DOL Will Not Pursue Appeal of Federal Court Rollover Ruling, But Will the “Regular Basis” of Fiduciary Rule Developments Continue?

The Department of Labor ("DOL") filed a joint stipulation on May 16, 2023 to voluntarily dismiss its appeal of a Florida District Court’s decision that vacated certain DOL interpretations concerning when financial institutions could be deemed investment advice fiduciaries under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") with respect to rollovers of assets from plans subject to ERISA and individual retirement accounts ("IRAs").

This decision, in litigation brought by the American Securities Association ("ASA"), is the latest in a 13-year saga involving the DOL's attempts to recraft the rules under which institutions may be deemed to be fiduciaries under ERISA and the analogous provisions of the Internal Revenue Code by rendering “investment advice” pursuant to a 1975 DOL regulation (the so called “Five Part Test”). The case may be found here, and our prior NewsFlash on the case may be found here.

While the ASA decision 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. Nevertheless, there are indications that the DOL is set to propose yet another regulation to amend the Five Part Test --perhaps during this year.  Such a proposal would promise to extend the 13-year saga even longer.  It will be interesting to see if any such proposal addresses the concerns which were the focus of the ASA decision. 

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, as we mentioned in our prior OnPoint, the court in ASA 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. 

We believe that 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. Given the indications that DOL is considering yet another regulation proposal is confirmation that there has certainly been a “regular basis” of twists, turns, pivots and about-faces during these past 13 years. More may be coming.