A federal judge in Texas has vacated the Labor Department’s revised fiduciary rule that was approved under the Biden Administration, according to Financial Advisor.
The 2024 revision would have expanded the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) to cover financial professionals making one-time recommendations about issues such as rolling over a 401(k) plan and purchasing annuities.
Judge Jeremy D. Kernodle of the U.S. District Court for the Eastern District of Texas approved a motion to scrap the rule, a decision that was unopposed by both the Labor Department and the Federation of Americans for Consumer Choice, which had challenged the regulation in court.
The updated fiduciary rule was intended to apply when financial services providers give investment advice for a fee to retirement plan participants, individual retirement account owners and plan officials responsible for administering plans and managing their assets. These fiduciaries would have had to adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the investment advice providers’ interests at the retirement savers’ expense.
Under the final rule and amended exemptions, financial institutions overseeing investment advice providers would have been required to have policies and procedures to manage conflicts of interest and ensure providers follow these guidelines.
The Department of Labor’s Employee Benefits Security Administration decided last November not to pursue its defense of the Biden-era fiduciary rule, stating its intention to rewrite the rule. A coalition of retirement and industry groups sued the DOL to overturn the rule, including the American Council of Life Insurers, the National Association of Insurance and Financial Advisors (NAIFA), the Insured Retirement Institute, Finseca (a life insurance trade group), and the National Association for Fixed Annuities.
They asserted that the DOL exceeded its authority granted by Congress in approving the rule and goes against precedent set by the courts.
Another lawsuit, filed by nine insurance trade organizations, also claimed the department exceeded its authority, and acted without analyzing impact data in an adequate way to quantify the benefits. The groups say the rule was approved without meeting federal Administrative Procedure Act requirements.
The rule, which had been scheduled to take effect in Sept. 2024, was stayed by two federal courts in Texas during the legal challenges.
Bradford Campbell, partner at Faegre Drinker and former head of the Labor Department’s Employee Benefits Security Administration, told Financial Advisor that Judge Kernodle’s decision removes a rule that many industry participants believed was deeply flawed.
“I think this is very good news,” Campbell said. “The 2024 regulatory package had fundamental flaws that would not only have disrupted the availability of advice in the real world, but also exceeded the Labor Department’s authority to regulate advice to individual retirement accounts.”
The DOL is expected to issue a new fiduciary rule regarding rollovers in May under the new head of the Employee Benefits Security Administration (EBSA), Daniel Aronowitz.
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