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On May 2, 2024, a group of plaintiffs, including the Federation of Americans for Consumer Choice (FACC), filed a complaint against the Department of Labor, challenging the validity of DOL’s recently finalized amendment to the ERISA advice fiduciary regulation.
In this article we highlight two key claims plaintiffs are making in this case: that DOL’s imposition of the general ERISA fiduciary obligations of prudence and loyalty on IRA advisers and its refusal to provide a carve out for brokers as mere salespersons cannot be supported by the statute and that the 2024 amendment to the rule must be vacated.
Background – DOL’s amended advice rule
For general background on DOL’s amendment to ERISA’s fiduciary advice rule, please see our recent article on it. In its critical part, the amendment changes/expands the criteria for when a recommendation is fiduciary advice/triggers fiduciary status. Under the new rule, fiduciary status is triggered when:
[T]he person makes a recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property … to [a] plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary (retirement investor);
For a fee or other compensation, direct or indirect; and
The person makes the recommendation in one of the following contexts:
The person either directly or indirectly (e.g., through or together with any affiliate) makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation is based on review of the retirement investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest; or
The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both, with respect to the recommendation.
Background on the case
FACC is a nonprofit trade organization representing “independent marketing organizations, insurance agents, and agencies that market fixed insurance products including traditional fixed rate annuities and fixed indexed annuities.” The other plaintiffs are an insurance agent, an insurance agency, and an “independent insurance marketing organization.” FACC is also a plaintiff in a challenge to DOL’s Prohibited Transaction Exemption 2020-02, one of the two primary challenges to PTE 2020-02. (The other case was American Securities Association v. United States Department of Labor, in which the US District Court for the Middle District of Florida vacated/(declared void) a key element of PTE 2020-02.)
In its (new) complaint/lawsuit against DOL with respect to DOL’s (April 23, 2024) final amendment to the ERISA fiduciary advice regulation, FACC raises certain issues that are unique to persons selling/marketing annuities to retirement investors. But it also raises more general issues with respect to the validity of that amendment, and in this note we briefly focus on those more general issues.
Plaintiffs’ claims
Plaintiffs challenge DOL’s amendment of ERISA’s advice fiduciary rule on two broad bases:
The imposition of “Title I” style fiduciary rules on IRAs is not authorized by ERISA
Title I of ERISA (which governs employer-provided retirement plans) imposes general fiduciary obligations on retirement plan fiduciaries – duties of loyalty and prudence, a duty to diversify plan investments, and a duty to follow the plan document (to the extent it does not violate ERISA). Title II of ERISA (which governs, e.g., IRAs) does not include these Title I fiduciary rules. It only incorporates a set of prohibited transaction rules (more or less identical to the prohibited transaction rules in Title I applicable to retirement plans), and those rules do apply to fiduciaries.
In its 2024 final amendment to these rules, DOL extended its new definition of fiduciary to Title II, providing that persons giving advice to an IRA/IRA investor are fiduciaries if they meet the new criteria for advice fiduciary status in the regulation (see above). And they will (probably) be engaged in a prohibited transaction if they do so in the context of a conflict of interest (e.g., they are receiving a fee from someone other than the advisee for giving the advice).
The only way out of that prohibited transaction would then be to come within the terms of a prohibited transaction exemption (e.g., PTE 2020-02, as amended). And that PTE incorporates the general Title I fiduciary obligations, e.g., the duties of loyalty and prudence.
Thus, DOL has, via the PTE, imported into Title II (and the regulation of IRA advisers) rules that (in the statute) only exist in Title I (regulation of retirement plans).
Plaintiffs claim that this effort by DOL “to assert new regulatory jurisdiction in the IRA market” is “beyond its statutory authority … was arbitrary, capricious, and not otherwise in accordance with ERISA and the Code.”
Failure to recognize the distinction between salespersons (e.g., brokers) and investment advisors violates ERISA and the APA
In the preamble to its proposed (October 24, 2024) amendment to the advice fiduciary rule, DOL was emphatic that it saw no essential distinction between “advice” and “sales activity”:
[T]he Department rejects the purported dichotomy between a mere “sales” recommendation to a counterparty, on the one hand, and advice, on the other, in the context of the retail market for investment products. As reflected in recent regulatory developments from both the SEC and NAIC, financial service industry marketing materials, and the industry’s comment letters reciting the guidance they provide to investors, sales and advice typically go hand in hand in the retail market.
DOL received a number of criticisms of this approach, and in the final amendment DOL included a separate paragraph addressing it:
A person does not provide “investment advice” … if they make a recommendation but [do not meet the criteria for fiduciary advice described above]. For example, a salesperson’s recommendation to purchase a particular investment or pursue a particular investment strategy is not investment advice if the person does not represent or acknowledge that they are acting as a fiduciary under ERISA Title I or Title II with respect to the recommendation and if the circumstances would not indicate to a reasonable investor in like circumstances that the recommendation is based on review of the retirement investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest. Similarly, the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of this rule.
It’s not unfair to say that this response to the criticism it received on this issue amounts to the DOL giving salespeople “the sleeves from its vest.” DOL did not change its rule to accommodate current sales practice. It simply stated that it is (theoretically) possible for a salesperson to not trigger fiduciary advice status.
Plaintiffs believe, however, that there is (legally) a status-based distinction between investment advisors, who may give fiduciary advice, and brokers, who are (always) merely salespeople and (in effect, by definition) cannot be advice fiduciaries: “[I]n the context of investment advice provided for a fee, it has long been recognized that only where it is the advice that is paid for, not the investment product being purchased or sold, that a fiduciary relationship may arise.”
DOL’s position to the contrary is, therefore, “fundamentally inconsistent with Congress’ intent,” was “flatly rejected” by the Fifth Circuit Court of Appeals in its 2018 decision vacating DOL’s 2016 attempt to re-write ERISA’s advice fiduciary rule, “is not a permissible construction of ERISA or the Code and is unreasonable,” and is therefore a violation of ERISA and the Administrative Procedure Act.
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We expect at least one other lawsuit to be filed challenging DOL’s 2024 fiduciary advice package. Given how controversial DOL’s revision of the advice fiduciary rule has been, the possibility that a court may vacate the 2024 amendment cannot be discounted.
We will continue to follow this issue.