Am. Sec. Ass'n v. United States Dep't of Labor
| Decision Date | 13 February 2023 |
| Docket Number | 8:22-cv-330-VMC-CPT |
| Parties | AMERICAN SECURITIES ASSOCIATION, Plaintiff, v. UNITED STATES DEPARTMENT OF LABOR, et al., Defendants. |
| Court | U.S. District Court — Middle District of Florida |
This matter comes before the Court upon consideration of Plaintiff American Securities Association's Motion for Summary Judgment (Doc. # 39), filed on May 20, 2022, and Defendants United States Department of Labor and Marty Walsh's Amended Motion to Dismiss for Lack of Jurisdiction or, in the Alternative, for Summary Judgment (Doc. # 49), filed on June 30, 2022. All Motions have been fully briefed (Doc. ## 49 50, 53) and are ripe for review. For the reasons that follow Defendants' Motion to Dismiss is denied, and both summary judgment Motions are granted in part and denied in part.
This case arises out of a challenge to guidance promulgated by the Department of Labor interpreting its Prohibited Transaction Exemption 2020-02, 85 Fed.Reg. 82798 (December 18, 2020) (the “2020 Exemption”). The 2020 Exemption governs the circumstances in which financial institutions and investment professionals who provide “fiduciary investment advice” to retirement investors can “receive otherwise prohibited compensation.” (JA Doc. # 54-1 at 66).
Congress enacted the Employee Retirement Income Security Act of 1974 (“ERISA”) following a determination that Americans' retirement savings were not adequately protected. Pub. L. No. 93-406, 88 Stat. 829, 898 (1974) (). ERISA's statutory framework includes enhanced “disclosure and reporting” requirements, “standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans,” and “appropriate remedies, sanctions, and ready access to Federal courts.” 29 U.S.C. § 1001(b); Ali v. California Field Ironworkers Trust Fund, No. 8:09-cv-1031-VMC-EAJ, 2010 WL 358539, at *2 (M.D. Fla. Jan. 23, 2010) (citing Aetna Health, Inc. v. Davila, 542 U.S. 200, 208 (2008)).
Title I of ERISA imposes stringent obligations on fiduciaries of employee benefit plans. See 29 U.S.C. § 1104 (detailing fiduciary duties under ERISA). An individual is a fiduciary with respect to a plan under ERISA to the extent:
29 U.S.C. § 1002(21)(A).
In general, under ERISA, a fiduciary must “discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries” and for the “exclusive purpose” of providing benefits to participants and beneficiaries and defraying reasonable expenses of plan administration. Id. § 1104(a)(1). A fiduciary must also act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims[.]" Id. § 1104(a)(1)(B).
In addition to imposing duties of care and loyalty on fiduciaries, ERISA categorically precludes fiduciaries from engaging in certain transactions. Id. § 1106. In particular, a fiduciary must not “deal with the assets of the plan in his own interest or for his own account" or “receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan." Id. § 1106(b)(1), (3). However, ERISA includes exemptions from section 1106 prohibitions for specified transactions, and authorizes the Secretary of Labor to grant “conditional or unconditional" administrative exemptions. Id. § 1108(a), (b). The Secretary may do so on a class-wide or individual basis, so long as the Secretary finds such an exemption is: “(1) administratively feasible, (2) in the interests of the plan and of its participants and beneficiaries, and (3) protective of the rights of participants and beneficiaries of such plan." Id. § 1108(a).
In Title II of ERISA, Congress amended the Internal Revenue Code (“the Code”) to adopt a “fiduciary” definition parallel to that in Title I. 26 U.S.C. § 4975(e)(3). Title II covers most employee benefit plans covered by Title I, as well as other tax-favored retirement and savings plans (collectively “IRAs”). Id. While the Code provisions do not include duties of loyalty and prudence, they do, as in Title I, prohibit fiduciaries and others from engaging in specified conflicted transactions. Id. § 4975(c). The Secretary has the authority to grant administrative exemptions from these Code provisions on the same terms as in Title I. Id. § 4975(c)(2).
