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DOL Files Notice of Appeal in 401(k) Rollover Ruling


The Department of Labor (DOL) filed its notice of appeal on Friday of a ruling that struck down its guidance pertaining to a fiduciary duty regarding rollovers.

“The notice of appeal is in line with what we expected,” ERISA attorney Jason Roberts, CEO of the Pension Resource Institute, said. “Regulators do not like to cede ground and leave opinions challenging their interpretations hanging out there.”

He’s telling his advisor clients to stay the course because “the lower court’s opinion could very well become moot when the DOL finalizes its yet to be proposed investment advice regulation.”

In February, the United States District Court’s Middle District of Florida sided with the American Securities Association (ASA) in the ASA’s suit against the department, ruling that the DOL overstepped its authority with certain parts of its Frequently Asked Questions (FAQs) regarding Prohibited Transaction Exemption 2020-02.

As the court noted, 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.”

While the plaintiffs had asked for summary judgment on four separate counts, they prevailed on only one—though it was a big one 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.”