Three trade associations, including two representing the insurance industry, brought this lawsuit challenging the DOL’s final fiduciary rule and two related prohibited transaction exemptions (PTEs). The final fiduciary rule replaces a rule that includes a restrictive five-part test for identifying investment advice fiduciaries. (Though effective June 7, 2016, the final rule is generally applicable April 10, 2017) One element of the five-part test requires that the advice be given on a “regular basis”—a condition that has allowed providers of one-time advice (e.g., for annuity purchases or IRA rollovers) to avoid fiduciary status. The new rule eliminates the regular-basis condition and requires advice providers to satisfy the conditions of the Best Interest Contract (BIC) exemption or amended PTE 84-24 if they wish to continue otherwise prohibited compensation practices. Those exemptions impose duties of loyalty and prudence when advising owners of IRAs, HSAs, and plans not subject to Title I of ERISA. The trade associations argued that the DOL exceeded its authority in promulgating the new rule and PTE changes; the trial court rejected their arguments and granted summary judgment (judgment without trial) to the DOL.
The trial court concluded that the DOL did not exceed its authority under ERISA to interpret who is a fiduciary when rendering “investment advice for a fee.” The court found that the DOL had provided a reasonable explanation for its new interpretation, and the court rejected arguments, among others, that ERISA’s fiduciary definition must be interpreted more narrowly consistent with the common law of trusts; that the regular-basis condition was implied in the statutory definition of fiduciary; and that Congress had implicitly ratified the five-part test by repeatedly amending ERISA without changing the test. The court also concluded that the DOL did not exceed its exemptive authority when it applied the ERISA Title I duties of loyalty and prudence to arrangements (including IRAs and HSAs) that are subject to ERISA Title II. The court found that the DOL has broad authority, not limited to Title I, to establish conditions for PTEs; that compliance with the BIC exemption is not required; and that the BIC exemption’s effect on investment advisers’ compensation models is not arbitrary or capricious. The court also rejected arguments that the written contract requirement under the BIC exemption would impermissibly create a private litigation right under ERISA for IRA and HSA owners (and non-Title I plans); that the notice, comment period, and regulatory analysis for the DOL’s rulemaking were inadequate; and that requiring fixed indexed annuities to satisfy the BIC exemption (instead of PTE 84-24) was arbitrary and capricious.
Comment: Another trial court, in a similar challenge to the fiduciary rule, also rejected a trade association’s arguments and ruled for the DOL. As this court noted, the Trump administration has directed the DOL to review the fiduciary rule. In response, the DOL has submitted paperwork to the Office of Management and Budget (OMB) to delay the fiduciary rule’s April 10 applicability date.