Two U.S. District Courts in Texas issued stays on July 25, 2024, and July 26, 2024, respectively, delaying indefinitely the effective date of the final fiduciary regulations and related prohibited transaction exemptions released by the U.S. Department of Labor (“DOL”) in April of this year (“2024 Fiduciary Rule”). The 2024 Fiduciary Rule was supposed to become effective September 23, 2024.
2016 Fiduciary Rule
The DOL first attempted to redefine “investment advice fiduciary” in 2016 (the “2016 Fiduciary Rule”). The U.S. Court of Appeals for the Fifth Circuit vacated the 2016 Fiduciary Rule, holding that it conflicted with ERISA by redefining “investment advice fiduciary” to include non-trust and non‑confidence relationships. The Fifth Circuit explained that (1) the term “fiduciary” in ERISA incorporated the common law understanding of fiduciary status which turns on the existence of a relationship of trust and confidence between the fiduciary and client and (2) the financial services industry distinguishes between investment advisors, who are considered fiduciaries (i.e., trust and confidence relationships), and stockbrokers and insurance agents, who generally do not assume such status in selling products to their clients (i.e., non-trust and non‑confidence relationships).
2024 Fiduciary Rule
With the 2024 Fiduciary Rule, the DOL stated it had been careful to craft a fiduciary definition consistent with both ERISA and the Fifth Circuit’s focus on relationships of trust and confidence. According to the DOL, the 1975 five-part test defining when a person is an investment advice fiduciary does not capture the full range of fiduciary activity because it excludes one-time transactions like IRA rollovers. The DOL believes that treating one-time advice as fiduciary investment advice is consistent with a relationship of trust and confidence. The 2024 Fiduciary Rule was intended to provide uniformity across retirement investment markets and investment products and extended the ERISA fiduciary standard of care to broker‑dealers, investment advisors, insurance agents, banks and other advisors to retirement plans and IRAs.
Both of the U.S District Courts in Texas disagreed with the DOL, however, holding that the 2024 Fiduciary Rule, like the 2016 Fiduciary Rule, conflicts with ERISA because it redefines “investment advice fiduciary” to include non-trust and non‑confidence relationships.
Under the Administrative Procedures Act, these U.S. District Court holdings staying the 2024 Fiduciary Rule are not limited to just the parties in these cases. This means the DOL cannot enforce the 2024 Fiduciary Rule against anyone anywhere in the country. There are other cases against the 2024 Fiduciary Rule still being litigated, but for now, the 2024 Fiduciary Rule is dead.
What Now?
The 2024 Fiduciary Rule amended the existing ERISA regulation defining fiduciary advice as well as certain prohibited transaction exemptions (“PTEs”), including the original version of PTE 2020-02 issued in December 2020 and PTE 84-24. While the 2024 Fiduciary Rule is dead, the prior fiduciary definition regulation (five-part test) and the prior PTEs are very much alive.
As a reminder, PTE 2020-02 permits investment advice fiduciaries to receive certain compensation that otherwise would be prohibited without following PTE 2020-02’s requirements. PTE 84-24 permits insurance agents, brokers and pension consultants to receive, directly or indirectly, a sales commission from an insurance company in connection with the purchase of an insurance or annuity contract with ERISA plan assets.
Investment advisers, broker-dealers and insurance companies and their agents should continue to comply with the prior versions of PTE 2020-02 and PTE 84-24, along with any other applicable PTEs.
We will keep you posted on any further developments.
Questions
If you have any questions, please contact Lisa Zimmer or any member of the Funds and Investments Industry Group.