ERISA also empowers the Secretary to “prescribe such regulations as he finds necessary or appropriate to carry out the provisions of this subchapter.” 29 U.S.C. § 1135. “Among other things, such regulations may define accounting, technical and trade terms used in such provisions.” Id. Pursuant to that authority, the Department of Labor issued a regulation in 1975 “clarify[ing] the definition of the term ‘fiduciary' as set forth in [29 U.S.C. § 1002(21)(A)].” 40 Fed.Reg. 50842 (Oct. 31, 1975) (the “1975 Regulation”). Under the 1975 Regulation, a person “renders investment advice” within the meaning of 29 U.S.C. § 1002(21)(A)(ii) when he:
(1) renders advice to the plan as to the value of securities or other property, or makes recommendation[s] as to the advisability of investing in, purchasing, or selling securities or other property, . . . (2) on a regular basis[,] (3) pursuant to a mutual agreement, arrangement, or understanding, written or otherwise, between such person and the plan or a fiduciary with respect to the plan, (4) [where] that the advice given will serve as a primary basis for investment decisions with respect to plan assets, and (5) [where] the advice will be individualized . . based on the particular needs of the plan.
Nat'l Assoc. for Fixed Annuities v. Perez, 217 F.Supp.3d 1, 23 (D.D.C. 2016) (citing 29 C.F.R. § 2510-21(c)(1)) (internal quotations omitted)). The 1975 Regulation also applies to the definition of fiduciary in the Code, which is identical in its wording. 26 C.F.R. § 54.4975-9(c); 40 Fed.Reg. 50840 (October 31, 1975).
In 2016, in response to changes in market conditions since 1975, the Department finalized a new regulation intended to replace the 1975 Regulation. Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice, 81 Fed.Reg. 20946 (Apr. 8, 2016) (the “Fiduciary Rule”). In part, the Fiduciary Rule was animated by concern over how the “regular basis” and “primary basis” prongs of the 1975 Regulation would exclude one-time transactions, like IRA rollovers, from the definition of fiduciary. Chamber of Commerce v. U.S. Dep't of Labor, 885 F.3d 360, 365-66 (5th Cir. 2018). The Fiduciary Rule provided in relevant part that an individual “renders investment advice for a fee” whenever he is compensated in connection with a “recommendation as to the advisability of” buying, selling, or managing “investment property.” 29 C.F.R. § 2510.3-21 (a) (1) (2017). And “[c]ritically, the [Fiduciary Rule] dispense[d] with the ‘regular basis' and ‘primary basis' criteria used in the [1975 Regulation.]” Chamber of Commerce, 885 F.3d at 366. The Fiduciary Rule additionally granted new associated prohibited transaction exemptions. Id.
However, in 2018, the Fifth Circuit vacated the Fiduciary Rule. See Chamber of Commerce, 885 F.3d at 379, 388 ( that the Fiduciary Rule conflicted with plain text of ERISA) . Accordingly, on July 7, 2020, the Department proposed a new class exemption, taking the Fifth Circuit's ruling into account. (Joint Appendix (“JA”) Doc. # 54-1 at 71). The notice additionally “set[] forth the Department's final interpretation of when advice to roll over Plan assets to an IRA will be considered fiduciary investment advice under Title I and the Code.” (Id.). The notice also made clear that:
[a]ll prongs of the [1975] five-part test must be satisfied for the investment advice provider to be a fiduciary within the meaning of the regulatory definition, including the “regular basis” prong and the prongs requiring the advice to be provided pursuant to a “mutual” agreement, arrangement, or understanding that the advice will serve as “a primary basis” for investment decisions.
(Id. at 76). The Department concurrently published a technical amendment to the Code of Federal Regulations, “reflect[ing] the Fifth Circuit's vacatur of the Fiduciary Rule . . . and reinstat[ing] the 1975 Regulation[.]” (Id. at 104). Therefore, the definition of “fiduciary” in the 1975 Regulation is currently the operative definition.
During the notice-and-comment period, the American Securities Association submitted a comment on August 6, 2020, requesting the Department “make explicit that the ERISA ‘five-part test' will be consistent with the Fifth Circuit's opinion regarding the 2016 Rule.” (Id. at 134). ASA further argued that requiring broker-dealers to disclose their fiduciary status to investors in the context of rollover recommendations was “unnecessary and could have adverse impacts,” and that such “written...
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