The recent decision by a federal judge that one rollover transaction cannot start an "ongoing advice relationship" is not the end of the fiduciary rule battle, ERISA attorneys say.
In his mid-July decision, U.S. District Judge Ed Kinkeade ruled 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 a retirement saver with even one retirement savings rollover transaction.
The ruling, in the U.S. District Court for the Northern District of Texas, weighed in on a February 2022 case against Labor brought by the Federation of Americans for Consumer Choice, which challenged the department's 2020 guidance on who is considered a fiduciary when giving rollover advice.
FACC said Thursday that it will seek "reconsideration or appeal" Kinkeade's ruling, as the decision "is right in some respects and wrong in others."
"Essentially, the Texas court in the FACC case on the 2020 [rollover] guidance reaffirmed the status quo, as its decision largely mirrored" a Florida court's ruling in another case, ERISA attorney Brad Campbell of Faegre Drinker told ThinkAdvisor Monday in an email.
In February 2023, a Florida district court vacated parts of Labor’s fiduciary rule interpretation related to rollover advice, specifically the "regular basis" component, in a case brought by the American Securities Association.
The court found that Labor’s interpretation, which suggested a single rollover recommendation could trigger fiduciary status, was arbitrary and capricious. The decision means that Labor can no longer consider a single rollover recommendation as advice given on a "regular basis" — one of the factors that determine fiduciary status under ERISA.
PTE 2020-02 was partly overturned by the Florida district court decision, but still faced the challenge in court by FACC in the U.S. District Court for the Northern District of Texas.
DOL did not appeal the Florida case. “I assume that the DOL also will not appeal the recent Texas decision on the same issue,” ERISA attorney Fred Reish of Faegre Drinker told ThinkAdvisor in an email.
As it stands, “if an advisor does not have a relationship with a plan, the advisor can recommend a rollover without being a fiduciary,” Reish said. “However, it is not clear that the advisor would not be a fiduciary for a rollover recommendation to a participant if the advisor is a fiduciary advisor to the plan or a fiduciary advisor to that participant (e.g., manages the participant’s account).”
Neither decision regarding PTE 2020-02 "materially affects the 2024 Fiduciary Rule,” Campbell added.
What’s Next?
Two Texas courts have stopped the fiduciary rule from taking effect. The two cases — which apply only to the halt, not to the rule itself — have been consolidated in the U.S. Court of Appeals for the 5th Circuit, Campbell said. The DOL has until mid-August to respond. Labor has received three 60-day delays since February to get organized.
Taking all the recent court decisions together, "the bottom line is that a rollover recommendation, standing alone, is not fiduciary advice," Reish said.
For investment advisors, "a rollover recommendation is a fiduciary decision under the SEC standards; for broker-dealers, it is a best interest recommendation; and for insurance agents it is a limited best interest recommendation," Reish continued.
"I say 'limited' because under the SEC standards for investment advisers and broker-dealers, the recommendation has to consider the investments, services and expenses in the plan and compare them to the IRA’s, but the insurance standard does not require consideration of whether it would be better for the participant to leave the money in the plan," Reish continued.
"Instead it requires that the recommendation to buy the annuity be appropriate for the participant, without consideration of leaving the money in the plan."
Credit: Chris Nicholls/Touchpoint Markets
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