The U.S. Department of Labor (DOL) reportedly has abandoned its appeal in the case of American Securities Association [“ASA”] v. U.S. Department of Labor, No. 8:22-cv-00330 (M.D. Fla. Feb. 13, 2023). In ASA, a Florida federal district court, consistent with a similar ruling by a New York federal district court, rejected a critical DOL interpretation of its fiduciary rules under the Employee Retirement Income Security Act of 1974 (ERISA), as amended. This ruling, and the interpretation of the fiduciary rules at issue, is a major problem for the agency’s policy initiative concerning the regulation of rollover solicitations.
The Amended Fiduciary Rule
Historically, the DOL has focused significant efforts on expanding the reach of fiduciary rules. More specifically, the DOL considers the definition of “investment advice” (the “Existing Fiduciary Rule”) to be too narrow. As a result, the DOL has tried to expand that definition and what constitutes a fiduciary under ERISA by issuing an “Amended Fiduciary Rule” that broadens the scope of “investment advice.”
One of the DOL’s goals was to protect retail investors in employee benefit plans subject to ERISA and owners of individual retirement plans (IRAs), most of which are not subject to ERISA. DOL has interpretative authority regarding certain rules that apply to employee benefit plans and IRAs. Still, it has enforcement authority only regarding employee benefit plans, not non-ERISA IRAs. The issuance of the Amended Fiduciary Rule was the culmination of these goals, and its impact was substantial in that it caused financial institutions to reexamine and revise their practices applicable to retirement accounts.
However, the U.S. Court of Appeals for the Fifth Circuit vacated the Amended Fiduciary Rule as “arbitrary and capricious,” along with various other new and amended administrative exemptions. Among the vacated exemptions was the Best Interest Contract (BIC) exemption, which protected financial institutions by allowing them to act as fiduciaries without violating certain ERISA provisions. The Trump administration’s DOL declined to appeal the decision, which returned the DOL to the status quo of the Existing Fiduciary Rule.
Prohibited Class Transaction Exemption 2020-02
The DOL eventually reinterpreted some aspects of its five-part test defining investment advice under the Existing Fiduciary Rule and followed it up with a FAQ concerning the same issues as part of its April 2021 FAQs. Through this reinterpretation, the DOL reasoned that advice given during the solicitation process of plan rollovers from new customers could constitute “advice given regularly” if the financial institutions gave continuing advice concerning the IRA receiving the rollover. As a result, this advice could constitute fiduciary advice that subjected the rollover solicitation and the soliciting institution to ERISA. This reinterpretation and reasoning formed, in part, the preamble to the Prohibited Class Transaction Exemption (PTCE) 2020-02, which created an exemption allowing financial institutions to provide fiduciary services to the retail retirement market and charge compensation in a way that ERISA otherwise might not permit.
The DOL’s new approach required financial institutions to alter their rollover solicitation procedures dramatically. Although the DOL sought to reach the same result as the rejected Amended Fiduciary Rule by different means, the agency’s reinterpretation of the Existing Fiduciary Rule now also has failed to produce the desired result.
Since the ASA court has rejected the DOL’s reinterpretation as “arbitrary and capricious,” and the DOL has now dropped its appeal of the decision, it appears that the agency also has effectively abandoned its reinterpretation of the Existing Fiduciary Rule. This decision, and the DOL’s subsequent decision not to pursue an appeal, is a definite setback to the agency’s attempts to regulate rollover solicitations. These developments also make it unclear what position or efforts the DOL will take to continue upon this course of regulation. As a result, financial institutions should continue to monitor the situation, as the future remains unclear.
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