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On May 15, 2023, the Department of Labor dropped its appeal of the (February 2023) decision by the United States District Court for the Middle District of Florida, in American Securities Association v. United States Department of Labor (“ASA”). DOL’s decision to drop this appeal is generally understood as a recognition by DOL that, at least with respect to IRA rollovers, it cannot change its position with respect to fiduciary advice – and the historical understanding of DOL’s five-part test – within the current regulatory framework and will, at a minimum, have to (once again) go through a formal rulemaking process.
Background
In ASA, the court held (among other things) that a critical feature of DOL’s interpretation of the ERISA’s fiduciary advice rule with respect to rollover advice was arbitrary and capricious, declaring DOL’s position unlawful, and vacating its guidance in DOL’s 2020 fiduciary advice Prohibited Transaction Exemption (PTE 2020-02) and its 2021 FAQs on the 2020 PTE. We discuss the court’s decision in detail in our article District Court Vacates DOL’s Fiduciary Rollover Advice Policy.
New fiduciary advice rule in the works
DOL is understood to have been working on a new fiduciary regulation that was to have supplemented the PTE. Most believe that, after deciding to drop its appeal in ASA, that new proposal will attempt to amend via regulation the five-part test. By our count, that new proposal will be DOL’s fifth try at changing the test for fiduciary advice.
The (1975) regulation articulating the five-part test currently provides that a person who renders advice is an ERISA fiduciary if that person:
(1) [R]enders advice to the plan as to the value of securities or other property, or makes recommendation as to the advisability of investing in, purchasing, or selling securities or other property … (2) on a regular basis … (3) pursuant to a mutual agreement, arrangement or understanding, written or otherwise, between such person and the plan or a fiduciary with respect to the plan, (4) that such services will serve as a primary basis for investment decisions with respect to plan assets, and (5) that such person will render individualized investment advice to the plan based on the particular needs of the plan regarding such matters as, among other things, investment policies or strategy, overall portfolio composition, or diversification of plan investments.
A critical goal for DOL has been to extend ERISA fiduciary rules to advice with respect to IRA rollovers. They have been frustrated in this project by the courts. Most recently, as noted, the court in ASA struck down DOL’s (re)interpretation of the five-part test in PTE 2020-02. In the preamble to PTE 2020-02, DOL had sought to consider post-rollover IRA advice in applying the “regular basis” element of the five-part test (which all agree requires more than a one-time advice event, e.g., with respect to the rollover). The court found (among other things) that this interpretation conflicted with the regulation’s requirement that the advice be “to the plan” (and not to an IRA-holder).
In explaining DOL’s 2016 version of ERISA’s fiduciary advice rule, Assistant Secretary of Labor Borzi said that “We had to be creative to try to find a way to make the responsibility for acting in your client’s best interest, the fiduciary responsibility, enforceable in the IRA context.” In 2018, the Fifth Circuit struck down that 2016 version of a fiduciary advice rule. It remains to be seen whether, in once again going back to the drawing board on this issue, DOL will be able to fashion a rule that will pass muster with the federal courts.
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We note that there is ongoing litigation on the PTE in the United States District Court for the Northern District of Texas, in Federation of Americans For Consumer Choice v. United States Department of Labor.
We will continue to follow this issue.