The Eastern District of Texas Treats the DOL’s 1975 Fiduciary Rule Like It’s a Statute

So, it turned out I was right in my completely vanilla, unexciting prediction that the U.S. District Court for the Eastern District of Texas would agree with the Federation of Americans for Consumer Choice and reject the Department of Labor’s Retirement Security Rule. You can read the opinion here. I’m not going to get into the whole thing, but I do want to explore one part of it that I find odd.

ERISA’s Definition of “Fiduciary”

For context, ERISA says that a “person is a fiduciary with respect to a [retirement] plan to the extent . . . he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.” 29 U.S.C. 23 § 1002(21)(A).

DOL’s 1975 Definition of “Fiduciary”

In 1975 the DOL wrote a rule that was somewhat more narrow than the statutory definition. The DOL’s rule said that a person is a fiduciary to the extent he renders investment advice “on a regular basis to the plan,” “pursuant to a mutual agreement” between the fiduciary and plan, and “as a primary basis for investment decisions with respect to plan assets.” 29 C.F.R. § 2510.3-21(c)(1)(ii)(B). But this was an implementing regulation, not the statute itself.

DOL’s 2024 Retirement Security Rule

DOL took a run at amending the fiduciary definition in 2016, which failed for reasons we’ll skip for brevity, and is back again this year. Under the new rule, a person qualifies as an investment advice fiduciary if she:

either directly or indirectly (e.g. through or together with any affiliate) makes professional investment recommendations on a regular basis as part of [his] business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation: is based on review of the retirement investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.

89 Fed. Reg. 32,122.  

Because DOL’s more recent incarnation of this rule removes the “primary basis” qualifier and mostly removes the “regular basis” qualifier, the new rule expands the instances in which a fiduciary obligation could attach to include rollover recommendations. Retirement plan rollovers are not especially “regular”, but they do involve great amounts of money, so a lot is stake as to how those decisions get made.  

Anyway, Judge Kernodle does not like this development! Even though the new rule maintains the “regular basis” requirement to the extent that a fiduciary is still required to make investment recommendations on a regular basis as part of his regular business, that is not enough for him. The court requires more faithful devotion – not to ERISA, but to DOL’s 1975 rule. For Judge Kernodle, the key question is not so much what Congress has enacted but what DOL has done for almost 50 years, in a business context that has largely shifted away from defined pension benefit plans and toward 401(k)s and IRAs.

Here’s the court:

Chamber (the Fifth Circuit opinion that vacated DOL’s 2016 rule) explained that “[f]or the past forty years, DOL has considered the hallmarks of an ‘investment advice’ fiduciary’s business to be its ‘regular’ work on behalf of a client and the client’s reliance on that advice as the ‘primary basis’ for her investment decisions.” DOL codified these requirements in the 1975 Definition, which stated that a person is a fiduciary to the extent he renders investment advice “on a regular basis to the plan,” “pursuant to a mutual agreement” between the fiduciary and plan, and “as a primary basis for investment decisions with respect to plan assets.” 29 C.F.R. § 2510.3-21(c)(1)(ii)(B). The “regular basis” factor ensured that the fiduciary regularly advised a specific client—as would be expected in a relationship of trust and confidence. See, e.g., Schloegel v. Boswell, 994 F.2d 266, 273 (5th Cir. 1993) (holding that “only a few instances” of “providing investment-type of advice . . . falls far short” of a fiduciary relationship under ERISA); Fuller v. SunTrust Banks, Inc., 2019 WL 1996693, at *14–15 (N.D. Ga. Mar. 29, 2019) (same). And the “primary basis” criterion reflected that the fiduciary’s advice would be the primary basis for the client’s investment decisions—again, consistent with a well established relationship between an adviser and client built on trust and confidence. See Chamber, 885 F.3d at 366.

And maybe the “regular basis” and “primary basis” requirements are good ones, but they’re not ones prescribed by ERISA. Judge Kernodle’s analysis preserves the DOL’s 1975 regulation in amber and essentially makes it part of the Congressionally-enacted statute.

It’s weird! Tell me it’s not. I’d love to be proven wrong.