Two federal district courts in Texas have blocked enforcement of the Department of Labor’s (DOL’s) fiduciary-only rule. The rule’s September 23 effective date was enjoined (blocked) by the Texas Eastern District Court on July 26, and then one day later stayed (stopped) by the Texas Northern District Court. NAIFA and several of its chapters are among the plaintiffs in the Northern District court case.
The federal district court for the Northern District of Texas followed the reasoning of the Eastern District, and also extended the ruling to all of the amended prohibited transaction exemptions (PTEs) associated with the fiduciary-only rule. Thus, the September 23 effective date is on hold for PTE’s 84-24 and 2020-02, as well as for the rule itself.
Both courts said that the plaintiffs suing to stop the rule are likely to prevail on the merits of the case. If they do, that will overturn the rule and the changes to its associated PTEs. The courts are considering plaintiffs’ arguments that the rule is so similar to the older version of the rule that it cannot stand. The Fifth Circuit Court of Appeals overturned the older rule in 2018. Plaintiffs also argue that the rule is arbitrary and capricious and that it exceeds DOL’s statutory authority. The Eastern District Court (which was cited favorably by the Northern District Court) also noted the plaintiffs’ “substantial likelihood of prevailing” on the case, including their argument that the courts are not bound to accept the agency’s interpretation of its statutory authority. This is the result of the Supreme Court’s holding, in Loper Bright, that overturned the decades-old Chevron doctrine that required courts to accept “reasonable” interpretations of “ambiguous” statutes.
Prospects: It appears that the Texas district courts will overturn the fiduciary rule and the changes to its associated PTEs. It is likely that DOL will appeal those decisions if, in fact, they occur to the Fifth Circuit Court of Appeals. But enforcement of the rule is blocked until after the courts either are reversed if the DOL appeals the stays, or until the courts decide the merits of the cases if the stays are not appealed successfully.
In addition, Congress may still vote on a pending Congressional Review Act (CRA) motion to block the rule and its associated PTEs, although not until September or perhaps during the post-November elections lame-duck session. However, even if Congress passes the CRA motion, it is virtually certain that President Biden will veto it. And there are not enough votes to override a presidential veto.
So, it currently seems that the fate of the fiduciary-only rule rests with the courts. It will probably take considerable time before the judicial process, which likely will include appeals from the district court rulings, is complete.
Industry experts agree that financial advisors, including NAIFA members, must remain cognizant that financial services companies (including insurers) will continue to dictate the rules under which financial advisors must operate. Many companies are already operating under at least some of the new requirements contained in the now temporarily stopped fiduciary rule.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.
