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In this article we discuss of the status of the Department of Labor’s (controversial) 2020 fiduciary advice Prohibited Transaction Exemption (PTE 2020-02)and ongoing litigation over PTE 2020-02 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 (FACC v. DOL). We begin, however, with a review of why this issue matters for plan sponsors.
Why this matters to plan sponsors and plan fiduciaries
PTE 2020-02 was primarily targeted at financial institutions. But the new rule – via its reinterpretation in PTE 2020-02 of the 1975 fiduciary advice regulation – was generally intended to in many cases make, e.g., call center operators affiliated with financial institutions “advice fiduciaries.” This will likely require plan fiduciaries to monitor those advice fiduciaries’ compliance with the PTE – in effect adding a new compliance burden and additional compliance/litigation risk.
The broad terms of the PTE may also pick up, as “advice fiduciaries,” sponsor employees, e.g., employees whose job it is to respond to participant questions about the plan and plan investments.
Background
Much of what follows (as background) we have said before in different articles covering the development of and litigation over DOL’s fiduciary advice rule project. We thought it would be useful, however, to provide in one place a more comprehensive treatment of these issues.
The five-part test
When a person becomes an ERISA fiduciary because he or she has given advice to a plan or plan participant is governed by a 1975 regulation articulating a “five-part test,” under which, to be an advice fiduciary, a person must:
(1) [Render] 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.
Under the conventional reading of this rule, “one-time” advice events could not trigger advice status; financial institutions and their agents were able to disclaim fiduciary status by denying any mutual agreement (“that such services will serve as a primary basis for investment decisions with respect to plan assets”); and, under a 2005 DOL Advisory Opinion (the “Deseret Letter), DOL took the position that ERISA fiduciary rules did not apply to IRA rollovers because, once in the IRA, the relevant assets were no longer ERISA “plan assets.”
The significance of rollovers
While the revised interpretation of the five-part test in PTE 2020-02 has a broad reach and raises many issues unrelated to rollovers, the primary focus – the critical problem that both the 2016 Fiduciary Rule and the preamble to PTE 2020-02 sought to solve – was the status of persons (e.g., call center operators) affiliated with financial institutions “pitching” IRAs from their affiliated financial institution to participants considering a distribution.
Quoting from DOL’s brief in FACC v. DOL:
It is also clear that extremely large sums of retirement investments are rolled over annually from Title I plans. … And the investment professionals to whom people turn have significant incentives to encourage such transactions. … With such stakes, and the precise risks of harm through conflicts of interest that ERISA was designed to address, the Department’s interpretation plainly serves ERISA’s remedial purpose. The Interpretation aligns the definition of investment advice with today’s marketplace realties and ensures, consistent with ERISA’s text and congressional intent, that fiduciary status applies to “persons whose actions affect the amount of benefits retirement plan participants will receive.”
Reshaping the five-part test to cover rollovers
In 2016 DOL issued a regulatory package generally referred to as the “Fiduciary Rule,” in which it got rid of the five-part test and substituted for it a much broader definition of “ERISA advice fiduciary” that would have, in many circumstances turned, e.g., call center operators into advice fiduciaries. In 2018, the Fifth Circuit struck down that 2016 version of a fiduciary advice rule. In 2020, DOL issued PTE 2020-02, which included a 64-page preamble that reinterpreted the five-part test in several novel respects.
Critical to the issue of rollovers, under DOL’s new interpretation of the five-part test:
The “regular basis” requirement of the five-part test would be satisfied with respect to “advice to roll assets out of a Title I Plan into an IRA where the investment advice provider has not previously provided advice but will be regularly giving advice regarding the IRA in the course of a more lengthy financial relationship.” That is, the relationship between the adviser and the participant after the participant leaves the plan (and, as it were, leaves ERISA) could be used to satisfy the “regular basis” requirement.
With respect to the “mutual agreement” requirement, “the Department intends to consider the reasonable understanding of each of the parties, if no mutual agreement or arrangement is demonstrated. Written statements disclaiming a mutual understanding or forbidding reliance on the advice as a primary basis for investment decisions will not be determinative ….” The short version: disclaimers will no longer protect the financial institution.
Finally, in connection with this new view/treatment of rollovers, DOL revoked the Deseret Letter.
Carfora and ASA
In recent decisions in Carfora et al. v. Teachers Insurance Annuity Association of America and TIAA-CREF Individual & Institutional Services and American Securities Association v. United States Department of Labor(“ASA”), federal courts have rejected DOL’s reinterpretation of the “regular basis” part of the five-part test, generally holding that that part requires more than one advice event in connection with a plan – future advice with respect to an IRA (to which plan assets have been rolled over) doesn’t count.
FACC v. DOL
The remaining lawsuit against DOL with respect to the PTE is Federation of Americans for Consumer Choice v. United States Department of Labor. Briefly, plaintiffs in FACC v. DOL attack the PTE in several respects, including its reinterpretation of the “regular basis” and “mutual agreement” parts of the five-part test, its general treatment of brokerage commissions as fees for advice (rather than as sales fees), and its failure to limit fiduciary advice to situations in which there is a clear “special relationship of trust and confidence.”
On July 15, 2022, plaintiffs in FACC v. DOL filed a motion for summary judgment, asking the United States District Court for the Northern District of Texas to “(1) declar[e] that the New Interpretation [in the preamble to PTE 2020-02] was promulgated by the DOL in excess of its statutory jurisdiction, authority, or limitations … and is arbitrary, capricious, or otherwise contrary to [the Administrative Procedure Act]; (2) vacat[e] and [set] aside the New Interpretation in its entirety; and (3) permanently enjoi[n] the DOL and all of its officers, employees and agents from implementing, applying, or taking any action of any type under the New Interpretation anywhere within the DOL’s jurisdiction.”
DOL’s brief in opposition to this motion challenged plaintiffs standing to sue and generally argued that its reinterpretation of the five-part test, including, e.g., its reinterpretation of the “regular basis” part of that test, was within its regulatory discretion.
Subsequently, as noted in our last article, DOL has dropped its appeal of the decision by the United States District Court for the Middle District of Florida in ASA (which, as noted above, had struck down its reinterpretation of the “regular basis” part of the five-part test).
Most recently in FACC v. DOL, on May 17, 2023, plaintiffs filed an Amended Notice of Supplemental Authority, which argued (among other things) that: “DOL’s decision not to appeal the ASA Order nullifying and vacating this central feature [DOL’s reinterpretation of the ‘regular basis’ part of the five-part test to pick-up post-rollover advice with respect to an IRA] 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.”
On May 18, 2023, the court (in FACC v. DOL) “invite[d] Defendants to respond to the Amended Notice, specifically to discuss whether the New Interpretation is ‘unworkable’ if the government is not challenging the vacatur of the policy behind [the application of the ‘regular basis’ part of the five-part test to rollovers].” DOL’s response to this invitation is due by June 9, 2023.
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We will continue to follow this issue.