District court vacates Labor Department position on rollover advice

On Monday, the U.S. District Court for the Middle District of Florida vacated the Labor Department’s interpretation of the Employee Retirement Income Security Act and its implementing regulation on fiduciary investment advice. Specifically, the court invalidated the department’s guidance interpreting the “regular basis” prong of the regulation’s so-called five-part test.

Consistent with the recent decision by the U.S. District Court for the Southern District of New York—and with the American Bankers Association’s analysis and argument laid out in a recent comment letter on fiduciary investment advice—the court concluded that the Labor Department’s interpretation was arbitrary and capricious. According to the ruling, the department’s interpretation did not take into account the language of ERISA and the fiduciary advice regulation, which provides that fiduciary status is determined based on whether the advice is given regularly to the retirement plan out of which the assets are being rolled (a 401(k) plan), not necessarily to the plan into which the assets are being moved (an IRA). For a rollover recommendation to satisfy the regular basis prong—which would trigger the need to rely on exemption—the adviser who advises on the rollover must have a pre-existing investment advisory relationship with the 401(k) or other employee benefit plan.

The decision leaves the department with the question of whether to move forward on its forthcoming proposed rulemaking, which would amend the fiduciary advice regulation to include virtually all rollover decisions as fiduciary advice—a major component of the rulemaking initiative. It further provides examination issues for the department as it conducts reviews for compliance to the exemption relied upon for providing fiduciary investment advice. The department has 90 days to appeal the court’s decision.

Share.

About Author