Last week, a group representing advisors who sell annuities challenged the legality of the fiduciary rule in federal court—and now a second suit filed in a different federal court accuses the Labor Department of making law with a series of FAQs.
This suit was filed in U.S. District Court for the Middle District of Florida by the American Securities Association[i] against the U.S. Department of Labor and Marty Walsh, “in his official capacity as the Secretary of Labor, for declaratory and injunctive relief” because, they allege, “…the Department has violated its obligations under the Administrative Procedure Act (APA).”
More specifically, the plaintiff here says it has members that, “because of the Department’s pronouncements in FAQ 7,[ii] prohibit their investment advisors from recommending that an investor roll over assets out of an employee benefit plan”—members that, it claims, would otherwise allow their advisors to recommend rolling assets out of a qualified plan “even if it was the advisor’s first contact with the investor.”
Similarly, the suit claims that it has members that would comply with the rule, but that under the terms of FAQ 15[iii] would be subjected to requirements they claim are “burdensome, expensive, and time-consuming”—costs and burdens that their members “would not endure” but for the Department’s “pronouncements about the documentation required to comply with the Exemption.” And beyond that, they assert that they also have members that won’t undertake to make those recommendations “because of the Department’s pronouncements in FAQ 15.”
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) reminds that Congress passed the Administrative Procedure Act to ensure that agencies follow constraints as they exercise their powers, and that the requirement that agencies engage in notice-and-comment rulemaking is “one of the law’s most important checks on agency power.” The suit continues that “by requiring notice and an opportunity to comment, the APA ensures that agency regulations are tested via exposure to diverse public comment” and that there is “fairness to affected parties.”
The FAQs (frequently asked questions) in question were issued about a year ago to provide “guidance” on the requirements of its existing rules. “In reality, however, the Department issued these FAQs to impose new obligations that have no basis in the agency’s underlying rules,” the suit continues.
Specifically, the suit alleges that via FAQ 7 the Labor Department has established that a financial professional’s first instance of advice to roll over assets from one retirement plan to another can be the act of a fiduciary, “even though the Department’s regulations state that a person is not a fiduciary unless he provides advice on a regular basis to the plan.” They also claim 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.”
The suit cites as “a critical flaw of the Rule” is that it dispensed with the “regular basis” prong of the five-part test, and that “…by eliminating this prong, the Fiduciary Rule had improperly sought to define as fiduciaries virtually all financial and insurance professionals who do business with ERISA plans and IRA holders.
“Thus, under FAQ 7, a financial professional can be considered an investment-advice fiduciary when making a rollover recommendation even though he has not provided any advice on a regular basis to the plan.” As a consequence, the suit claims, FAQ 7 “transforms countless one-time rollover recommendations into the acts of a fiduciary, despite the plain meaning of the five-part test, the Department’s prior interpretation of its rules, and the common law understanding of a ‘fiduciary,’” which “turns on the existence of a relationship of trust and confidence between the fiduciary and client.”
And while the suit acknowledges that PTE 2020-02 states that financial institutions must “document the specific reasons that any recommendation to roll over assets . . . is in the Best Interest of the Retirement Investor,” that exemption “does not mandate any specific ways in which financial institutions must comply with this documentation requirement,” and that FAQ 15 “significantly expands financial institutions’ documentation and investigation requirements under the Exemption.” It continues that “even though the Exemption requires financial institutions to do nothing more than document their ‘specific reasons’ for recommending a rollover, FAQ 15 subjects financial institutions to numerous documentation and investigation requirements that are contained nowhere in the Exemption.”
The suit claims that the policies referenced in FAQ 7 and FAQ 15 are “unlawful and violate the APA. The FAQs should be vacated and the Department should be enjoined from implementing or enforcing them in any manner.”
The suit concludes that the APA “prohibits agencies from regulating in this manner. If the Department wanted to change its rules, it needed to do so through the required notice-and-comment process—not through guidance documents.”
Less than a week earlier the Federation of Americans for Consumer Choice Inc., joined by several advisors and advisory firms that sell annuities as part of their practice(s), filed suit in federal court in Texas, arguing that “the Agent Plaintiffs oftentimes make rollover recommendations for purchase of annuities to IRA owners and participants in employer-sponsored 401k and similar benefit plans, for which they receive commissions or other compensation from annuity issuers. The Agent Plaintiffs will thus be directly and adversely affected by the DOL’s New Interpretation suddenly categorizing their status as investment advice fiduciaries under ERISA or the Code, as applicable.”
[i] Described in the suit as the “trade association that represents the retail and institutional capital markets interests of regional financial services firms who provide Main Street businesses with access to capital and advise hardworking Americans how to create and preserve wealth.”
[ii] FAQ-7 speaks to the “regular basis” aspect of the five-part test, noting that “a single, discrete instance of advice to roll over assets from an employee benefit plan to an IRA would not meet the regular basis prong of the 1975 test.” However, the guidance goes on to point out that “advice to roll over plan assets can also occur as part of an ongoing relationship or as the beginning of an intended future ongoing relationship that an individual has with an investment advice provider,” and that when the investment advice provider has been giving advice to the individual about investing in, purchasing, or selling securities or other financial instruments through tax-advantaged retirement vehicles subject to ERISA or the Code, the advice to roll assets out of the employee benefit plan is part of an ongoing advice relationship that satisfies the regular basis prong.
[iii] FAQ-15 outlines the factors that financial institutions and investment professionals should “consider and document” in their disclosure of the reasons that a rollover recommendation is in a retirement investor’s best interest, including (but not limited to):
- the alternatives to a rollover, including leaving the money in the investor’s employer’s plan, if permitted;
- the fees and expenses associated with both the plan and the IRA;
- whether the employer pays for some or all of the plan’s administrative expenses; and
- the different levels of services and investments available under the plan and the IRA.