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Advice fiduciaries – DOL’s view
In this article, we review the Department of Labor’s explanation, in the context of the Federation of Americans for Consumer Choice v. United States Department of Labor(“FACC”) litigation, of its view of the status of its advice fiduciary guidance, after a key (perhaps the key) element of that guidance was vacated (declared void) in American Securities Association v. United States Department of Labor(“ASA”). We then briefly discuss a new item on DOL’s Spring 2023 regulatory agenda (released June 13, 2023) – a “rulemaking that would amend the regulatory definition of the term fiduciary … to more appropriately define when persons who render investment advice … are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code.”
We begin, however, with a discussion of why the issue that features in the two cases noted above – the fiduciary (or non-fiduciary) status of one-time advice to a participant with respect to a rollover – matters to sponsors.
Why this matters to sponsors
We have discussed this question generally in the past. Here we just want to emphasize the significance for sponsors of the key issue disputed in these cases – whether one-time advice about a rollover may trigger fiduciary status.
In this regard, the target of DOL’s regulatory concern – the index “adviser” whose fiduciary status is being disputed in this litigation – is a call center operator affiliated with a mutual fund operator. And the index event DOL is targeting is a participant call to discuss, e.g., her approaching retirement, where the call center operator pitches the idea of the participant rolling her assets over into one of the affiliate’s IRAs.
An important first principle: plan fiduciaries are responsible (as fiduciaries) for the appointment and monitoring of plan service providers, even where those service providers are not themselves fiduciaries. But, if the service provider is a fiduciary, then the standards by which they are to be selected and monitored are higher. And in the case of advice fiduciaries advising participants about rollovers, according to DOL those standards are much higher.
For instance, a “Financial Institution” affiliated with the advice fiduciary must adopt “policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and conduct a retrospective review of compliance.” They are expected to create a “culture of compliance,” and the new rule goes into detail as to which sorts of, e.g., broker compensation arrangements may or may not be appropriate, in what circumstances. Before making a rollover recommendation, the advice fiduciary must investigate all relevant (but often hard to obtain) facts. And the Financial Institution must keep copious records as to why it thinks that a recommendation that a participant roll assets out of a plan and into an (affiliated) IRA is in the participant’s best interest.
The plan fiduciary must monitor compliance with all of those requirements. And if the advice fiduciary fails to comply, e.g., has the wrong compensation/incentive program for persons advising about rollovers, then the plan fiduciary may be a litigation target.
Where the person giving rollover advice is not a fiduciary, the plan fiduciary would generally only have to monitor the call center operator/adviser’s compliance with, e.g., Securities and Exchange Commission rules.
DOL: follow-on IRA advice may satisfy the regular basis test
To turn that call center operator into an “advice fiduciary,” in 2020 DOL issued a new fiduciary advice Prohibited Transaction Exemption (PTE) the preamble of which included a comprehensive reinterpretation of its 1975 regulation on the issue. That regulation (the terms of which were, to repeat, not changed but rather comprehensively reinterpreted) provides that a person is an advice fiduciary if he meets all five parts of a “five-part test.” (We discuss the five-part test in detail here.)
One part of the five-part test is a requirement that the advice be provided on a “regular basis,” understood to mean that the person (and proto-advice fiduciary) provides “advice” on (at least) more than one occasion. Since the targeted conduct often involves only one-time advice (because rollovers are typically a one-time event), DOL (reinterpreting its 1975 rule) took the position that future advice (or conceivably simply the expectation of future advice) to the IRA holder, given after the participant had rolled her benefit out the plan and into an IRA, could satisfy the more-than-one-time-advice element of the “regular basis” part of the five-part test.
