The Latest in the “Regular Basis” of DOL Fiduciary Rule Developments: Federal Court Vacates Certain Provisions Applicable to Rollover Advice

Introduction

The District Court for the Middle District of Florida issued a decision (the “ASA Decision”) on February 13 that adds yet another twist to the 13-year long story of the U.S. Department of Labor’s (“DOL”) attempts to recraft the definition of investment advice fiduciary for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”). The ASA Decision vacates some key components of the DOL’s controversial 2020 guidance (“2020 Guidance”) in connection with a 1975 regulation (the “Five-Part Test” and the “1975 Regulation”) defining when one becomes an investment advice fiduciary under ERISA and the Code as applied to financial institutions’ interactions with customers who are considering rollovers of assets from qualified plans subject to ERISA to individual retirement accounts (“IRA”). 

Along with a September 2022 case in the Southern District of New York (the “Carfora Decision”), the ASA Decision casts doubt on the DOL’s 2020 interpretation of the1975 Rule, which to our knowledge, appears to be the only written guidance the DOL has ever issued on the rule.¹ A discussion of the 2020 interpretation, with links to other key developments associated with the DOL’s 13-year effort to recraft can be found here. Additionally noteworthy is the fact that the ASA Decision marks the second vacatur that a Federal court has issued in connection with the DOL’s efforts to recraft or interpret the investment advice fiduciary rule codified as the 1975 Rule—the first being the repeal by the Fifth Circuit in 2018 of a highly controversial investment advice fiduciary rule issued in 2016 (the “Revoked Fiduciary Rule”).

As background, the Five-Part Test of the 1975 Rule confers investment advice fiduciary status when a person provides (1) individualized advice, (2) for a fee or other compensation, (3) on a regular basis, (4) pursuant to a mutual understanding and (5) where the advice will serve as a primary basis for the investment decision. It is the “regular basis” prong with which the ASA Decision is concerned, with the court “vacate[ing] the policy referenced in” the DOL’s frequently asked question (“FAQ 7”) that interprets “regular basis” to include IRA rollovers, “remanding to the DOL for further proceedings consistent with this order.” 

In its 2020 Guidance, and in follow up guidance contained in FAQ 7, the DOL indicated that the “regular basis” prong will be satisfied at the beginning of what is anticipated to be a series of interactions that otherwise meet the Five-Part Test. The DOL elaborated on its interpretation with respect to interactions between financial institutions and ERISA plan participants concerning the decision to rollover plan monies to individual retirement accounts (“IRAs”) at the financial institution. In FAQ 7, the DOL asked: “When is advice to roll over assets from an employee benefit plan to an IRA considered to be on a ‘regular basis?’” It answered:

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, 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. 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. Similarly, when the investment advice provider has not previously provided advice but expects to regularly make investment recommendations regarding the IRA as part of an ongoing relationship, the advice to roll assets out of an employee benefit plan into an IRA would be the start of an advice relationship that satisfies the regular basis requirement. The 1975 test extends to the entire advice relationship and does not exclude the first instance of advice, such as a recommendation to roll plan assets to an IRA, in an ongoing advice relationship. 

Such an “anticipatory” approach to the “regular basis” test struck many as inconsistent with both basic legal principles and common sense: how can one establish a “regular basis” until all events have transpired that in fact prove that it has in fact been regular and ongoing? In our OnPoint associated with this interpretation and the DOL’s accompanying release of Prohibited Transaction Class Exemption 2020-02 (“PTCE 2020-02”), we questioned the DOL’s interpretation, and, because the language of the regulation speaks about advice provided on a regular basis to a plan we also indicated skepticism about the DOL’s position that the “regular basis” test could be aggregated across both the ERISA plan and the IRA in the context of a rollover^.2

The Court’s Decision

It is this last point with which the court primarily took issue. In so doing, the court decides that “regular basis” should be applied on a plan-by-plan basis. The court stated “Because assets cease to be assets of an ERISA plan after the rollover is complete, any future provision of advice is, by nature, no longer to that ERISA plan.”

Relying on a strict statutory reading of the provision underlying the Five-Part Test, the court emphasized that “a person is a fiduciary with respect to a plan to the extent . . . he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so [emphasis in original].” Referring back to the Carfora Decision, the court indicated that “the scope of the regular basis inquiry is limited to the provision of advice pertaining to a particular plan.” It also highlighted the Carfora Decision’s skepticism about the validity of the “anticipatory” regular basis: the “promise of future investment advice, . . . is not, itself, an additional instance of advice-giving relevant to the regular basis inquiry.³ It also referred to prior caselaw interpretations of the regular basis prong which stood for the same proposition, while finally confirming that:⁴

“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.”

Rejecting DOL arguments that the plaintiff’s arguments could lead to nonsensical results, the court stated that in fact “[plaintiff’s] reading of the [Five-Part Test and the 1975 Rule] is that which the Department adhered to for several decades.” Accordingly, “the Court is reluctant to find it ‘absurd.’” Thus, the court concluded that the DOL failed to comply with its own regulations stating “[t]he policy referenced in FAQ 7 departs from [permissible interpretative authority] by sweeping advice that is not made to an ERISA plan into its ambit. Because the policy referenced in FAQ 7 allows fiduciary obligations to be premised on conduct that does not fall within the “regular basis to a plan” analysis, the Department has “fail[ed] to comply with its own regulations.”  

