assistant Secretary of Labor. “It’s unclear how courts would proceed with that. But if you’re going to challenge the rule, you would make every plausible challenge,” he says.

The ASA letter also asserts that the DOL proposal does not have an adequate comment period, nor does it properly account for reliance interests which is the right of a party to a contract to seek compensation when a contract is violated, as required by the Administrative Procedures Act.

According to ASA, agencies are required to consider the reliance interests that have developed around a longstanding rule when making regulatory changes. ASA argues that the DOL failed to do this by deviating considerably from the traditional five-point fiduciary test and by not considering alternative proposals.

The DOL’s proposal also violates ERISA by extending fiduciary requirements to IRAs, when fiduciary status was intended to apply only to employer-sponsored plans, ASA argued.

Lastly, ASA argued that the proposal, because of its economic impact and controversial nature, is a “major question.” This is a reference to the major questions doctrine under federal law, a judicial standard that says administrative regulations which have unusually high economic or political impact need to be more explicitly authorized in the text of the statute and not rely on textual ambiguity.

Other trade groups in the securities industry have not yet commented on the proposed rule, except for requests for extensions of the comment period, which was 60 days and included a few holidays. The comment period closes on January 2.