It was reported May 15, 2023, that the U.S. Department of Labor has abandoned its appeal in American Securities Association [“ASA”] v. U.S. Department of Labor, No. 8:22-cv-00330 (M.D. Fla. Feb. 13, 2023). ASA (along with the earlier case of Carfora v. TIAA, No. 1:21-cv-08384 (S.D.N.Y. Sept. 27, 2022) and rejected a key DOL interpretation of its own fiduciary rules under the Employee Retirement Income Security Act of 1974, as amended (including the corresponding provisions of the U.S. tax code, “ERISA”). ASA has the potential to act as a major impediment to the DOL’s pursuit of a critical policy initiative relating to the regulation of rollover solicitations. We previously commented on the ASA case in an earlier Law Alert.
Background – In General
For years, the DOL has devoted substantial time and effort to expanding the reach of the fiduciary rules. The DOL, arguably dissatisfied with the existing regulatory definition of “investment advice” (the “Existing Rule”) as being too narrow and easy to avoid, had embarked on an effort to expand the scope of that definition and, by so doing, expanded the scope of who is a fiduciary for ERISA purposes.
A stated goal was to attempt to protect non-institutional individual (so-called “retail”) investors in participant-directed employee benefit plans that are subject to ERISA (“Plans”) and owners of individual retirement arrangements (“IRAs”) most of which are not subject to ERISA. It is noted that the DOL has interpretive authority regarding certain rules applicable to Plans and IRAs, but has enforcement authority only as to Plans and not as to non-ERISA IRAs.
The crowning accomplishment of this DOL endeavor may well have been the DOL’s proposal, and eventual finalization, of an amendment to the regulatory definition of “investment advice.” The impact of the final amended fiduciary rule (the “Amended Fiduciary Rule”) was broad, and caused financial institutions to reexamine and revise their practices applicable to retirement accounts, and sometimes even to non-retirement accounts, in an effort to maintain uniform practices across their customer base.
But the best laid plans sometimes don’t ultimately work out, and in 2018 the U.S. Court of Appeals for the Fifth Circuit vacated the Amended Fiduciary Rule, together with a number of new and amended administrative exemptions, as being “arbitrary and capricious.” When the Trump Administration declined to appeal the decision, the vacatur became final, and the regulatory definition of “investment advice” returned to the status quo of the Existing Rule.
One of the things the DOL addressed in the wake of the demise of the Amended Fiduciary Rule was the elimination of a particularly significant new (and now vacated) exemption (the “Best Interest Contract Exemption”). While the Amended Fiduciary Rule was generally adverse to the interests of financial institutions, the Best Interest Contract Exemption (or “BIC Exemption”), where applicable, permitted financial institutions to act as fiduciaries under the Amended Fiduciary Rule (and receive otherwise potentially prohibited compensation) without running afoul of certain ERISA prohibitions. Thus, when the Amended Fiduciary Rule and the related exemptions were vacated, financial institutions lost the potential protection of the BIC Exemption.
The DOL realized that the loss or the BIC Exemption could make it more difficult for financial institutions to continue to serve the retail retirement market where those institutions (i) might be at risk of being considered to be fiduciaries even under the Existing Fiduciary Rule; or (ii) might have wanted affirmatively to assert fiduciary status, for example to gain an advantage in the market.
Somewhat perversely, the elimination of the BIC Exemption could therefore have discouraged financial institutions from proceeding as fiduciaries. The DOL was aware of the conundrum, and provided for transition relief while it considered how to address the issue.