DOL Rollover Guidance Is Not Dead, Lawyer Warns

The recent federal court decision in Florida striking down the Labor Department's guidance that declared rollover advice fiduciary advice does not mean Labor's interpretation is "dead," ERISA attorney Brad Campbell of Faegre Drinker said Thursday. "That's not what's happening."

What's happened, Campbell said Thursday on Faegre Drinker's Inside the Beltway webcast, is that the court has said "they want to vacate it, but they have to do all the procedural stuff … and then DOL has an opportunity to appeal. We've not yet run through that process."

Another Pending Case

Further, said Campbell, a former head of Labor's Employee Benefits Security Administration, "we don't know what's going to happen" in the case pending in Texas.

That case was filed in February 2022 by the Federation of Americans for Consumer Choice in the U.S. District Court for the Northern District of Texas.

This district, Phyllis Borzi, a former head of EBSA, told ThinkAdvisor in a previous interview, is "the go-to court for all the forum-shopping financial services and business suits against the DOL and other cabinet agencies."

The FACC lawsuit challenges the Trump-era Labor Prohibited Transaction Exemption, or PTE, 2020-02, Improving Investment Advice for Workers & Retirees, which established more stringent rollover rules and became effective on Feb. 16, 2022.

Advisory firms are now required to provide "retirement investors" with the specific reasons why a rollover or transfer of their retirement money is in the best interest of the retirement investor. The rollover requirements went into effect July 1.

The federation alleges that "Labor has 'resurrected and repackaged' the substance of its vacated 2016 rule in direct violation of the 5th Circuit decision" by allowing PTE 2020-02 to take effect, Borzi said.

The federation's case "asks the court to vacate PTE 2020-02 in its entirety and enjoin DOL from implementing or enforcing it in any manner."

What the Florida Ruling Means

At issue in ASA's case was the "regular basis" prong of ERISA's five-part test on when investment advice is fiduciary advice.

As the law firm Dechert explains in a recent alert, it is the "regular basis" prong "with which the ASA Decision is concerned, with the court 'vacate[ing] the policy … that interprets 'regular basis' to include IRA rollovers."

In the Florida case, Campbell said on the webcast, the American Securities Association "asked for several different aspects of DOL's guidance to be vacated; the court agreed really with the one key one, but it's a big deal."

The court said that "DOL's reinterpretation of 'regular basis' is inconsistent with the law. … The court is saying ERISA applies to investment advice to a plan, and investment advice as they've [DOL] defined it for this 'regular basis' test would include advice after the rollover to the individual once they're in their IRA."

However, the court "said effectively an IRA is not a plan, and therefore you can't say that it's a regular basis because if advice was provided once when the assets were in the plan, and then multiple times thereafter when assets were now in an IRA."

That "key part of DOL's guidance that applies to rollover recommendations is vacated," Campbell relayed.

Bottom line, according to Campbell: In light of the Florida court decision, "I wouldn't run out and change my policies and procedures right now, but I would keep an eye on it as it goes forward."

Fred Reish, partner at Faegre Drinker, agreed on the webcast that he'd "be pretty cautious about saying 'Hey, this is all over' based on this [Florida] court decision. That is just a first step in a long process."

Further, Reish reiterated that Labor is working on a new fiduciary definition rule, which he said may be sent to the Office of Management and Budget in April or May.