The U.S. District Court for the Northern District of Texas has upheld the Labor Department’s fiduciary rule.
In an 81-page ruling, Chief Judge Barbara Lynn ruled that the Labor Department acted within its statutory authority under the Employee Retirement Income Security Act in promulgating a rule that expands the definition of a fiduciary.
The U.S. Chamber of Commerce, Securities Industry Financial Markets Association, and a consortium of trade groups challenged Labor’s authority to redefine the definition of fiduciary on eight counts.
All of those arguments failed to persuade Judge Lynn.
The plaintiffs argued that the rule’s expanded definition of fiduciary was not in accordance with trust law.
But Lynn countered that argument by citing case law showing Congress made “an express statutory departure” from the common law of trusts when it wrote ERISA.
“Plaintiffs contend that because everyday business interactions are not relationships of trust and confidence, a person acting as a broker or an insurance agent engaged in sales activity is not a fiduciary. This argument is not supported by the plain language of ERISA,” wrote Judge Lynn.
“ERISA does not define ‘fiduciary’ in terms of formal trusteeship, but in functional terms of control and authority over the plan, thus expanding the universe of persons subject to fiduciary duties,” wrote Lynn.
ERISA definition of fiduciary
The plaintiffs also argued that financial professionals receiving sales commissions are not fiduciaries, as defined by ERISA, because they are not giving investment advice for a fee.
Lynn said that argument relied on an incomplete interpretation of the definition of fiduciary under ERISA, which defines a fiduciary as anyone rendering investment advice for “a fee or other compensation, direct or indirect.”
“The word ‘indirect’ contradicts the notion that compensation must be paid principally for investment advice, as opposed to advice rendered in the course of a broader sales transaction,” said Lynn.
A key provision of Labor’s fiduciary rule says advice does not have to be given on an ongoing basis for it to be considered a fiduciary act.
In doing so, the regulation makes the sale of an annuity or investment based on a one-time interaction with a financial professional or insurance agent a fiduciary act.
The plaintiffs argued that aspect of rule was in direct contradiction with a five-prong fiduciary test offered in ERISA.
But Lynn said, “Nothing in ERISA suggests ‘investment advice’ was intended only to apply to advice provided on a regular basis.”
Lynn added: “The DOL has defined what it means to render investment advice since 1975, and decided its new interpretation is more suitable given the text and purpose of ERISA, along with new marketplace realities.”
Fiduciary rule reflects Congressional intent of ERISA
The plaintiffs argued that the fiduciary rule contradicts Congress’ intent when it wrote ERISA in 1974.
Lynn was not persuaded. “ERISA was enacted on the premise that the then-existing disclosure requirements did not adequately protect retirement investors, and that more stringent standards of conduct were necessary,” wrote Lynn.
“The DOL’s new rules comport with Congress’ expressed intent in enacting ERISA,” she added. “As a result of the rulemaking process, the DOL rejected a disclosure-only regime, finding that disclosure was ineffective to mitigate the problems ERISA sought to remedy.”
Lynn defended the legal viability of the rule’s Best Interest Contract Exemption, saying the new exemption does not prohibit commission-based compensation on lower-value IRAs in creating conditions to qualify for the BIC Exemption.
“Although the industry may have less ideal options than before the current rulemaking, the industry has been given viable choices,” said Lynn.
Congress was not concerned “with the particulars of financial professionals’ compensation practices” when it enacted ERISA, noted Lynn. “Therefore, a change in their current compensation structure does not affect the meaning of a statute Congress enacted.”
Lynn’s decision relied, in part, on the broad discretion Congress gave the Labor Department to create policies that best protect retirement investors from conflicted transactions.
She conceded that the BIC Exemption “may be more onerous” than previous prohibited transaction exemptions, but that that does not mean the Labor Department’s exercise of its authority was unreasonable in crafting the new contract.
She also noted several examples of broker-dealers and insurance companies’ public statements announcing their intentions to use the BIC Exemption. “The exemption’s conditions have been deemed workable by many in the industry,” said Lynn.
In a joint statement from five of the plaintiffs in the case, the Chamber of Commerce, SIFMA, Financial Services Institute, Financial Services Roundtable, and the Insured Retirement Institute, stood by their claim that the Labor Department exceeded its authority in promulgating the fiduciary rule.
“We will pursue all of our available options to see that this rule is rescinded,” the plaintiffs said. “While we have long supported a best interest standard, this is a misguided rule that will harm retirement savers and financial services firms that provide needed assistance and options to their clients, including modest savers and small business employees.”