District Court vacates of DOL’s reinterpretation of “regular basis”
On February 13, 2023, the US District Court for the Middle District of Florida, in ASA v. DOL, held that that DOL interpretation (that post-rollover advice to an IRA could count for purposes of the “regular basis” test) was arbitrary and capricious, declaring DOL’s position unlawful, and vacating that element of its guidance in the PTE and FAQ 7 of DOL’S 2021 FAQs on the PTE, reasoning that post-rollover advice with respect to an IRA is not advice to the plan within the meaning of the regulation and ERISA.
DOL first (on April 14, 2023) filed a notice of appeal in ASA, then (in May 2023) withdrew its appeal, leaving many to wonder what was DOL’s position on this critical issue after losing its case in district court.
FACC v. DOL
Thereafter, the plaintiffs in FACC v. DOL (which attacks the reinterpretation of the five-part test in the PTE more broadly) filed an Amended Notice of Supplemental Authority, arguing that the decision in ASA v. DOL and DOL’s failure to appeal it were grounds for the court in FACC vacating the PTE’s reinterpretation of the five-part test in its entirety. Quoting: “The DOL’s decision not to appeal the ASA Order nullifying and vacating this central feature [the reinterpretation of the ‘regular basis’ requirement] of the New Interpretation underscores that the DOL’s attempted reimagining of the five-part test is simply unworkable and further supports the relief requested by Plaintiffs in this case.”
The court invited DOL to respond to this argument.
On June 9, 2023, DOL filed its response. In it, DOL emphasized the limits of the court’s decision in ASA:
[I]t is clear that [in ASA] the now-vacated “policy referenced in FAQ 7” was the Department’s interpretation of the regular basis prong to include anticipated advice from one ERISA plan to another, following the assets that were rolled over. … Thus, the Department’s 2020 Interpretation and FAQ 7 are vacated only to the extent that the regular basis test must be satisfied with respect to each ERISA plan about which advice is rendered.
While this (now vacated) reinterpretation of the “regular basis” part of the five-part test is arguably the most significant element of DOL’s reinterpretation of the five-part test in PTE 2020-02, DOL argues that significant elements of its reinterpretation remain intact. Quoting DOL’s response:
The vacatur of this “policy referenced in FAQ 7” does not undermine the Department’s interpretation of the other prongs of the 1975 regulation as applied to rollovers – the “recommendation”, “mutual agreement, arrangement, or understanding”, “a primary basis”, and “individualized investment advice” prongs – or the Department’s longstanding interpretation that “compensation, direct or indirect” includes commissions.
Litigation in FACC v. DOL is ongoing.
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DOL’s Spring 2023 Regulatory Agenda includes proposal on “Conflict of Interest in Investment Advice”
On June 13, 2023, DOL (along with other government agencies) released its Spring 2023 Regulatory Agenda, in which it briefly outlined the various regulatory projects it is working on. One of those is a new regulation addressing, once again, the definition of advice fiduciary under ERISA. The description of the project is short enough to quote in full:
This rulemaking would amend the regulatory definition of the term fiduciary [citation omitted] to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code. The amendment would take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest. In conjunction with this rulemaking, EBSA also will evaluate available prohibited transaction class exemptions and propose amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors.
Two elements (at least) of this briefly sketched proposal are worth noting. First, DOL is going to take another shot at revising its advice fiduciary rule, this time through a formal rulemaking process. The last time it did this, in 2016, its new rule was (in 2018) vacated by the Fifth Circuit. A key question will be how it will treat rollover advice, after the decision in ASA. Will it read the decision in ASA as holding only that DOL could not change the “regular basis” part of the five-part test without going through a full notice-and-comment rulemaking procedure? Or will it try to find some other way around the court’s objections to the PTE?
Second, as indicated in the last sentence of the description of the rulemaking project, DOL intends to review a number of prohibited transaction exemptions “to ensure consistent protection of employee benefit plan and IRA investors.” The ultimate outcome of that process is likely to be that DOL will toughen the eligibility requirements for exemptions for certain transactions/ways of doing business in the securities/investment industry that have for a long time been available subject to limited scrutiny.
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We will continue to follow these issues.