A federal judge “illegalized” and overturned a portion of the Department of Labor’s guidance that held that rollover recommendations were considered fiduciary investment advice.
The U.S. District Court in Tampa, Florida, ruled in favor of the American Securities Association on Monday in a lawsuit filed in February 2022.
The April 2021 Guidance – a series of frequently asked questions – refers to the Department of Labor exemption from investment advice that went into effect in February 2021. This exemption allows trustees who provide investment advice to be compensated for additional types of advice, including asset rollover advice. to an individual retirement account from a pension plan.
Primarily, the ASA’s lawsuit concerns two of the Department of Labor’s frequently asked questions regarding renewal recommendations – FAQ 7, which specifies when renewal recommendations are considered “regular”, which is a component of the five-part test used to determine whether whether the investment professional or financial institution is a fiduciary, and FAQ 15 details the factors that financial institutions and investment professionals should consider and document in relation to how a rollover is in the best interest of the client.
On Monday, the court rejected FAQ 7, but sided with the Department of Labor and upheld FAQ 15 in the American Securities Association v. U.S. Department of Labor et al. formal notice and comment period.
“ASA is pleased that the court has recognized that DOL is acting outside of its legal authority and has reversed its illegal policies through guidance,” ASA CEO Chris Jacobella said in a statement.
Judge Virginia M. Hernandez Covington ruled that FAQ 7 was in conflict with existing Department of Labor regulations and said it was an “arbitrary and wayward” interpretation of the 1975 five-part test.
“The policy referred to in FAQ 7 differs from the agency’s past guidance, explaining that a one-time provision of advice to transfer assets from a plan to an IRA may, under certain circumstances, give rise to fiduciary duties,” the judge wrote.
At a later stage in the decision, Ms Covington said that while the offer to provide future advice could be the start of a relationship, “this relationship is inherently out of touch with the ERISA-managed plan. Because any provision of future advice occurs at a time when the assets are no longer plan assets, they are not covered by the “on a regular basis” analysis.
Steven W. Rabitz, Co-Chair of the Dechert Law Firm’s Employee Compensation and Executive Compensation Practice and Head of the Firm’s National Fiduciary Practice, agreed with the judge’s decision on FAQ 7.
“This regulation has been in effect since 1975…until 2020, the Department of Labor has never issued any guidance on how to interpret this provision,” Mr. Rabitz said. “So for 45 years you’ve been talking about a rule that was at first glance independent. And in 2020, the department said, “This is our interpretation and we have always interpreted it that way.” It surprised a lot of people that the way you interpret it doesn’t seem to necessarily match how (the ruling) is read or how people probably traditionally interpret it.”
The Department of Labor may appeal this decision.
A Department of Labor spokesman sent requests for comment to the Department of Justice; The Justice Department did not immediately respond.
Industry stakeholders have seen the last three administrations promulgate rules or guidelines on fiduciary investment advice, most notably a rule finalized under the Obama administration that expanded the definition of an individual or entity assuming fiduciary duties and replaced the five-part test. That rule was overturned in 2018 by the Fifth U.S. Circuit Court of Appeals in New Orleans, which said the department had exceeded its legal authority.
The Department of Labor is currently working on a policy development initiative that could broaden the range of individuals considered fiduciaries under ERISA by amending the statutory definition of the term “fiduciary”.