Non-Insurer Plaintiffs Join ACLI in Fiduciary Rule Lawsuit

The Securities Industry and Financial Markets Association and the Financial Services Institute joined a lawsuit against the Department of Labor’s Retirement Security Rule on Friday, broadening the range of firms seeking to beat back the new rule beyond just insurers—who would be hit by rules around annuity sales in particular.

The complaint was initially brought by the American Council of Life Insurers in U.S. District Court for the Northern District of Texas on May 24, following a separate complaint challenging the rule filed in U.S. District Court for the Eastern District of Texas on May 2 by the Federation of Americans for Consumer Choice, an insurance industry group.

The Retirement Security Rule, finalized in April and taking effect in part in September, would apply fiduciary requirements on a broader range of investment recommendations to include one-time transactions, such as rollovers, annuity sales and investment menu design sales.

Before SIFMA and FSI joined, legal challenges had been led by the insurance industry, which has consistently opposed the rule since it was first proposed. SIFMA is an interest group that represents broker/dealers, investment banks and asset managers; FSI represents independent financial services firms.

The brief filed by SIFMA and FSI, using logic similar to that of the prior suits, argues that the rule is unlawful and should be vacated. The organizations say that it “is materially indistinguishable from the 2016 Rule,” a reference to a previous attempt by the DOL to regulate one-time advice, one which was finalized in 2016 and vacated by the U.S. 5th Circuit Court of Appeals in 2018.

The DOL, in a responsive brief in the same case filed on June 14, argues that the new rule is distinct from the 2016 version because it focuses on the character of the relationship between the professional and the investor instead of capturing any communication and because it lacks provisions requiring certain contractual terms.

The SIFMA and FSI brief continues: “If the 2024 Rule goes into effect, recommendations by a broker-dealer or other financial professional regarding assets in a retirement account, including sales recommendations, will once again be considered ‘fiduciary’ advice even in the absence of an ongoing, mutually recognized advice relationship,” which the groups argue is required by the 5th Circuit opinion. The brief argues that a relationship must be ongoing and continuous in order to entail “trust and confidence,” a key phrase used by the 5th Circuit as encompassing the common-law understanding of fiduciary.

The DOL, in turn, has emphasized that the manner in which a professional presents himself or herself to investors “or holds themselves out” is what establishes whether such a relationship exists.

“Congress did not empower the Department to impose fiduciary duties of prudence and loyalty on broker-dealers and insurance agents that do not have a heightened relationship of trust and confidence with their customers,” the DOL brief explains.

The court has not issued a ruling, and parts of the Retirement Security Rule remain set to take effect in September.