IRAs, Investment Advice, And The Department Of Labor'Important Takeaways

• Jurisdiction: United States,Federal
• Law Firm: Winston & Strawn LLP
• Subject Matter: Employment and HR, Retirement, Superannuation & Pensions, Employee Benefits & Compensation
• Author: Ms Amy M. Gordon and Basil V. Godellas
• Published date: 22 February 2023

On February 13, 2023, a Florida federal district court (the Court) partially invalidated the U.S. Department of Labor's Employee Benefit Security Administration's (the Department's) interpretation of its rule that described when a financial adviser who helps participants roll over some or all of their 401(k) assets into an individual retirement account (IRA) or an annuity is providing investment advice and acting as a fiduciary under the Employee Retirement Income Security Act of 1974, amended (ERISA). The ruling was issued pursuant to an action brought by the American Securities Association (ASA) against the Department. [https://si-interactive.s3.amazonaws.com/prod/plansponsor-com/wp-content/uploads/2023/02/14182814/DOL-Lawsuit-Verdict.pdf]

Background

In 2016, the Department finalized a new regulation intended to replace its 1975 Regulation that defined the term "Fiduciary" and addressed the conflict-of-interest rule associated with retirement investment advice [see 81 Fed. Reg. 20946 (Apr. 8, 2016)] (the Fiduciary Rule). The Fiduciary Rule provided, in relevant part, that an individual "renders investment advice for a fee" whenever they are compensated in connection with a "recommendation as to the advisability of" buying, selling, or managing "investment property."

In 2018, the Fifth Circuit vacated the Fiduciary Rule [see Chamber of Com. v. U.S. Dep't of Lab., 885 F.3d 360, 379, 388 (5th Cir. Mar. 15, 2018)], holding that the Fiduciary Rule conflicted with the plain text of ERISA. After the Fifth Circuit's decision, the Department issued guidance confirming that the definition of "fiduciary" in the 1975 Regulation (found at 29 C.F.R. ' 2510.3-21(c)) was the applicable definition.

In 2020, the Department proposed a new class exemption, Prohibited Transaction Exemption (PTE) 2020-02 (PTE 2020-02), to address the circumstances in which financial institutions and investment professionals who provide "fiduciary investment advice" to retirement investors can "receive otherwise prohibited compensation." During the notice-and-comment period, the American Securities Association (ASA) submitted comments requesting that the Department "make explicit that the ERISA 'five-part test' will be consistent with the Fifth Circuit's opinion regarding the 2016 Rule." The ASA further raised that requiring broker-dealers to disclose their fiduciary status to investors in the context of rollover recommendations was "unnecessary and could have adverse impacts," and that such...