The Wagner Law Group | Est. 1996

Sophisticated Legal Solutions And Boutique-Style Service

Was the DOL FAQed Out and Rolled Over? Second Court Rejects DOL’s Interpretation of ERISA’s Fiduciary Rule

by | Feb 15, 2023 |

By Andrew Oringer

Two recent federal courts, in Carfora v. TIAA, No. 1:21-cv-08384 (S.D.N.Y. Sept. 27, 2022) and American Securities Association [“ASA”] v. U.S. Department of Labor, No. 8:22-cv-00330 (M.D. Fla. Feb. 13, 2023), have rejected a key interpretation by the U.S. Department of Labor (the “DOL”) of its own fiduciary rules under the Employee Retirement Income Security Act of 1974, as amended (including the corresponding provisions of the U.S. tax code, “ERISA”). These cases, and particularly the ASA case, which was decided earlier this week, could potentially act as a major impediment to the DOL’s pursuit of a critical policy initiative relating to the regulation of rollover solicitations.

Background – In General

For years, the DOL has devoted substantial time and effort to expand the reach of the fiduciary rules. The DOL arguably seemed to have become dissatisfied with the existing regulatory definition of “investment advice” (the “Existing Fiduciary Rule”) as being too narrow and easy to avoid, and embarked upon an effort to expand the scope of that definition and, by so doing, expanded the scope of who is a fiduciary for ERISA purposes.

A stated goal was to attempt to protect non-institutional individual so-called “retail” investors in participant-directed employee benefit plans that are subject to ERISA (“Plans”) and owners of individual retirement arrangements (“IRAs”) most of which are not subject to ERISA. It is noted that the DOL has interpretive authority regarding certain rules applicable to Plans and IRAs, and has enforcement authority as to Plans but not non-ERISA IRAs.

The crowning accomplishment of this DOL endeavor may well have been the DOL’s proposal and eventual finalization of an amendment to the regulatory definition of “investment advice.” The impact of the final amended fiduciary rule (the “Amended Fiduciary Rule”) was broad, and caused financial institutions to reexamine and revise their practices applicable to retirement accounts, and sometimes even to non-retirement accounts in an effort to maintain uniform practices across their customer base.

But the best laid plans sometimes don’t ultimately work out, and in 2018 the U.S. Court of Appeals for the Fifth Circuit vacated the Amended Fiduciary Rule, together with a number of new and amended administrative exemptions, as being “arbitrary and capricious.” When the Trump administration declined to appeal the decision, the vacatur became final, and the regulatory definition of the “investment advice” returned to the status quo of the Existing Fiduciary Rule.

One of the things the DOL addressed in the wake of the demise of the Amended Fiduciary Rule was the elimination of a particularly significant new (and now vacated) exemption (the “Best Interest Contract Exemption”). While the Amended Fiduciary Rule was generally adverse to the interests of financial institutions, the Best Interest Contract Exemption (or “BIC Exemption”), where applicable, permitted financial institutions to act as fiduciaries under the Amended Fiduciary Rule (and still receive otherwise potentially prohibited compensation) without running afoul of certain ERISA prohibitions. Thus, when the Amended Fiduciary Rule and the related exemptions were vacated, financial institutions lost the potential protection of the BIC Exemption.

The DOL realized that the loss of the BIC Exemption could make it more difficult for financial institutions to continue to serve the retail retirement market where those institutions (i) might be at risk of being considered to be fiduciaries even under the Existing Fiduciary Rule; or (ii) might have wanted affirmatively to assert fiduciary status, for example to gain an advantage in the market.

Somewhat perversely, the elimination of the BIC Exemption could therefore have discouraged financial institutions from proceeding as fiduciaries. The DOL was aware of the conundrum, and provided for transition relief while it considered how to address the issue.

PTCE 2020-02

Eventually, the DOL proceeded to propose and adopt what became Prohibited Transaction Class Exemption (“PTCE”) 2020-02, which provided a path for financial institutions to provide fiduciary services to the retail retirement market and still charge compensation under desirable structures that may not be permitted under ERISA absent an exemption. In that regard, PTCE 2020-02 is in the nature of relief.

