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INSIDE ANGLE
The Next Chapter
The DOL is back in court over the investment advice fiduciary definition
O
ver the last decade, the Department of Labor's definition
of investment advice has been the subject of constant
debate, uncertainty and litigation. The ongoing
fiduciary saga adds a new chapter as both the Federation of
Americans for Consumer Choice and the American Securities
Association recently filed suit against the DOL in separate lawsuits
seeking to set aside the agency's latest foray into the investment
advice fiduciary definition. Both lawsuits were filed under
the Administrative Procedure Act of 1946, which: governs the
process by which federal agencies develop and issue regulations;
requires a rulemaking period to solicit public input; and prevents
federal organizations such as the DOL from promulgating
rules that are " arbitrary and capricious. "
Both lawsuits seek to challenge the DOL's latest interpretation
of the definition of investment advice under Employee
Retirement Income Security Act Section 3(21)(A)(ii). In this
regard, on December 15, 2020, the DOL finalized Prohibited
Transaction Exemption 2020-02, which provides an exemption
to investment advice fiduciaries whereby to enter into certain
transactions, including rollover transactions, provided that the
conditions of the exemption are met.
In finalizing PTE 2020-02, the agency also issued its interpretation
of the investment advice definition under 29 Code of
Federal Regulations Part 2550 in a set of FAQ released last April.
Of concern to the regulated community, and contrary to prior
authorities, the DOL explained its position in the preamble to PTE
2020-02 and the FAQ that a single instance of advice preceding
the start of an advice relationship could result in fiduciary status.
Both organizations seek a declaration that the DOL's interpretation
of the investment advice fiduciary regulation " five-part
test " articulated in the preamble to PTE 2020-02 exceeded the
department's legal purposes and violated the Administrative
Procedure Act. If successful, these lawsuits could have a huge
effect on the retirement industry by potentially decreasing the
number of investment entities that are designated as investment
advice fiduciaries under the DOL regulations and opening the
floodgates for litigation by the regulated community against unfavorable
guidance and determinations by the DOL more generally.
The Complaints
The Federation of Americans for Consumer Choice is a trade
group representing independent life insurance agents and
agencies selling annuities and other insurance products; many
of them would be unwillingly thrust into the role of an investment
advice fiduciary under the five-part test. Notably, the FACC
complaint was filed in the same circuit that struck down the
DOL's fiduciary rule issued by the Obama administration. In
its complaint, the FACC took issue with the broadening of the
definition of fiduciary and said PTE 2020-02 was an attempt to
" resurrect and repackage the substance of its vacated fiduciary
rule. " The FACC implored the court that arguing the existing 5th
Circuit precedent precludes DOL action on the five-part test in
addition to violating the Administrative Procedure Act.
In a separate lawsuit, the American Securities Association
argued that some of its members- broker/dealers and registered
investment advisers-may be unwillingly put into the role of a
fiduciary if the five-part test is allowed to stand. More specifically,
however, the ASA's complaint takes issue with the FAQ, as the
association alleges that the questions impose new obligations on
retirement accounts that did not previously exist. The ASA alleged
that the DOL's rulemaking through the questions constituted a
patent violation of the Administration Procedure Act.
The Outlook
The U.S. Constitution requires that a plaintiff have actually
suffered a concrete harm before having standing to sue. Without
standing, a plaintiff's complaint cannot be heard by the federal
court. We expect that the DOL will likely argue that these lawsuits
constitute pre-enforcement judicial review signifying a lack of
standing on behalf of the plaintiffs, which therefore precludes
the court from currently making a decision on this issue.
If either case is heard, a victory for the ASA or the FACC
would invalidate the department's interpretation of the five-part
test under only the FAQs, not the PTE 2020-02. However, if the
lawsuits are successful in limiting those who might be deemed
a fiduciary under ERISA regulations, fewer may seek to rely on
the exemption. Regardless of the outcome, the regulated community
has a significant interest in the outcome of these two lawsuits
moving forward, and we expect this next chapter to be pivotal in
determining the fate of the DOL's definition of investment advice.
Steve Saxon is a partner in Groom Law Group, Chartered, and
George Sepsakos is a principal in Groom. Offices for Groom
are in Washington, D.C.
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