District Court Sides With Challenges to DOL’s Fiduciary Standards

A federal judge this week ruled partially in favor of a coalition of financial professionals and organizations challenging the U.S. Department of Labor’s interpretation of fiduciary standards under the Employee Retirement Income Security Act. 

In Federation of Americans for Consumer Choice Inc. et al. v. United States Department of Labor et al., U.S. District Judge Ed Kinkeade, in the Northern District of Texas, issued an order on July 9 that accepted the findings and recommendations of a U.S. magistrate judge, who concluded in 2023 that portions of the DOL’s guidance under Prohibited Transaction Exemption 2020-02 exceeded the agency’s authority and were arbitrary and capricious. 

The plaintiffs—comprised of independent insurance agents, financial planners and industry organizations—argued that the DOL’s reinterpretation improperly expanded the definition of who qualifies as an “investment advice fiduciary” under Title I of ERISA, particularly regarding advice on rolling funds into individual retirement accounts from other retirement plans. 

Following the magistrate judge’s recommendation, Kinkeade struck down parts of PTE 2020-02 that allowed the Department of Labor to treat certain relationships involving IRAs as evidence of a fiduciary role under ERISA. Specifically, the judge rejected the DOL’s attempt to consider a single rollover as the start of an ongoing advisory relationship, the assumption of possible future advice to IRAs and the view that a continuous advisory relationship covering both a workplace retirement plan and an IRA meets the “regular basis” requirement for fiduciary status. Kinkeade found these interpretations went beyond the DOL’s legal authority and were unreasonably applied. 

While Kinkeade denied the DOL’s motion to dismiss the case for lack of jurisdiction, he also granted in part and denied in part various motions for summary judgment. 

The district court’s ruling partially invalidates the DOL’s attempt to regulate one-time rollover advice as fiduciary investment guidance, potentially narrowing the department’s oversight of financial professionals who offer IRA rollover services. 

The U.S. 5th Circuit Court of Appeals, which vacated the DOL’s previous fiduciary rule in its 2018 decision in Chamber of Commerce v. DOL, in April granted the DOL 60 days to consider its stance on the latest version of the rule, called the Retirement Security Rule, which had been scheduled to take effect in September 2024. The DOL, which published the latest rule during the Biden administration, began pursuing the appeal. Following the change in presidential administration, the DOL has not said if it will continue the appeal. The 5th Circuit hears appeals from district courts in Louisiana, Mississippi and Texas and would be the next court to hear any appeals to Kinkeade’s decision. 

A DOL spokesperson was not immediately available for comment on the status of the rule. 

One attorney argued that more of the by upholding much of the DOL’s preamble in the 2020 Prohibited Transaction Exemption the circuit court’s decision raises a host of issues. 

“I do not speak for FACC, obviously, but I would be extremely surprised if FACC did not appeal, and frankly, I would be very surprised if FACC did not win its appeal,” says Kent Mason, a Washington, D.C.-based partner at Davis & Harman LLP, which was not involved in the legal action. “The 2020 DOL preamble was just a transparent effort to turn salespeople into fiduciaries, which the 5th Circuit has found invalid. Clearly, neither the magistrate nor the district judge understood the issues. I read the magistrate’s report, and it is just devoid of logic on key points.”