However, in the preambles to the proposed and final versions of what became PTCE 2020-02, the DOL reinterpreted important aspects of the five-part test governing what is “investment advice” under the Existing Fiduciary Rule. The DOL followed this reinterpretation with FAQ-7 of its April 2021 Frequently Asked Questions regarding these matters (the “2021 FAQ”).

Critically, among other aspects of the DOL’s reinterpretation, the DOL reasoned that advice given during the process of soliciting rollovers from the Plan accounts of new customers could be advice rendered on a “regular basis” if there would be continuing advice rendered with respect to the IRA receiving the rollover, and therefore could be fiduciary advice subjecting the rollover solicitation, and the soliciting institution, to ERISA. This approach differed from the approach taken over the course of the proposing and finalizing of the Amended Fiduciary Rule, where the DOL acknowledged that a change in the underlying regulation was generally necessary in order for the “investment advice” regulation to reach such rollover solicitations.

The DOL’s new approach (i.e., the approach outlined in connection with the proposal and finalization of PTCE 2020-02 and thereafter) has caused a number of financial institutions to rework their rollover-solicitation procedures so as to provide a better position that the procedures fit within the conditions of PTCE 2020-02. However, it has never been clear that the DOL’s reinterpretation of the five-part test of the Existing Fiduciary Rule is correct or sustainable.

Recent Judicial Developments

The Carfora case is now no longer alone in adjudicating the sustainability of the DOL’s analysis. The more recent ASA decision generally agrees with and follows the Carfora decision as to the validity of FAQ-7 and as to the DOL’s related rationale and analysis, and likewise rejects the DOL’s approach as “arbitrary and capricious.”

Carfora has now been followed by the ASA case. The ASA decision agrees with and follows the Carfora decision as to the validity of FAQ-7 and as to the DOL’s related rationale and analysis, and likewise rejects the DOL’s approach as “arbitrary and capricious.” ASA is a case in which the DOL is a defendant, and if ASA is affirmed or otherwise becomes final, the DOL’s reinterpretation of the Existing Fiduciary Rule will be vacated. (It is noted that ASA addresses a number of other points as well, and, as to certain of these other points agrees with the DOL’s approach in certain respects.)


Arguably, a central part of the DOL’s initiative regarding the expansion of the reach of ERISA’s fiduciary rules has been the purported expansion of the definition of “investment advice” to certain rollover solicitations that were previously outside of ERISA’s reach. With the Amended Fiduciary Rule, the DOL changed the underlying regulatory language in order to get to its desired result.

In the wake of the demise of the Amended Fiduciary Rule, the DOL asserted a new interpretation of the Existing Fiduciary Rule that could allow it to get to the same ultimate result. This new interpretation has now been rejected by the Carfora and ASA courts.

Interestingly, in the ASA case, the DOL went so far so as to contend that the plaintiff’s position that the DOL had improperly expanded the reach of the five-part test would “lead to absurd outcomes.” The ASA court responded to this contention by stating: “Because [the plaintiff’s] reading of the 1975 Guidance is that which the [DOL] adhered to for several decades, the Court is reluctant to find it ‘absurd.’”

If ASA stands, it could be a major blow to what is arguably a centerpiece of the DOL’s efforts to regulate rollover solicitations. It remains to be seen what the DOL’s next steps would be.

The situation right now is an uncertain one, and financial institutions, some of which have already embarked upon substantial efforts to revamp their procedures applicable to rollover solicitations of new customers, may wish to watch the situation with great care.

Those institutions that have accepted or embraced fiduciary status, and wish to continue to do so, could be positioned to stay the course, regardless of how the courts view the DOL’s analysis of the regular-basis prong of the regulatory five-part test. For those institutions that wish to avoid fiduciary status based on the contention that the DOL’s analysis is invalid, the next chapter in this NeverEnding Story of the Amended Fiduciary Rule and its progeny has not yet been written.

*         *         *         *

We will be following the manner in which these matters progress, and expect to be providing updates regarding particularly important developments. If you have any questions regarding Carfora or ASA, or regarding the Existing Fiduciary Rule or ERISA’s fiduciary rules generally, please do not hesitate to contact us.