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Critics of the Biden administration’s proposed retirement plan fiduciary advice rule are warning the US Labor Department that the agency will likely be taken to court for proposing a regulation they say would harm investors and curtail sales. Brass Snap Hook With Ring

Regulators appear to still be poring over the more than 19,000 comments they’ve received on the proposed Retirement Security rules package (88 Fed. Reg. 75890–76045). The proposal would cast strict fiduciary standards of conduct over a wider array of financial professionals, threatening the commissions they earn on investment sales.

DOL’s Employee Benefits Security Administration has said it’s protecting retirement investors from self-interested advisers who make big commissions off selling risky, long-term investments. Critics claim the department is conflating retirement advice with sales activity, and that commission-based advice is a lower-cost alternative to pricier fiduciary professionals.

The first wave of public comments the DOL has published—a total of 95 comments on the proposed definition and related prohibited transaction exemption amendments—make it clear that industry groups backed up by Wall Street lobbyists aren’t pleased with the proposed version of the rule and will likely sue unless the final version contains substantial changes.

“These proposals will be vigorously challenged in court should the Department proceed to adopt them,” wrote Don Colleluori, a partner at Figari & Davenport LLP. Colleluori submitted a letter on behalf of the Federation of Americans for Consumer Choice Inc., a group already suing the DOL in Texas federal court over its last attempt at amending the fiduciary definition in 2020.

The Labor Department didn’t immediately respond to a Bloomberg Law request for comment.

Since 2010, the department has drafted four different proposed regulations redefining who qualifies as an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (Pub. L. No. 93-406). DOL voluntarily withdrew its first proposal after facing overwhelming opposition from business interests and lawmakers. The second rewrite, proposed in 2015 and finalized a year later, was substantially more broad but supported by consumer advocacy groups such as AARP. The US Court of Appeals for the Fifth Circuit vacated that rule in 2018 for over-extending the department’s reach under ERISA and violating the traditional understanding of a fiduciary under common trust law.

Commenters made repeated reference to that last rule in their letters to the department, emphasizing the Fifth Circuit’s interpretation of what Congress meant when it used the term “fiduciary.”

Rep. Virginia Foxx (R-N.C.), who chairs the House Committee on Education and the Workforce, has emerged an early staunch critic of the DOL’s proposal and characterized it as a “regurgitation of the same old rule” in a comment letter. A House Financial Services subcommittee has announced a formal, GOP-led inquiry into the proposal that will kick off Jan. 10 with a hearing examining the impact it would have on retirement access.

“This ‘new’ Proposal incorporates many of the same inappropriately expansive concepts as were included in the Department’s 2016 fiduciary rulemaking package,” American Council of Life Insurers Vice Presidents James Szostek and Howard Bard wrote in an unpublished comment letter provided to Bloomberg Law. “This Proposal has several significant fatal flaws, is similarly inconsistent with the statutory text and, therefore, must be withdrawn.”

ACLI and other industry groups drew parallels between the 2016 rule’s emphasis on a contractual private-right-of action for individual retirement accounts and the latest proposal’s elimination of regulatory text that would apply Title I ERISA duties to advisers traditionally bound by Title II factors. There is a clear legal difference between workplace-sponsored plans under Title I and personally sponsored IRAs under Title II, but the DOL risks crossing that line, they said.

The department’s third fiduciary proposal, proposed by the Trump administration in 2020, extended duties by reinterpreting the 1975 regulation. It’s already been significantly curtailed by a federal district court in Florida and may be overturned entirely by the FACC lawsuit in Texas.

“The proposal is legally flawed,” said Investment Company Institute President and CEO Eric Pan. “It ignores past case law, exceeds the DOL’s authority, and falls short of applicable administrative law standards.”

The majority of published comment letters call on the Labor Department to extend the rule’s 60-day comment period, which expired on Jan. 2. The DOL has said that prior iterations of the rule have given the public enough time to digest the purpose of its conflict-of-interests protections, despite the fact that prior rules all gave commenters more time to review.

Letters from ACLI, the Insured Retirement Institute, Investment Company Institute, and Charles Schwab & Co Inc. say the department should withdraw the proposed rule in its entirety.

“We do not believe the Proposal can or should be ‘fixed,’” IRI President and CEO Wayne Chopus and Chief Legal and Regulatory Affairs Officer Jason Berkowitz wrote in the organization’s unpublished comment letter provided to Bloomberg Law.

Yet other commenters made suggestions. The department’s new three-part test for defining an investment advice fiduciary emphasizes providing advice for compensation and individuals who hold themselves out as fiduciaries. Those are “bright-line, objective” rules, wrote David S. Addington, executive vice president and general counsel of the National Federation of Independent Business.

But the third context factor hinges on an ambiguous question about whether “individual circumstances” would suggest that the advice is individualized and an investor should rely on it.

“Interpretation of the proposed rule’s use of the phrase ‘circumstances indicating’ matters greatly, and it is unclear to whom the Department means the circumstances indicate: to the advice-giver, the retirement investor, or the Department of Labor,” Addington wrote.

NFIB suggested the department apply a clear “reasonable person” standard for determining whether advice is trustworthy.

The ERISA Industry Committee told EBSA its revised definition could trigger fiduciary status for “routine interactions and investment education” regulators likely didn’t intend to capture. Regulators should carve out human resources employees and stand by prior guidance that protects investment education, the group said in an unpublished letter provided to Bloomberg Law.

Some proponents of the rule, however, voiced their overall support. Better Markets Legal Director and Securities Specialist Stephen Hall pushed back on the notion that the DOL’s new rule will face the same fate as the 2015-16 rule, noting that regulators made clear a relationship of trust and confidence between advisers and their clients that is grounded in common trust law.

The proposed rules “each scrupulously abide by the holdings of the [Fifth Circuit] case by incorporating a trust and confidence requirement in the rule and by dispensing with any provision that could be read as creating an impermissible private cause of action,” Hall said in a yet unpublished letter.

To contact the reporter on this story: Austin R. Ramsey in Washington at aramsey@bloombergindustry.com

To contact the editors responsible for this story: Rebekah Mintzer at rmintzer@bloombergindustry.com; Laura D. Francis at lfrancis@bloomberglaw.com

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