RIA Compliance Blog
The DOL recently dismissed its appeal of an earlier ruling from the U.S. District Court for the Middle District of Florida (the Court) invalidating part of the DOL’s guidance regarding application of its fiduciary duty to rollover recommendations. The guidance was in the form of an FAQ issued in connection with PTE 2020-02 that explained how a recommendation to roll over retirement assets from a plan to an IRA at the beginning of an ongoing relationship could still be subject to ERISA and/or Code fiduciary duties.
Whether an individual is providing fiduciary investment advice under ERISA or the Code is determined by the DOL’s five-part test set forth in its 1975 regulation. Generally, an individual will be deemed to be rendering fiduciary investment advice if: 1) the individual renders advice to a plan or IRA as to the value of, or advisability of investing in, securities or other property; 2) on a regular basis; 3) pursuant to a mutual agreement with the plan or IRA; 4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and 5) that the advice will be individualized based on the needs of the plan or IRA.[1]
In its 2021 FAQs issued in connection with PTE 2020-02, the DOL clarified in FAQ 7 that while a one-time instance of advice to rollover assets from a plan to an IRA would not meet the “regular basis” requirement of its five-part test, if the advice is provided at the beginning of an intended future ongoing relationship where the adviser has not previously provided advice but expects to regularly make recommendations regarding the IRA going forward, that would satisfy the “regular basis” requirement. The DOL noted that the 1975 test extends to the entire relationship and would not exclude the first instance of advice at the beginning of an ongoing relationship.
The American Securities Association (ASA) filed suit last year arguing that the DOL was attempting to use informal guidance to change existing retirement rules in violation of the Administrative Procedure Act (APA). Specifically, the ASA argued that the policy described in FAQ 7 was an arbitrary and capricious interpretation of current law which resulted in a significant expansion of ERISA fiduciary duties to cover recommendations that did not meet the “regular basis” requirement of the five-part test. The Court agreed with ASA and vacated the DOL’s FAQ 7 guidance in February of this year.
The Court reasoned that the DOL’s interpretive policy 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.” The Court’s analysis largely focused on the application of the ERISA fiduciary duty with respect to a particular plan. The Court noted that while a plan to IRA rollover recommendation may be the beginning of an ongoing advice relationship, the ongoing relationship is “inherently divorced” from the ERISA plan and occurs when the assets in question are no longer plan assets. Accordingly, the recommendation would not satisfy the “regular basis” requirement of the five-part test.
As the DOL noted in its argument, the five-part test applies to fiduciaries under both ERISA and the Code. Accordingly, an individual providing a plan to IRA rollover recommendation at the beginning of an ongoing advice relationship would arguably still owe a fiduciary duty to the IRA under the Code for the recommendation, if not ERISA. While the Court acknowledged that, based on its ruling, the same conduct could subject an individual to fiduciary obligations under the Code but not Title I of ERISA, the Court did not find this argument sufficiently persuasive.
The DOL initially filed a notice of appeal of the Court’s decision in mid-April, although it voluntarily dismissed its appeal in early May. It also updated its FAQ 7 to include a reference to the Florida case. It is anticipated that the DOL is working on an amendment to its 1975 regulation which will more directly bring rollover recommendations within the definition of fiduciary investment advice. The DOL has repeatedly said that it is reviewing PTE 2020-02 and anticipates taking further regulatory action, including amending the investment advice fiduciary regulation or existing exemptions.
Until the DOL issues additional guidance, the safest course of action for RIAs is to continue complying with PTE 2020-20 for any Plan to IRA rollover recommendations. As mentioned above, even if the ERISA fiduciary duty does not apply in the case of new clients with no pre-existing relationship, the DOL has indicated that the Code fiduciary duty would still apply if it is the beginning of an ongoing relationship. While the Code does not impose duties of loyalty and prudence, as ERISA does, it contains all the same prohibited transaction rules. In addition, these recommendations are of course also still subject to the RIA’s fiduciary duty under the Advisers Act, for which it is best practice to maintain best interest documentation.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.
[1] 29 CFR 2510.3-21(c)(1), 40 FR 50842 (October 31, 1975).