Magistrate’s recommendations in FACC litigation indicate “path forward” for DOL on rollover advice

In this article, we review briefly the Findings, Conclusions, and Recommendations of the United States Magistrate Judge in Federation of Americans for Consumer Choice v. United States Department of Labor (FACC). Bottom line: the Magistrate agrees with other courts that DOL’s interpretation of the “regular basis” element of the five-part test conflicts with its own regulation, but (unlike other courts) believes that that regulation could be modified to provide that one-time advice, e.g., with respect to a rollover, could trigger fiduciary status. The court is not, however, required to adopt the Magistrate’s analysis in its opinion.

We begin with some background.


For more detail on the case, on why the issue of advice with respect to rollovers is such a critical issue for DOL, and on why this issue is important for plan sponsors, see our article Advice fiduciaries – DOL’s view. Very briefly:

DOL has for some time been trying to re-write current rules as to when a person becomes an ERISA “advice fiduciary” because of recommendations that person has made to a plan or plan participant. That effort culminated in 2016 in a new, comprehensive “Fiduciary Rule” which was (in 2018) struck down by the Fifth Circuit. DOL then, in 2020, issued a prohibited transaction exemption (the PTE) that included a lengthy preamble reinterpreting DOL’s old rule, the “five-part test.”

Critical elements of the five-part test include that, to trigger fiduciary status, the recommendations must be made on a “regular basis” pursuant to a “mutual agreement” that the recommendation will serve as a “primary basis” for the participant’s or plan’s investment decision.

DOL has been particularly concerned about advice with respect to rollovers (and especially as to advice to roll plan assets into an IRA), which often affect a “lifetime of savings.” In this regard, the “regular basis” element of the five-part test has been particularly problematic for DOL. All agree that it requires more than one advice event, but advice as to a rollover may be a one-time event. DOL’s solution to this problem in the PTE was to count post-rollover advice with respect to the IRA as additional advice events.

Courts – in American Securities Association v. United States Department of Labor (ASA) and Carfora et al. v. Teachers Insurance Annuity Association of America and TIAA-CREF Individual & Institutional Services – have rejected DOL’s theory, finding (in ASA) that to be counted for purposes of the regular basis requirement the (multiple) advice events must be with respect to the same plan.

All of this matters to sponsors because DOL’s main target – for translation to fiduciary status – is call center operators. Making call center operators fiduciaries will increase pan sponsors’ fiduciary monitoring burden.

What the Magistrate said about rollover advice

The Magistrate – following ASA and Carfora – found that counting post-distribution advice for purposes of the regular basis test was an unreasonable interpretation of the DOL’s current regulation (the five-part test) and that that element of DOL’s reinterpretation of the five-part test should therefore be vacated.

Critically, however, the Magistrate found that while the regulation required more than one advice event to satisfy the regular basis element, ERISA did not. That is, that DOL could (e.g., via an amendment to the regulation) provide that one-time advice – where the participant was placing her trust and confidence in the adviser – could be sufficient to trigger ERISA advice fiduciary status:

As to the regular basis requirement and the New Interpretation’s [in the PTE] consistency with ERISA, the Fifth Circuit held that investment advice procured “on a fee basis” generally encompasses “a substantial, ongoing relationship between adviser and client.” … But that opinion did not foreclose that Title I duties may reach those fiduciaries who, as aligned with Title I’s text, render advice, even for the first time, “for a fee or other compensation.” … And, as another court has noted, “[n]othing in the phrase ‘renders investment advice’ suggests that the statute applies only to advice provided ‘on a regular basis.’” … Indeed, ERISA expressly authorizes the DOL to impose fiduciary duties on those who provide recommendations concerning Title I assets, if that investment advice is given “for a fee or other compensation.” While a regular, ongoing relationship may be indicative of one based in confidence and trust, the length of the relationship itself is not dispositive of whether the recommendation is investment advice.

As we discussed in our article Advice fiduciaries – DOL’s view, DOL has place on its agenda a new “Conflict of Interest in Investment Advice” regulatory project, with a proposal due this August.

The rest of the PTE’s reinterpretation of the five-part test is reasonable

The Magistrate found that in all other respects DOL’s reinterpretation of the five-part test – including subjecting the “mutual agreement” and “primary basis” elements to a facts and circumstances analysis – does not conflict with either ERISA or the regulation.

Status of Magistrate’s Report

The parties may object to the Magistrate’s “Findings, Conclusions, and Recommendations,” and we would expect both plaintiffs and DOL to file objections. The Court will issue its own opinion – which is the only one that “counts” – and may accept, modify, or reject those findings, etc. in that opinion.

* * *

We will continue to follow these issues.