"Based on ERISA's text and purpose, coupled with the common law understandings of fiduciary relationships, the court should find the DOL's new interpretation of the five-part test narrowly conflicts with ERISA and the DOL's own regulations," Magistrate Judge Rebecca Rutherford said in a June 30 recommendation. "In view of this conflict, the court should conclude that the DOL exceeded its statutory authority in promulgating the new interpretation and that the new interpretation is an arbitrary and capricious interpretation of the five-part test."
At the heart of the issue is when rollover advice is considered to be on a "regular basis," a component of the five-part test used to determine whether an investment professional or financial institution is a fiduciary.
Ms. Rutherford noted that the Labor Department "now takes the position that while 'a single instance of advice to take a distribution from (an ERISA plan) and roll over assets would fail to meet the regular basis prong,' 'advice to roll over plan assets can also occur as part of an ongoing relationship or an intended ongoing relationship that an individual enjoys with his or her investment advice provider.'"
The court should vacate the portions of the exemption's text and preamble that allow consideration of individual retirement account investment advice relationships when determining fiduciary status, Ms. Rutherford said. "These provisions exceed the DOL's authority under ERISA and constitute arbitrary and capricious interpretations of the five-part test to determine whether financial professionals are acting as 'investment advice fiduciaries,'" she concluded.
As a magistrate judge, Ms. Rutherford is not overseeing the FACC lawsuit, but her recommendation does carry weight.
The Justice Department, which is representing the Labor Department in the case, did not immediately respond to a request for comment.
The recommendation comes after a U.S. District Court judge in Tampa, Fla., in February partially vacated the Labor Department guidance concerning rollovers. The American Securities Association filed a lawsuit challenging the guidance in February 2022 and the department withdrew its appeal in that case in May.
But separately, the Labor Department is currently working on a rule-making initiative that could broaden who's considered a fiduciary under ERISA by amending the regulatory definition of the term fiduciary.
