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DOL Says it Might Appeal Rollover Ruling

Practice Management

Commenting that “the Florida court’s analysis is rooted in a fundamental legal error,” the Department of Labor says it may appeal a ruling that upended its guidance pertaining to fiduciary duty regarding rollovers.

Last month, the United States District Court’s Middle District of Florida sided with the American Securities Association, ruling that the DOL overstepped its authority with certain parts of its Frequently Asked Questions (FAQs) regarding Prohibited Transaction Exemption 2020-02. More specifically, the court[1] cited the DOL’s April 2021 FAQs where, among other things, they addressed the point at which advice to roll over assets from an employee benefit plan to an IRA is considered to be on a “regular basis.” 

The court agreed with the American Securities Association on FAQ 7 and declared it unlawful, noting, “Because the policy referenced in FAQ 7 conflicts with the Department’s existing regulations, it is an arbitrary and capricious interpretation of the 1975 Regulation.” It vacated the policy as a violation the Administrative Procedures Act (APA) and “remanded it to the Department of Labor for further proceedings consistent with this Order.”

The DOL Response


In the response (Federation of Americans for Consumer Choice v. US Dep’t of Labor, N.D. Tex., No. 3:22-cv-00243, motion filed 3/20/23), the Labor Department acknowledged that “the Court found that the policy referenced in FAQ 7 was arbitrary and capricious,” but cautioned that it “did not consider the analysis contained in the Preamble, which discusses the Department’s interpretation of the relevant regulatory text at far greater length and includes issues not discussed in FAQ 7.” And then, “because the Florida plaintiff did not challenge the Department’s interpretation of any other elements of the five-part test, even though those elements are addressed by other FAQs in the same document, the court did not address any of the remaining elements of the five-part test,” and thus, in the DOL’s assessment “…only addressed a narrow subset of the issues before the Court here.”

The Labor Department then turns to the “regular basis” element of the 1975 regulation, commenting that “the Florida court’s analysis is rooted in a fundamental legal error: it continually refers to Title II plans (IRAs) as ‘non-ERISA plans’ or containing ‘non-ERISA assets.’” By way of challenging that delineation, the Labor Department pointed out that “both Title I and Title II were enacted as parts of ERISA in 1974, both include identical ‘fiduciary’ definitions, and since 1984 both have been subject the Department’s regulatory and interpretive authority.” And, having built on what it terms a “mistaken premise,” the Labor Department concludes that the court “erroneously concluded that ‘the policy referenced in FAQ 7 departs from [the regulatory] standard by sweeping advice that is not made to an ERISA plan into its ambit’” — and thus, “should be rejected because it is infused with the mistaken conclusion that reasonably-expected ongoing advice to a post-rollover Title II plan ‘is inherently divorced from the ERISA-governed plan.’”

‘Regular Basis’ Rationale


The Labor Department counters that its interpretation of the “regular basis” prong as applied to the rollover context is reasonable because:

1. the retirement investment advice to make a rollover from a Title I ERISA plan plainly concerns the assets of “the plan;”
2. a relationship of trust and confidence can be present in the conversations and advice that lead up to the first transaction; and
3. at the time of the rollover transaction, a reasonable expectation of an ongoing advice relationship that encompasses both the Title I plan from which the assets are moved and the Title II plan or plans to which the assets are rolled over can satisfy the “regular basis” inquiry.

That said, the Labor Department concedes here that an advice provider only becomes a fiduciary with regard to each transaction if each prong of the five-part test is satisfied and the advice provider receives compensation from the transaction — before commenting that the court’s analysis was “also unhelpful because it:

  • does not address the Department’s interpretation of the other elements of the 1975 regulation;
  • does not address the relationship between the current Exemption and Interpretation and the Fifth Circuit’s opinion in Chamber of Commerce v. Department of Labor, 885 F.3d 360 (5th Cir. 2018);
  • does not discuss the evolving standards in both insurance and securities regulations toward a best interest standard aligned with the approach taken by the Department here; and
  • does not address the scope of relief arguments briefed in this case.”

And, having said that, they conclude by noting that “The Department is currently considering next steps in the Florida case, including a potential appeal.”

Stay tuned.


[1] The suit also noted an FAQ that sought to clarify when financial institutions and investment professionals must consider and document the “specific reasons” a rollover recommendation was thought to be in the client’s best interest — but the court rejected that aspect of the suit.