A U.S. District Court in Florida on Monday struck down the Department of Labor’s guidance, calling its extension of fiduciary requirements to 401(k) and IRA rollover recommendations “arbitrary and capricious.” The decision leaves broker-dealers in the tough position of having to decide whether they will follow the rule anyway or reject the guidance.
“The decision by the Florida court is just the first step in a long process,” said Fred Reish, a partner at Faegre Drinker and a fiduciary authority. “It will likely be followed by a DOL appeal and probably by a new regulation. We could be in a state of legal flux for a year or more.”
Judge Virginia M. Hernandez Covington ruled the DOL’s Employee Benefits Security Administration was “arbitrary and capricious” in its 2020 interpretation that asserted firms have to treat rollover recommendations as fiduciary advice beginning at a first client meeting.
“While an offer to provide future advice may, as the Department suggests, be the beginning of a relationship, that relationship is inherently divorced from the ERISA-governed plan," Judge Covington wrote in its summary judgement in American Securities Association v. United States Department of Labor.
The court also ruled that EBSA violated the Administrative Procedures Act when it used answers to frequently asked questions in 2021 to assert that the fiduciary rule must apply to “the entire advice relationship and does not exclude the first instance of advice, such as a recommendation to roll plan assets to an IRA, in an ongoing advice relationship.”
Reish expects the DOL to challenge the ruling. “I think that it is likely that the DOL will appeal. If an appellate court agrees with the DOL it would be helpful in terms of a new fiduciary regulation. In addition, it buys time for a new rule to be developed.”
Jason Berkowitz, chief legal and regulatory affairs officer of the Insured Retirement Institute, also said he expects the DOL to appeal the ruling. “My thought is they won’t want to leave this opinion out there,” said Berkowitz, who expects the agency will make a request to stay the lower court decision and allow the fiduciary requirements to take effect, which he said most courts grant.
However, Labor Secretary Marty Walsh’s resignation on February 16 to lead the NHL player’s union throws a wrench into DOL plans, Berkowitz added.
“The White House may not want this issue to impact nomination hearings for Walsh’s replacement, especially with the presidential election coming up. That’s speculation on my part, but the administration could slow down the rulemaking. It is a consideration,” Berkowitz said.