A federal judge has rejected a key part of the U.S. Labor Department's fiduciary rule regulations on retirement transactions.
U.S. District Judge Ed Kinkeade ruled Thursday against sections in Prohibited Transaction Exemption 2020-02 stating that an advisor could start an "ongoing advice relationship" with a retirement saver under the Employee Retirement Income Security Act if the advisor helped the retirement saver with even one retirement savings rollover transaction.
Traditionally, the Labor Department has used a "five-part test" to determine whether the people or companies giving retirement savers financial advice were fiduciaries.
When department officials were developing the PTE 2020-02 advice relationship provisions, while President Joe Biden was in office, they wanted to classify more people as advisors, in an effort to increase the department's ability to protect retirement savers against what department officials believed was bad advice.
The PTE 2020-02 advice relationship provisions "exceed the DOL's authority under ERISA and constitute arbitrary and capricious interpretations of the five-part test to determine whether financial professionals are acting as 'investment advice fiduciaries,'" Kinkeade wrote in an order accepting recommendations made in June 2023 by a U.S. magistrate judge.
The case is Federation of Americans for Consumer Choice et al. v. U.S. Department of Labor et al.
Representatives for the parties could not immediately be reached for comment.
Labor Department regulation terminology: The Labor Department adopts regulations based on ERISA.
ERISA imposes a tough "fiduciary obligation" on many parties that interact with the benefit plans governed by ERISA and the participants. The obligation requires fiduciaries to put the interests of plans and plan participants first.
In practice, strict application of a fiduciary requirement may interfere with many traditional financial services company practices, such as commission-based compensation arrangements and tendencies for people who work for mutual fund companies or annuity issuers to promote sales of their own companies' products before offering clients other companies' products.
The Labor Department often supplements ERISA-related regulations with additions called "prohibited transaction exemptions."
The PTEs protect specified parties from the full force of the ERISA fiduciary obligation, rather than imposing the requirement on more people.
The backdrop: The federal courts have stayed implementation of the Labor Department investment advice regulations, but the regulations continue to exist.
Litigation surrounding the regulations is still moving through the federal courts.
Nevin Adams' view: Nevin Adams, a lawyer and a longtime retirement services industry player, wrote in a commentary posted on the website of the National Association of Plan Advisors that the new ruling means that the court believes the Labor Department effort to classify helping with a rollover transaction as the start of a fiduciary relationship was beyond the department's authority.
A Florida court issued a similar ruling in May 2023, Adams noted.
"If this all feels like this puts us at a place we were already at with the restoration of the five-part test and rollover recommendations…well, there's a reason," Adams wrote.
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