Last week was not a good week for the Department of Labor (“DOL”) in Texas. On July 25, the District Court for the Eastern District of Texas, in a civil action filed by the Federation of Americans for Consumer Choice, placed a stay on the DOL’s enforcement of its 2024 “Retirement Security Rule” and the amended prohibited transaction class exemption (“PTCE”) 84-24. Then, on July 26, the District Court for the Northern District of Texas, in a civil action brought by the American Council of Life Insurance, completed the rejection of the DOL’s recent guidance on providing investment advice for a fee by placing a separate stay of the amendments to PTCE 2020-02, and the other prohibited transaction class exemptions that were revised as part of the Retirement Security Rule. The only victory for the DOL was that both courts denied the plaintiff’s motion for a preliminary injunction in favor of the less drastic remedy of a stay, which does not require the DOL to take any action in response to either of these court decisions. From a client’s perspective, the decisions by both District Courts to issue a stay rather than a preliminary injunction is of no immediate consequence.
District Courts in Texas are within the Fifth Circuit and were therefore required to follow the 2018 decision of the Fifth Circuit in Chamber of Commerce v. Department of Labor. The DOL, in drafting the Retirement Security Rule and related prohibited transaction class exemptions, knew that any revision of the rules governing investment advice fiduciaries would be challenged in the Fifth Circuit and clearly attempted to address the concerns of the Fifth Circuit by narrowing the persons who could be treated as investment advice fiduciaries. However, both District Courts were unpersuaded and characterized the DOL’s position as arguing that the Chamber of Commerce case was wrongly decided. To the extent that the District Court’s characterization of the DOL’s position is accurate, it is now an argument that must be made to the Fifth Circuit rather than a District Court. While both of these cases were decided without application of the Chevron doctrine, there is no indication in either District Court opinion that the decision would have been different had the Chevron doctrine applied. Further, the DOL did not rely on the Chevron doctrine.
In either case, as of the date of this alert, the DOL’s 1975 rule (the so-called “five-part test”) for defining an investment advice fiduciary is back in place. It is thought likely, however, that the DOL will be appealing both District Court decisions, and there can be no assurance of the how the Fifth Circuit will decide. So, while it would be appropriate to place efforts to comply with the Retirement Security Rule on hold, our recommendation is to continue complying with the unamended version of PTCE 2020-02 and to monitor events before the Fifth Circuit. It is also possible that the results of the Presidential election could affect the eventual outcome.
Stay tuned.
