Department of Labor to appeal decision striking down portion of rollover guidance

The Department of Labor appeals a February ruling striking down part of its investment advice rule.

By John Hilton

The Department of Labor filed a notice of appeal Friday from a February federal court ruling striking down a portion of guidance issued in 2021 that expanded the definition of a retirement plan fiduciary.

Filed in the name of Acting Secretary Julie A. Su and the department, DOL attorneys are appealing to the Eleventh Circuit Court of Appeals. The appeal has not been posted there as of noon today.

Judge Virginia M. Hernandez Covington sided with the American Securities Association in striking down a portion of guidance the DOL issued in 2021 that expanded the definition of a retirement plan fiduciary.

In the Feb. 13 decision, the District Court for the Middle District of Florida granted the ASA’s motion for summary judgment one year after the lawsuit was filed. The judge ruled that a portion of the department’s frequently-asked-questions guidance illegally widened its regulatory lane, and failed to comply with the agency’s own regulations.

The ruling is setback for the DOL in its bid to extend fiduciary duty to advisors who handle "rollover" planning.

When recipients retire and the money is "rolled" out of those plans, many advisors earn a commission. Regulators consider that a conflict of interest and want to expand the definition of fiduciary. The fiduciary standard is based on the "five-part test" established in 1975, in which one of the prongs is whether the advisor and client are in an "ongoing relationship."

In order to satisfy that prong, the DOL claims a one-time rollover contains the expectation of future advice rendered. The judge was not buying it.

"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," she wrote. "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."

Immediate lawsuit

The ASA filed its lawsuit days after the DOL investment advice rule took effect on Feb. 1, 2022.

Created by the Trump administration, the Investment Advice Rule has two main parts: a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" to determine what constitutes investment advice.

The Biden administration allowed the investment advice rule to take effect Feb. 16, 2021.

The ASA lawsuit claims the DOL overstepped its bounds with guidance issued in April 2021, which spelled out the new treatment of first-time advice to transfer retirement assets out of a federally regulated plan. Issued as a series of Frequently Asked Questions, the guidance essentially created new rules, the ASA claimed in the lawsuit.

The trade group claimed the guidance essentially “rewrote” the regulation, in the process, imposing burdensome documentation and investigation requirements on their members.

"The [Administrative Procedures Act] prohibits agencies from regulating in this manner," the lawsuit reads. "If the Department wanted to change its rules, it needed to do so through the required notice-and-comment process—not through guidance documents."

The ASA lawsuit was the second filed against the DOL investment advice rule. The Federation of Americans for Consumer Choice, joined by a number of independent insurance agents and agencies, sued the Labor Department in Dallas federal court. That case is ongoing.

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.