On February 13, 2023, the United States District Court’s Middle District of Florida (“the court”) struck down the expanded definition of investment-advice fiduciary put forward by the Department of Labor (DOL) in its Frequently Asked Questions (FAQ) publication from April 2021. The DOL’s reinterpretation of the definition had greatly increased the number of advisers that would be deemed investment-advice fiduciaries.  It was published in tandem with a new exemption (DOL PTE 2020-02) offering protection from rollover advice being a prohibited transaction. Implicated advisers rushed to get the protection of DOL-PTE 2020-02 by adopting new policies and procedures by the compliance deadlines of January and July of 2022.  Now it seems the DOL’s attempt to reinterpret the rule through published guidance has run into a legal challenge.

The DOL’s 2021 FAQ, among other guidance, stated in FAQ 7 that the “regular basis” prong of the 1975 five-part test for investment-advice fiduciary could be satisfied where advice to roll over retirement plan assets is part of an ongoing relationship or the beginning of an intended future ongoing relationship between the retirement investor and an investment adviser. However, in February 2023 the court found that the policy in FAQ 7 “deviates from past agency guidance” and “contradicts the plain language of the rule it purports to interpret.” Future advice no longer concerns the plan’s interests, thus “[b]ecause the policy referenced in FAQ 7 abandons this plan-specific focus in the context of rollovers, it sweeps conduct into its purview that would not otherwise trigger fiduciary obligations.” In sum, this decision strikes down the DOL’s reinterpretation of fiduciary status through guidance.

This victory for the plaintiffs, and all other providers of advice to retirement investors, is tempered by its narrow focus on a single aspect of the DOL’s guidance.  The plaintiff also sought summary judgement for three additional counts. The DOL prevailed in each, including that the type of documentation required by FAQ 15 to demonstrate that advice is in an individual investor’s best interest, though burdensome, is “precisely of the nature that a prudent investment advisor would undertake.”

While the DOL lost this battle over fiduciary status, the war for expanding fiduciary status continues.  Since the DOL can appeal the decision, it would be risky to rely on this district court opinion until a final judgement is reached.  Additionally, the DOL has already proposed changes to the fiduciary rule, is still working on this new rulemaking, and could revise their definition of fiduciary status to respond to this loss in court.

In the face of this uncertainty, Fairview advises that firms carry on with their DOL-PTE 2020-02 compliance procedures until more is known.  This will ensure you are in compliance with your own procedures and DOL-PTE 2020-02, it will keep you acting in the best interest of retirement investors, and it will keep your team ready for the DOL’s next moves in court and through rulemaking.