FACC v. DOL, 2024 WL 3554879 (E.D. Tex. 2024); American Council of Life Insurers v. DOL, 2024 WL 3572297 (N.D. Tex. 2024)
Two federal trial courts in separate cases have placed a hold on the DOL’s 2024 investment advice fiduciary regulations and related Prohibited Transaction Exemption (PTE) amendments (collectively, the Rule). The courts concluded that the parties challenging the Rule had shown a substantial likelihood of succeeding in their claims that the DOL exceeded its legal authority and that the Rule is unreasonable and arbitrary and capricious. As background, the regulations treat investment recommendations directed to specific retirement investors regarding the advisability of a particular investment or management decision as “investment advice” where the persons making the recommendations (1) regularly provide professional investment recommendations to retirement investors, either directly or through affiliates, in a way that objectively suggests the recommendations are tailored to an investor’s specific needs and circumstances, and reflect professional judgment that is intended to advance an investor’s interests; or (2) represent or acknowledge that they are acting as an ERISA fiduciary with respect to the recommendations (see our article). The regulations and PTE amendments were generally slated to take effect on September 23, 2024, with a one-year additional transition period for certain conditions in the PTE amendments. Under both decisions, the hold on the effective date is not limited to the parties in the cases and applies nationwide.
In one decision, the court placed a hold on the effective date of the regulations and the PTE 84-24 amendment, concluding that the Rule conflicted with ERISA by treating as fiduciaries companies making one-time recommendations to roll over assets from an ERISA plan to an IRA. The court first explained that it owed no deference to the DOL’s interpretation of ERISA (see our article). Guided by applicable precedent striking down DOL investment advice fiduciary regulations issued in 2016 (see our article), the court concluded that the Rule conflicted with ERISA in seeking to cover one-time transactions such as IRA rollovers by removing the “regular basis” and “primary basis” criteria for investment recommendations that are central to the meaning of “fiduciary” under ERISA as set forth in 1975 regulations. According to the court, regularity in advice and reliance on this advice has been a hallmark of fiduciary relationships; eliminating these criteria overreaches and conflicts with ERISA’s intent. Furthermore, the Rule was impermissible because (1) it captured scenarios where fees were paid for mere recommendations or sales, and not advice, and (2) by capturing one-time rollover and annuity recommendations, the Rule imposed ERISA Title I duties (which generally relate to plans) on IRA service providers (which are generally subject to the more limited provisions of ERISA Title II) in direct conflict with ERISA.
Another court then agreed with and incorporated the first court’s analysis in a decision extending the hold to cover amendments to the remaining related PTEs. The court observed that it had already been determined that the statutory definition of “fiduciary” codified an understanding of a “relationship of trust and confidence” between a fiduciary and client. The court concluded that the DOL had impermissibly regulated beyond its ability because the Rule expanded ERISA’s fiduciary standard in a way that gave the DOL discretion to recognize a fiduciary relationship where common law would not (i.e., by transforming sales conduct into fiduciary actions).
EBIA Comment: Because the hold on the Rule applies nationwide with immediate effect, plan sponsors and their advisors must look to the 1975 regulations, which employ a five-part test, to determine whether investment advice providers are fiduciaries under ERISA and the Code’s prohibited transaction rules. Under those rules, individuals render investment advice where they make investment recommendations on a regular basis, pursuant to a mutual agreement, arrangement, or understanding that the services will be a primary basis for investment decisions, and that the advice will be individualized based on the recipient’s particular needs. For more information, see EBIA’s 401(k) Plans manual at Section XXIV.D (“Investment Advice Fiduciaries”) and EBIA’s Consumer-Driven Health Care manual at Section XVI.E.2 (“Who Is a ‘Fiduciary’ With Respect to an HSA?”).
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