A Condensed History of the DOL’s Fiduciary Rule

The Employee Retirement Income Security Act of 1974 is less than one year away from turning 50. For nearly the entirety of those 50 years, it has defined fiduciary investment advice using a five-part test. Attempts in 2010 and 2016 to modify the 1975 regulation containing the definition were unsuccessful.

Recently, the U.S. Department of Labor sent a proposed regulation to the Office of Management and Budget entitled “Retirement Security,” using the same identifying number as the projects marked as amending the definition. That makes now a good time to review the history of this very important, keystone definition regarding when a person becomes a functional ERISA fiduciary in the course of making investment recommendations. As a fiduciary to a retirement plan, that investment advice provider owes fiduciary duties of prudence and loyalty to the plan.

Under the five-part test, an investment-advice fiduciary is a person who:

• (1) renders advice or makes recommendations as to the advisability of investing in, purchasing or selling securities or other property;
• (2) does so on a regular basis;
• (3) does so pursuant to a mutual agreement between such person and the plan;
• (4) provides advice that serves as a primary basis for investment decisions with respect to plan assets; and
• (5) provides advice that is individualized based on the particular needs of the plan.

In 2016, the administration of former President Barack Obama finished its six-year effort to establish a broad fiduciary standard for advisers to ERISA plans and IRAs. The DOL replaced the five-part test definition (the ‘Vacated Definition’); created two new prohibited-transaction class exemptions, 2016-01 (the BIC Exemption) and 2016-02 (the Principal Transactions Exemption); and amended several existing class exemptions: 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128. Several FAQs were also published addressing the Vacated Definition and the class exemptions.

The Vacated Definition cast a wide net over financial discussions regarding retirement assets. Generally speaking, written or oral communications that are recommendations with regard to the purchase, holding, sale and management of investment property related to a retirement plan or IRA were swept into the Vacated Definition. As a result, one-time advice, suggestions about distributions and rollover recommendations were all cast as fiduciary advice, and whether the giver intended for the recipient to rely upon the recommendation was disregarded, for the most part.  

There were safe harbors meant to describe actions that were not intended to be investment advice and areas that the definition specifically excludes from being investment advice.

In the 2018 decision Chamber of Commerce v. U.S. Department of Labor, the U.S. 5th Circuit Court of Appeals held that agents and other persons engaged in such sales activities are not fiduciaries for purposes of ERISA and the Internal Revenue Code of 1986, absent a special relationship of “trust and confidence.” On that basis, the 5th Circuit vacated the DOL rulemaking.

On December 15, 2020, the DOL issued a prohibited transaction class exemption for fiduciary investment advice (PTE 2020-02). A replacement for the vacated BIC and Principal Transactions exemptions, PTE 2020-02 serves two broad functions. First, PTE 2020-02 makes available prohibited transaction exemptive relief for such fiduciaries, subject to specific conditions, including adherence to three main tenets: 1) the advice must be in the “best interest” of the client; 2) the adviser and firm receive reasonable compensation for the services; and 3) no materially misleading statements about the transaction, conflicts, fees or other relevant matters can be made. PTE 2020-02 also reflects the DOL’s desire to harmonize its approach with that of the Securities and Exchange Commission’s Regulation Best Interest and the National Association of Insurance Commissioners’ Suitability in Annuity Transactions Model Regulation.

Second, in the preamble, the DOL provided an interpretation of the five-part test. With respect to the regular basis prong, the DOL stated that when an adviser has not previously provided advice but expects to regularly make investment recommendations with respect to an IRA as part of an ongoing relationship, a recommendation to roll assets out of an ERISA plan into an IRA would be the start of an advice relationship that satisfies the regular basis prong. Thus, the DOL stated that an initial recommendation without a prior relationship can satisfy the regular basis prong and therefore be considered fiduciary investment advice under the five-part test. The DOL took the view that “it is appropriate to conclude that an ongoing advisory relationship spanning both the Title I Plan and the IRA satisfies the regular basis prong.” The DOL reiterated this point in FAQ 7 of an FAQ issued in 2021.

In February 2022, two separate trade groups filed suit against the DOL in the U.S. District Court for the Northern District of Texas seeking to set aside the DOL’s preamble guidance interpreting the regular basis prong of the five-part test. The American Securities Association alleged that the policies underlying FAQ 7 in the DOL’s 2021 guidance were “arbitrary and capricious” in violation of the Administrative Procedure Act.

In March 2023, the court in ASA held that the DOL’s new interpretation of the regular basis prong, described in FAQ 7, was arbitrary and capricious because it contradicted the plain language of the DOL’s 1975 fiduciary investment advice regulation. The district court also determined that FAQ 7 constituted an unreasonable interpretation of ERISA’s statutory text. Relying on the analysis of the 2022 Carfora v. TIAA decision, the court noted that ERISA’s statutory text and the 1975 regulation both define fiduciary investment advice as advice given “to a particular plan.” The court reasoned that in the context of a rollover, any investment advice that may be given after the rollover occurs is “inherently divorced from the ERISA-governed plan” and is not captured by the analysis of whether the regular basis prong of the five-part test has been met with respect to the plan. The court noted that its decision to vacate the “policy” underlying FAQ 7 would extend to the corresponding discussion in the preamble to PTE 2020-02, in addition to FAQ 7 itself.

The DOL initially appealed but dropped that appeal in May, but it continues to defend the rollover interpretation in the second trade group suit brought by the Federation of Americans for Consumer Choice after a magistrate judge recommended that “the court should conclude that the DOL exceeded its statutory authority in promulgating the new interpretation and that the new interpretation is an arbitrary and capricious interpretation of the five-part test.”

Now that it is at OMB, the proposal will be reviewed and stakeholder meetings held prior to anything being published in the Federal Register as part of notice and comment rulemaking. Many comments are anticipated as this definitional saga continues.

Allison Itami is a partner at Groom Law Group, Chartered.