PLANSPONSOR - May - June 2023 - 39

INSIDE ANGLE
It's Complicated
Recent litigation says the definition of investment advice is still unclear
T
he Department of Labor's 1975 regulation determining who
is an investment advice fiduciary has been a point of contention
for more than the past decade. The regulation includes
a five-part test, every prong of which must be satisfied for an
adviser to be considered a fiduciary for purposes of the Employee
Retirement Income Security Act. A particular
point of contention in recent years has been
the second prong of this test, which states
that a person must render advice " on a regular
basis " to be considered a fiduciary.
The five-part test, and the regular basis
prong in particular, are important to advisers
who serve plan sponsors and participants
because these advisers often make rollover
recommendations for 401(k) participants;
when doing so, these advisers often prefer to
avoid the designation of " investment advice
fiduciary " and thereby avoid regulatory risk
and compliance costs.
As readers of this column would know,
The department supported its views by stating, " it is approAfter
an
overhaul of
the regulation
by the Obama
priate to conclude that an ongoing advisory relationship spanning
both [an ERISA] plan and the IRA satisfies the regular
basis prong. "
Before this guidance was released, many regulated entities
had assumed that the advice provided to an
ERISA plan and to an IRA would be assessed
separately for the purpose of the regular
basis prong. The DOL's interpretation would
upend this.
the Department of Labor's investment advice
regulation has a complicated history. After an
overhaul of the regulation by the Obama administration, the 5th
Circuit vacated the rulemaking in 2018. The DOL subsequently
reinstated the 1975 regulation. Later, the agency issued an updated
interpretation of its regulation within Prohibited Transaction
Exemption 2020-02 and subsequently issued frequently asked
questions on the subject. The latest developments and recent challenges
to the DOL's rulemaking are described below.
PTE 2020-02 and FAQ
As noted above, the preamble of PTE 2020-02 and the FAQ
included the DOL's updated interpretation of the five-part test.
In many cases, the agency's interpretation deviated from how
the regulation had been historically interpreted, both by the DOL
itself and the courts.
In particular, the DOL announced its views that the regular
basis prong of the five-part test might be met where an adviser who
has not previously provided the participant with investment advice
recommends that the person roll assets out of an ERISA plan into
an individual retirement account, and would make regular recommendations
with respect to the person's IRA assets.
administration,
the 5th Circuit
vacated the
rulemaking
in 2018.
ical
interpretations of the five-part
Recent Litigation
A recent decision has cast serious doubt on
the new interpretation of this rule. In ASA
v. Walsh, the district court held that recommendations
to employee benefit plans must
be analyzed separately from those to IRAs
when determining whether the regular basis
prong has been met, and found that the aforementioned
FAQ constituted an unreasonable
interpretation of ERISA.
The ASA court further affirmed histortest
that take into account
advice given " to a particular plan, " rather than agreeing with the
DOL's opinion: that one should look more holistically at a relationship
and that advice provided to an individual in an ERISAgoverned
plan could also constitute advice related to the person's
IRA. In doing so, the ASA court vacated the policies underlying
the department's investment advice interpretation, effectively
nullifying the interpretation.
Although the DOL has recently said it will seek to appeal the
ASA decision, the decision itself shows the ongoing divide on
the issue and underlines the fact that the definition of fiduciary
investment advice is still in flux. The DOL has also stated that it
plans to issue a revised investment advice regulation, although the
timing remains somewhat unclear. Nevertheless, if history shows
us anything, it is that we should likely expect more uncertainty.
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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