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Department of Labor Drops Florida 401(k) Fiduciary Appeal

Fiduciary Rules and Practices

The American Securities Association (ASA) said Monday that the Department of Justice (DOJ) and Department of Labor (DOL) voluntarily dismissed an appeal of a ruling in the ASA’s favor in the Middle District of Florida, which stopped the attempt to use what the association called “informal guidance to change existing retirement rules in violation of the Administrative Procedure Act (APA).”

On February 13, 2023, the District Court struck down DOL’s guidance which stated that a financial advisor’s one-time recommendation to roll over retirement assets might be subject to ERISA fiduciary duties.

The District Court declared the guidance “arbitrary and capricious” and vacated it. The DOL filed its notice of appeal in mid-April, only to abandon it Monday.

“We are pleased the DOL dropped its appeal of the district court’s decision to strike down its attempt to change existing rules about retirement advice without a formal rulemaking,” Chris Iacovella, President and CEO of the American Securities Association, said in a statement. “The district court correctly held the DOL’s guidance was arbitrary and capricious and had no basis in law. ASA remains dedicated to protecting the rule of law, investor choice, and the rights of America’s working families and retirement savers from the overreach of the administrative state.”

ASA sued the DOL last year in federal court in the Middle District of Florida over the APA violation.

As the court noted in its February ruling, the DOL issued a set of FAQs in April 2021, 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.”

It also clarified 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.

The suit focused on two FAQs in particular, 7 (regular basis) and 15 (specific reasons). Plaintiffs argued FAQ 7 unlawfully enlarged “the circumstances in which an investment advisor is subject to fiduciary duties.” It thus would subject ASA members to the increased and expensive documentation requirements detailed in FAQ 15, which plaintiffs claimed were undue and burdensome.

The court first determined that at least one wealth management member of the association bringing the suit had suffered an injury as a result and commented that “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 court then determined that “the policy referenced in FAQ 7 contradicts the plain language of the rule it purports to interpret.”

More specifically, “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 court agreed with the American Securities Association on FAQ 7. It 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 of the Administrative Procedures Act (APA) and “remanded it to the Department of Labor for further proceedings consistent with this Order.”

Yet it found that the policy referenced in FAQ 15 was not arbitrary and capricious and sided with the DOL.

“In short, the type of documentation that FAQ 15 requires is precisely of the nature that a prudent investment advisor would undertake,” the court held. “Accordingly, it neither contradicts the 2020 Exemption nor goes beyond it. The Court finds that the policy referenced in FAQ 15 is not arbitrary and capricious.”

The plaintiffs had asked for summary judgment on four separate counts but prevailed in only one—though it was significant in terms of potential long-term implications.

“While the DOL won on the question of whether the procedure outlined in FAQ 15 was appropriate, they lost on the bigger issue of the re-interpretation of the fiduciary rule for rollovers,” ERISA attorney Fred Reish, a partner with legal powerhouse Faegre Drinker Biddle & Reath LLP, said at the time. “If an advisor or agent isn’t a fiduciary, then a rollover recommendation won’t be a prohibited transaction, and PTE 2020-02 and the FAQ 15 process won’t be needed.”