Florida court overturns DOL leadership, making transfer board fiduciary

A federal court in Tampa, Fla., on Monday overturned a Labor Department guidance that recommended fiduciary investment.

The U.S. District Court for the Middle District of Florida ruled that DOL was “arbitrary and capricious” in its interpretation of a five-part test to determine whether a financial advisor is a retirement account trustee.

In an April 2021 FAQ, DOL argued that a one-time recommendation to transfer pension assets from a company plan to an individual retirement account triggered fiduciary duty requirements under the federal pension law, the Employee Retirement Income Security Act.

The American Securities Association filed a lawsuit in federal court in Florida, alleging that the DOL’s interpretation of the five-part test was too narrow. Instead, the group said that the rubric, which dates back to 1975, establishes that the ongoing relationship between consultant and client must be subject to fiduciary requirements.

Virginia District Judge M. Hernandez Covington ruled that DOL’s response to the FAQ conflicted with the existing ordinance and that “this is an arbitrary and wayward interpretation of the 1975 ordinance.” She released the policy listed in FAQ 7 and sent it back to DOL for further work.

“[W]While the offer to provide future advice may, as the department suggests, be the start of a relationship, the relationship is inherently disconnected from the ERISA-managed plan,” Covington wrote, in her opinion. “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. Because the policy mentioned in FAQ 7 waives this plan specificity in the context of renewals, it includes within its scope that would not otherwise give rise to fiduciary obligations.”

In a controversial decision, Covington denied the DOL’s motion to dismiss the suit, while issuing a summary judgment from the DOL on counts that dealt with other ASA allegations vs. FAQs. For example, she supported the FAQ, which focused on the requirement to document upgrade recommendations, stating that this did not require a rule development process.

The ASA celebrated its victory in answering a FAQ about a one-time rollover advice.

“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. “The ASA filed this lawsuit to protect America’s investor and retirement choice choices from administrative abuse, and the court agreed that DOL’s failure to obtain public opinion prior to changing its pension advice rules is a violation of the Administrative Procedures Act.”

A DOL spokesperson forwarded a request for comment to the Justice Department, where a spokesperson was not immediately available.

The court’s decision came as the Biden administration considers a proposal for rules that would expand the definition of a fiduciary under ERISA. The proposal would build on a Trump administration rule that the Department of Defense upheld at the start of the Biden administration.

Work to regulate investment advice began in the Obama administration, which promulgated a fiduciary rule for retirement accounts. Opponents of the financial industry filed a lawsuit, and in 2018 it was overturned in federal court.

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