As previously discussed in this client Update, on April 23, 2024, the U.S. Department of Labor (DOL) released a final rule, titled the Retirement Security Rule (the Final Rule), that, among other things, amended the definition of an “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (ERISA), with respect to “retirement investors,” as defined in the Final Rule. Concurrent with the release of the Final Rule, the DOL also changed several prohibited transaction exemptions, including Prohibited Transaction Class Exemption (PTCE) 84-24 (applicable to transactions involving insurance products, insurance agents, pension consultants and investment company principal underwriters), PTCE 2020-02 (applicable to the receipt of compensation in connection with the provision of investment advice and to certain principal transactions), PTCE 77-4 (applicable to purchases and sales of open-end registered investment companies), PTCE 86-128 (applicable to commissions paid to an affiliate of a plan fiduciary), PTCE 80-83 (relating to purchases of securities where the issuer may use the proceeds to reduce or retire indebtedness), and PTCE 75-1 (applicable to certain securities transactions).
The Final Rule and changes to the PTCEs were scheduled to become effective on September 23, 2024. Shortly after the Final Rule and amended PTCEs were announced, the Federation of Americans for Consumer Choice (FACC) brought suit in the Eastern District of Texas, and the American Council of Life Insurers (ACLI) brought suit in the Northern District of Texas. The plaintiffs in each case sought to have the court vacate the Final Rule. In addition, the FACC case sought to have the court vacate changes to PTCE 84-24, and the ACLI case sought to have the court vacate changes to the other PTCEs. On July 25, 2024, the U.S. District Court for the Eastern District of Texas ordered a stay on the effective date of the Final Rule and the amendments to PTCE 84-24 until further order from the court. On July 26, 2024, one day after the Eastern District of Texas ordered the original stay, the U.S. District Court for the Northern District of Texas issued a stay on the effective date of the Final Rule and the amendments to the other PTCEs listed above. The Eastern District of Texas opinion quoted the Fifth Circuit decision in Chamber of Commerce v. Dep’t of Labor (5th Cir. 2018), which vacated the earlier 2017 DOL investment advice fiduciary rule, stating that “[t]he 2024 Fiduciary Rule suffers from many of the same problems.”
Both opinions are clear that the stays are not limited to the parties to the cases. Therefore, the stays have broad application to all service providers to retirement investors. As a result, until further judicial guidance is issued on this matter, the existing definition of investment advice fiduciary (i.e., the five-part test), as well as the pre-amendment versions of the PTCEs listed above, remain in effect.
The DOL is likely to appeal these decisions, but the stays leave potential investment advice fiduciaries in limbo as the Final Rule and amendments to the PTCEs listed above are challenged in courts. Sidley is monitoring the cases and expects to issue additional client Updates to report developments.