The majority of Department of Labor guidance that established rollover recommendations as fiduciary investment advice remains "lawful and workable" despite a federal court's decision to vacate a piece of it, the Labor Department said in a court filing.
The department's April 2021 guidance — a series of frequently asked questions related to an investment-advice exemption that took effect in February 2021 — has faced multiple legal challenges.
The American Securities Association challenged the guidance in U.S. District Court in Tampa, Fla., with a February 2022 lawsuit. In February 2023, Judge Virginia Covington vacated one of the FAQs — FAQ 7 — which outlined 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. The court asserted that the regular basis prong of the five-part test is applied separately to a plan than it is to participants who then roll over their assets into an individual retirement account.
The Labor Department withdrew its appeal in that case in May.
But a separate lawsuit is still pending. The Federation of Americans for Consumer Choice filed a lawsuit in February 2022 in U.S. District Court in Dallas seeking to vacate the Labor Department's interpretation of a fiduciary that was finalized in the 2021 exemption's preamble. The preamble stated that rollover advice to a plan participant can be fiduciary advice if it is followed by advice to the same individual as an IRA owner, an assertion with which the FACC disagrees.
In light of the court's ruling in the ASA case and the Labor Department's decision not to appeal, FACC argued in a court filing that the department's interpretation of fiduciary investment advice is "unworkable." However, the Department of Justice, which is representing the Labor Department in the case, filed a brief June 9 that said the "ASA court's ruling only vacated one discrete aspect of the department's … interpretation of the 'regular basis' prong of the 1975 five-part test, and did not address the remaining elements of the test, each of which remains lawful and workable."
While recommendations to rollover money to an IRA are now less likely to satisfy the five-part test after the ASA court's ruling, the department's "interpretation of other elements of the 1975 regulation remains sound," the filing said.
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.
