Florida Court Decision’s Impact on Rollover Advice

Key Takeaways:

The Department of Labor (the DOL) expanded its interpretation of fiduciary advice in its guidance issued in connection with Prohibited Transaction Exemption (PTE) 2020-02. As a result, many more broker-dealers and registered representatives (advisors) became fiduciaries under ERISA and/or the Code for their recommendations to retirement investors, including rollover recommendations. Since fiduciary recommendations that result in transaction-based compensation are generally prohibited transactions, they will need the protection provided by complying with the conditions in PTE 2020-02.

A federal district court in Florida (American Securities Association (ASA) v. U.S. Department of Labor, Case No. 8:22-cv-330 (M.D. Fla. Feb. 13, 2023)) set aside the DOL’s expanded interpretation of fiduciary investment advice for rollover recommendations. At the time of writing this article, we do not know whether the DOL will appeal that decision.

However, the court did not change the regulatory definition of fiduciary advice and its application to advice to retirement plans or IRAs. Even if the expanded interpretation for rollover recommendations does not apply, where broker-dealers and their advisors provide ongoing advice to retirement investors they can still be fiduciaries for recommendations to IRA owners, plan fiduciaries and participants (and, in addition, under the DOL’s previous guidance can, in limited circumstances, still be fiduciaries for rollover recommendations). As a result, broker-dealers and their advisors will still need the relief provided by PTE 2020-02, including the best interest process it requires.

The Issues Addressed by the Court

ASA asked the court to set aside two parts of the DOL guidance issued with respect to (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees), in the form of Frequently Asked Questions (FAQs), specifically:

  • the DOL’s expanded interpretation of fiduciary investment advice for rollover recommendations in FAQ-7; and
  • the best interest process for rollover recommendations described in FAQ-15, which reflects the DOL’s view that information about the plan’s services, investments and expenses needs to be obtained and compared to the services, expenses and investments offered in the rollover IRA.

The court determined that the best interest process for rollover recommendations described in FAQ-15 should not be set aside because it is consistent with the process a prudent fiduciary advisor should undertake and aligns with the policies set forth in PTE 2020-02. On the other hand, the court found the DOL’s expanded interpretation for rollover recommendations in FAQ-7 unlawful and ordered that it be vacated.

The DOL’s Expanded Interpretation of Fiduciary Advice – FAQ-7

Under FAQ-7, the DOL re-interpreted the current regulatory definition of fiduciary advice. Here’s the background.

  1. The Regulatory Definition of Fiduciary Advice

    Under current DOL regulations, a broker-dealer and its advisors are fiduciaries to an ERISA plan if a functional 5-part test is satisfied. This same definition applies to an advisor to an IRA under the Internal Revenue Code (the “Code”).  Under the 5-part test, a broker-dealer and its advisors are fiduciaries under ERISA and the Code when (1) providing advice about investments for a fee, (2) on a regular basis, (3) under a mutual understanding with the plan fiduciary, plan participant or IRA owner, (4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and (5) that the advice is based on the particular needs of the plan or IRA.

  2. The DOL Guidance (Before PTE 2020-02)

    The DOL issued guidance in 2005 (Advisory Opinion 2005-23A) regarding how the 5-part test applies to rollover advice. The DOL said that if the advisor was not a fiduciary advisor to the ERISA plan and recommended a rollover to the investor, then the rollover recommendation would not be considered a fiduciary act under the five-part test. Under this interpretation, an advisor – with no prior relationship to an ERISA plan or participant – could recommend a rollover without becoming subject to the ERISA duties of prudence and loyalty and the prohibited transaction rules.

  3. The DOL’s Expanded Interpretation

    The DOL expanded its interpretation of fiduciary advice in FAQ-7 by saying that a broker-dealer and its advisor are providing advice on a regular basis (1) if the advisor has a pre-existing advice relationship with the investor on tax-qualified retirement assets (e.g., advising on another IRA), or (2) if the advisor anticipates that the rollover recommendation is the first step in an ongoing financial relationship concerning tax-qualified retirement assets (e.g., the rollover IRA). With this interpretation, the other 4 parts of the 5-part test are met for most rollover recommendations and, as a result, broker-dealers and their advisors need the protection of PTE 2020-02.

The ASA Decision

The ASA court found that the DOL’s interpretation of “regular basis” was not a reasonable interpretation. The ASA court reasoned that regular basis should be determined with reference to the advice provided to a particular plan and could not be connected to the rollover IRA:

Before a rollover occurs, a professional who gives rollover advice does so with respect to an ERISA-governed plan. However, after the rollover, any future advice will be with respect to a new non-ERISA plan, such as an IRA that contains new assets from the rollover. The professional’s one-time rollover advice is thus the last advice that he or she makes to the specific plan. So, while an offer to provide future advice may, as the Department suggests, 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. Because the policy referenced in FAQ 7 abandons this plan-specific focus in the context of rollovers, it sweeps conduct into its purview that would not otherwise trigger fiduciary obligations.

The ASA court then concluded that the DOL’s interpretation was arbitrary and capricious and should be vacated.

Implications for Rollover Advice

At this point, there are a number of reasons why broker-dealers and their advisors should not change their current practices and procedures with respect to rollover recommendations and should continue to comply with PTE 2020-02. First, it is possible the DOL will appeal this decision and on appeal, this decision could be overturned. Second, the ASA decision has no impact on rollover recommendations that were considered fiduciary advice under the DOL’s 2005 guidance. This means that the DOL’s prior guidance may be applicable even if the ASA decision is upheld. That guidance said that an advisor who is an ERISA fiduciary to the plan and who recommends a rollover would be considered a fiduciary with respect to the rollover advice. Third, the DOL regulatory agenda indicates that it will be proposing a new fiduciary definition in the near future (see our recent post about this) and it is likely that this decision will prompt the DOL to move quickly to issue the proposed rule.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About the Author: Fred Reish

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

About the Author: Joan M. Neri

Joan Neri represents plan service providers – including broker-dealers and registered investment advisers – and employer plan sponsors and counsels them on fulfilling their obligations under ERISA and complying with the Internal Revenue Code rules governing retirement plans and accounts. Joan advises on ERISA fiduciary status and responsibilities, avoidance of prohibited transactions, the considerations associated with structuring, developing and offering investment products and services to ERISA plans and day-to-day plan operational compliance issues.

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