On April 6, 2016, the U.S. Department of Labor ("DOL") issued its final rule expanding the definition of the "investment advice fiduciary" under the Employee Retirement Income Security Act of 1974 ("ERISA") and modifying the exemptions for investment activities. The new rule will be phased in starting in April 2017, and it is anticipated to draw battles over its expansion of the circumstances under which providing investment advice could give rise to a fiduciary duty. Specifically, by expanding the definition of a fiduciary, the rule casts a wide net in assigning fiduciary responsibilities to many investment professionals who did not previously consider themselves to be fiduciaries. Accordingly, the potential liability for large groups of investment advisors has greatly increased, and the rule could have "catastrophic consequences" for its members, as some opponents contend.
One such battle was recently decided, and came out in favor of the DOL. On June 6, 2016, the National Association for Fixed Annuities ("NAFA") filed a federal lawsuit in the D.C. District Court against the DOL and its Secretary, challenging the new rule and seeking a preliminary injunction to stay the implementation of the new rule. The NAFA's principal arguments against the new rule were that: (1) the DOL exceeded its authority to regulate IRAs; (2) the new rule improperly includes insurance agents as fiduciaries and creates private rights of action, which only Congress can do; and (3) the DOL's Notice of Proposed Rulemaking failed to provide adequate notice under the APA that the rule would subject fixed indexed annuities ("FIAs") to onerous compliance obligations. The NAFA contended that the new rule would have several disastrous consequences for its members, including lost jobs, fewer choices for consumers, and increased litigation.
After hearing oral argument and considering the NAFA and the DOL's cross-motions for summary judgment, the court was not persuaded by the NAFA's arguments and denied its request for a preliminary injunction, and granted summary judgment in the DOL's favor, upholding the validity of the new rule. The court explained that the DOL acted within its statutory authority when expanding the applicability of fiduciary responsibilities under the new rule, and provided a satisfactory rule-making and notification process. The court found that the DOL sufficiently explained how the relationship between advisors and investors has changed and that the new rule is appropriate due to the increased complexity and variety of financial products in the marketplace. Further, the court found that the NAFA lacked standing to complain about the rule's potential to "sweep in some relationships that are not appropriately regarded as fiduciary in nature" because this likely consequence was unrelated to the NAFA or its members' sale of annuities.
This was an important victory for the DOL because it is currently defending several other pending lawsuits filed by financial industry groups challenging the new rule. The rulings in these other matters will become increasingly important, as will NAFA's anticipated appeal, since time is running out before the rule becomes effective.