Moreover, the court declined to give the DOL the benefit of deference in interpreting the regulation: “While the standard for a finding of ambiguity is exacting, the Court need not undertake that inquiry because the policy referenced in FAQ 7 is not a reasonable interpretation of either the text of ERISA or the 1975 Regulation [and Five-Part test], regardless of the precise contours of the phrase “regular basis.” The court continued by stating that: “the policy referenced in FAQ 7 impermissibly unmoors the focus of the inquiry into whether an individual is a fiduciary away from a specific ERISA plan, rendering it inconsistent with the statute and previous guidance. Therefore, because the Department’s interpretation of the 1975 Regulation is unreasonable, it is not entitled to deference.”

Take-Aways and Next Steps

The ASA decision offers several observations. First, as noted above, it is the second vacatur issued by a Federal court concerning the DOL’s attempts to recraft the definition or interpretation of what it takes to be an investment advice fiduciary. It is also the second Federal case to cast doubts on the DOL’s analysis in its 2020 interpretation of the Five-Part Test. Given these formidable reactions, and the strength of the court’s analysis, it is uncertain whether the DOL will choose to appeal the decision (it has 60 days to file a notice of appeal). Second, the court’s decision would appear to apply to the application to FAQ 7 and related discussions about the “regular basis” test in the preambles associated with the proposed and final versions of Prohibited Transaction Class Exemption 2020-02. Third, the practical commercial consequences have yet to be digested and analyzed. Many financial institutions invested tremendous amounts of time, money and energy gearing up to comply with the ill-fated Revoked 2016 Rule, and then did so again as they struggled to comply with the demands of the DOL’s 2020 interpretation and the accompanying conditions of PTCE 2020-02. Ignoring the possibility of regime-change fatigue, it is important to note that many market participants have separate obligations with respect to rollovers and related activities under Securities and Exchange Commission Regulation Best Interest. Additionally, we note the court did not address whether “regular basis” prong of the Five-Part Test can be satisfied with respect to an existing relationship with the ERISA plan that may ultimately culminate in rollover advice rather than just “one-time rollover advice” as the court noted. Important also to note is the fact that this vacatur does not necessarily reinstate the DOL’s “Deseret” Letter. That letter stood for the proposition that rollover recommendations were not regarded as investment advice to a particular investment of the plan. Accordingly, there are numerous potential fact patterns involving rollover recommendations that could still result in investment advice fiduciary treatment notwithstanding this decision. It will continue to be important to evaluate the specific facts and circumstances involved. Business practices and compliance regimes will need to be assessed not only in view of this decision but also with respect to the architecture of other important legal, regulatory and commercial circumstances. Finally, there have been some indications that the DOL may yet propose even more sweeping changes to the investment advice fiduciary rule. There has certainly been a “regular basis” of twists, turns, pivots and about-faces during these past 13 years. It would not surprise us if more were to come.

Footnotes

1) Carfora v. Teachers Insurance Annuity Association of America, --- F. Supp. 3d ---, 2022 WL 4538213 (S.D.N.Y. Sept. 27, 2022). In that decision, the court declined to retroactively apply PTCE 2020-02 and associated guidance, and was thus faced with the question of whether, under the statutory and regulatory framework, the defendant provided “investment advice” on a “regular basis.” It concluded that it did not in the context of a rollover, because the “regular basis” should not be aggregated across plans.

2) "Notwithstanding the DOL’s approach to the regular-basis prong of the Five-Part Test and the Deseret Letter [the revoked DOL letter indicating that IRA rollover recommendations did not prove a “regular basis”], there may still be an open question regarding whether the regular-basis prong can be met in the rollover context generally. While any advice regarding the rollover would appear to be provided with respect to the transferor Plan (indeed, the transferee IRA (or other Plan) might not even yet exist), one can legitimately ask whether later advice regarding a transferee IRA (or other Plan) can ever cause otherwise isolated and independent advice regarding the rollover from the transferor Plan to be considered to be provided on a “regular basis” for these purposes.* Indeed, any subsequent advice would seem clearly to be advice to the transferee IRA (or other Plan) and not to the transferor Plan. Thus, query whether later advice regarding a transferee IRA (or other Plan) could cause otherwise isolated independent advice regarding the rollover from the transferor Plan to be considered to be provided on a “regular basis” for these purposes.”

We also highlighted that the preamble to the final version of the Revoked 2016 Rule stated that "Even if the assets will not be covered by ERISA or the Code when they are moved outside the plan or IRA, the recommendation to change the plan or IRA investments is investment advice under ERISA and the Code. Thus, recommendations on distributions (including rollovers or transfers into another plan or IRA) or recommendations to entrust plan or IRA assets to a particular IRA provider would fall within the scope of investment advice in this regulation, and would be covered by Title I of ERISA, including the enforcement provisions of section 502(a)."). Cf. 81 Fed. Reg. 20,946, 20,964. We also noted that in discussing the Deseret Letter, the DOL “seem[ed to have focused] on the transferor Plan and not on the transferee IRA: “A recommendation to roll assets out of a Plan is necessarily a recommendation to liquidate or transfer the Plan’s property interest in the affected assets, the participant’s associated property interest in the Plan investments, and the fiduciary oversight structure that applies to the assets.”

3) The court in ASA then noted that “[f]ocusing the analysis on only the timeframe when the assets in question were plan assets,” the court [in the Carfora Decision] found that the actions taken following the rollover ‘are outside the scope of the analysis[.]’”

4) Citing to Adv. Salon Visions Inc. v. Lincoln Benefit Life Co., No. 08 Civ. 2346 (LAB) (WMC), 2010 WL 3341803 (S.D. Cal. Aug. 25, 2010), the court noted that “[I]t doesn’t make a meaningful difference that Plaintiffs adopted multiple plans on the advice of the Defendants, and over the course of several years. This is because an ERISA fiduciary is a fiduciary of a plan (emphasis in original)).”