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DOL Pushes Back on ‘Downright Bizarre’ Fiduciary Challenge


The Labor Department is pushing back against litigation challenging specific elements of its FAQs regarding the fiduciary rule.

The suit (Am. Sec. Ass’n v. U.S. Dep’t of Labor, M.D. Fla., No. 8:22-cv-00330, complaint filed 2/9/22) was one of two filed earlier this year challenging the DOL’s Prohibited Transaction Exemption (PTE) 2020-02. While both were filed on behalf of individuals whose business were detrimentally impacted by the expanded definition of fiduciary, specifically in this case that in FAQs issued subsequent to the regulation. The suit basically alleged that the Labor Department regulated via the FAQs, rather than going through the standard, required, notice and comment period. 

In their assessment, the FAQs created a new situation where a rollover recommendation could be the act of a fiduciary, and that in FAQ 15, “the Department imposes a host of burdensome documentation and investigation requirements on financial institutions when making rollover recommendations, despite the fact that the exemption the Department promulgated contains no such requirements.” 

In response, and as part of its motion to dismiss the case (American Securities Association v. United States Department of Labor et al., case number 8:22-cv-00330, in the U.S. District Court for the Middle District of Florida), the Labor Department presented several alternative arguments. 

‘Downright Bizarre’

First, they argued that the members of the association bringing suit “openly admit that they are, in fact, assuming fiduciary obligations in the normal course”—and that therefore the issue of creating fiduciary status was moot. Secondly, they argued the FAQs merely restated[i] for clarity ideas that were already embodied in the regulations preamble and text—and that stopping or setting aside two of the Department’s FAQs without challenging the underlying, substantive policy that those FAQs embody is “downright bizarre.” 

And thirdly, that the plaintiff failed to identify an injury arising from the two FAQs, and “its proposed remedy—aimed only at the FAQs while ignoring the actual Exemption—would do nothing to redress any injury.” The DOL notes that “the preamble and the FAQs both state that the 1975 regulation and five-part test apply to rollover recommendations. AR 6 (Preamble); AR 1350 (FAQ 6). The preamble and the FAQs both state that furnishing of one-time rollover advice, without more, would not satisfy the ‘regular basis’ prong of the 1975 regulation and would not constitute fiduciary advice. AR 8 (Preamble); AR 1351 (FAQ 7).”

Indeed, the Labor Department’s arguments really come back to their belief that the FAQs didn’t extend/expand what was already included in the regulation/preamble itself—that had been through the regular notice and comment period—but simply clarified what was already there and “materially indistinguishable. 

“Even if the Court somehow found a procedural defect in the promulgation of the FAQs, it would be harmless error given that Plaintiff participated in the notice-and-comment process that led to the publication of the identical guidance in the Exemption’s preamble,” the DOL asserts.

Moreover, “Plaintiff does not identify how it and its members are injured by a requirement that they behave as fiduciaries, given that is what they claim they are already doing. Indeed, the one member of the organization put forward by ASA as allegedly being injured by FAQ 7, Mr. Schultz, claims that providing fiduciary advice is his company’s default business model.

“Not surprisingly, there is no precedent for granting a party standing to challenge a regulation that does not materially affect its operations in a manner that causes it injury.”

Benefit, Not a Burden

The DOL also pushed back on the notion that the clarity provided in the FAQs imposed a burden. “Rather, it is simply guidance regarding an exemption that provides regulated entities with a pathway to avail themselves of a benefit; that is, receiving otherwise illegal compensation in circumstances where an advice provider may have a conflict of interest insofar as they are recommending a rollover to an IRA that they themselves supervise, or where they are receiving a commission from a third-party as a result of that recommendation.” 

Beyond that, “As Plaintiff’s testimony makes clear, it is their business to provide prudent advice in the customer’s best interest, something that would necessarily require them to consider the participant’s current plan and how it compares to any recommended investments. Plaintiff has failed to show that any additional expenses incurred in connection with the documentation requirement would be so onerous that they would not be offset by financial gains made by ASA members when they were permitted to receive otherwise-prohibited compensation from third parties for successfully promoting rollover recommendations.”

As for the notion that the FAQs essentially convert a one-time recommendation into fiduciary advice, the DOL commented: “Plaintiff falls back on the demonstrably incorrect assertion that the Department’s view would sweep in all one-time IRA rollover or annuity transactions. In fact, the preamble and the FAQs all make plain that the 1975 five-part test needs to be satisfied in full and that a one-time rollover recommendation, without something more, would fail to satisfy the regular basis test.”

‘Just FAQs’

“Here, any judicial order setting aside the FAQs would not provide redress because virtually identical language exists in the preamble to the Exemption, which was published in the Federal Register and which explains at great length the Department’s thinking on the application of the 1975 five-part test to rollover recommendations,” the DOL asserts.

That said, the DOL basically summed it up as follows: “The upshot of these cases is simple: where FAQs merely encapsulate an agency’s pre-existing regulatory enactments, setting aside those FAQs would do nothing to address any alleged injury that actually arises from the substantive enactments. They are, after all, just FAQs.”

Stay tuned.

[i]“They are merely guidance about the interpretation set forth in the Exemption’s preamble and thus exempt from the Administrative Procedure Act’s (“APA”) notice-and-comment rulemaking requirement.”