A federal judge has "declared unlawful" and vacated a piece of Department of Labor guidance that established that rollover recommendations were considered fiduciary investment advice.
A U.S. District Court in Tampa, Fla., on Monday ruled in favor of the American Securities Association in its lawsuit that was filed in February 2022.
The April 2021 guidance — a series of frequently asked questions — relates to the Labor Department's investment-advice exemption that took effect in February 2021. The exemption permits investment-advice fiduciaries to receive compensation for more types of guidance, including advice to roll over assets to an individual retirement account from a retirement plan.
Chiefly, the ASA lawsuit took issue with two of the Labor Department's FAQs concerning rollover advice recommendations — FAQ 7, which outlines 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, and FAQ 15 that details the factors financial institutions and investment professionals should consider and document on how a rollover is in a client's best interest.
The court on Monday struck down FAQ 7, but sided with the Labor Department and upheld FAQ 15 in the case, American Securities Association vs. U.S. Department of Labor, et al. It also rejected the Labor Department's motion to dismiss the case and upheld that FAQ 7 didn't have to go through a formal notice-and-comment period.
"ASA is pleased the court recognized the DOL operated outside the scope of its legal authority and vacated its unlawful policymaking through guidance," ASA CEO Chris Iacovella said in a statement.
Judge Virginia M. Hernandez Covington ruled that FAQ 7 conflicted with the Labor Department's existing regulations and said it is an "arbitrary and capricious" interpretation of the 1975 five-part test.
"The policy referenced in FAQ 7 deviates from past agency guidance by explaining that the one-time provision of advice to roll over assets from a plan to an IRA can, in certain circumstances, trigger fiduciary duties," the judge wrote.
At a later point in the decision, Ms. Covington said that while an offer to provide future advice may be the beginning of a relationship, "That relationship is inherently divorced from the ERISA-governed plan. Because any provision of future advice occurs at a time when the assets are no longer plan assets, it is not captured by the 'regular basis' analysis."
Steven W. Rabitz, co-chair of law firm Dechert's employee benefits and executive compensation practice and leader of the firm's national fiduciary practice, agreed with the judge's decision on FAQ 7.
"This was a regulation in effect since 1975 … at no point prior to 2020 did the Department of Labor ever issue any guidance interpreting that regulation," Mr. Rabitz said. "So for 45 years you're talking about a regulation that's been on its face standing alone. And in 2020 the department said, 'This is our interpretation and this is the way we've always interpreted it.' It caught a lot of people by surprise that the way you're interpreting it seems to be a way that isn't necessarily consistent with the way (the regulation) reads or how people have probably traditionally interpreted it."
The Labor Department can appeal the decision.
A Labor Department spokesman directed comment requests to the Department of Justice; the Justice Department did not immediately respond.
Industry stakeholders have seen the last three administrations promulgate rules or guidance on fiduciary investment advice, most notably a rule finalized during the Obama administration that broadened the definition of a person or entity taking on fiduciary responsibilities and replaced the five-part test. That rule was vacated in 2018 by the Fifth U.S. Circuit Court of Appeals in New Orleans, which said the department exceeded its legal authority.
Currently, the Labor Department is 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.