A Second DOL Fiduciary Rule Court Challenge Emerges

The National Association for Fixed Annuities filed a complaint in district court to “challenge and vacate the Department of Labor’s final fiduciary regulations.”

A second federal lawsuit has been filed just a few days after a coalition of financial trade groups entered their own complaint seeking to halt the DOL fiduciary rule—both asking the courts to strike down the Labor Department’s new regulations that will require most brokers and investment consultants to act as fiduciaries.

The second complaint was filed in the U.S. District Court for the District of Columbia by the National Association for Fixed Annuities (NAFA), asking the court for “declaratory, injunctive, and other appropriate relief.” Whereas the suit filed June 1 seeks relief under the Administrative Procedure Act (APA) and the First Amendment to the U.S. Constitution, this one also suggests the Department of Labor (DOL) is violating the Regulatory Flexibility Act (RFA) with its sweeping advice regulation.

“Specifically, in promulgating the Rule and the Exemptions, the Department exceeded the authority granted to it by Congress under ERISA, the Code, and Reorganization Plan No. 4 of 1978,” the suit contends. “In addition, the Rule and the Exemptions are arbitrary and capricious, not in accordance with law, impermissibly vague, and otherwise promulgated in violation of federal law.”

The text of the complaint shows NAFA member firms are clearly worried about potential unintended consequences of the DOL rulemaking, and while they have not traditionally considered themselves as trusted fiduciary advisers for their clients, they feel the new rulemaking will treat them that way: “NAFA’s members have been adversely affected by the Department’s actions in that the Rule and Exemptions will, in many cases, threaten the very existence of their business, result in immediate and unrecoverable losses of market share, and result in unrecoverable economic losses for which no adequate relief can later be granted.”

As such, the complaint argues for injunctive relief that would effectively halt the rulemaking in its tracks until the court rendered a decision—an outcome that has already been deemed unlikely by many Employee Retirement Income Security Act (ERISA) industry experts.

NEXT: Annuities and the new fiduciary rule 

NAFA’s complaint spells out for the court the key differences between the two main types of annuities its members sell, ultimately arguing its members are entitled to injunctive relief because they are being inappropriately lumped into to the DOL’s effort to stamp out conflicts of interest between relationship-based financial advisers and their clients.

“Insurance agents who sell fixed annuities are bound by common-law requirements of agency and must pass tests of both competency and character before being granted a state license,” the complaint explains. “Insurance agents need to be licensed in each state in which they operate. Only state-licensed life insurance agents may sell fixed annuity contracts.”

Once fully qualified, NAFA explains, an agent is subject to comprehensive state regulations related to the sale of fixed annuities, and insurance companies have implemented policies to ensure compliance with such regulations.

“Accordingly, state insurance departments oversee all aspects of the transaction, from the development and approval of each fixed annuity product sold in the state, to the licensure and sales activities of the individual agents, to the operations and compliance protocols of the insurance companies,” NAFA says. “In each instance, the objective is to protect the interests of the fixed annuity purchaser.”

On NAFA’s reading, DOL’s new fiduciary rulemaking will adversely impact this already-effective system for preventing conflicts—leading to more liability, mountains of new paperwork, confused client and potentially driving an unwarranted cooldown in the annuity market.

“In 2014, for example, consumer complaints involving securities and advisers represented over 97% of combined annuity and securities complaints—but only .03% of total complaints were lodged by owners of fixed annuities,” NAFA says. “Congress has determined that fixed annuities, including fixed index annuities (FIAs), should be regulated by the states as insurance products, rather than under federal securities laws. Following an attempt by the SEC to regulate FIAs under the securities laws, Congress made its intentions clear in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.”

NEXT: Should insurance agents be fiduciaries? 

NAFA suggests to the court that the DOL “has created fiduciary obligations for relationships not appropriately regarded as fiduciary in nature and that [even] the Department does not believe Congress intended to cover as fiduciary relationships. Accordingly, under the new test, the average insurance agent is now an ERISA fiduciary if the agent sells a single fixed annuity contract to an IRA owner.”

This is one area where the DOL’s amendments to the proposed version of the rulemaking actually got tougher, from NAFA's perspective: “Prior to these amendments, the sale of all annuity products fell with the purview of the prohibited transaction exemption (PTE) under section 84-24. In its Notice of Proposed Rulemaking, the Department proposed that variable annuities be removed from PTE 84-24, leaving only fixed annuities and fixed index annuities (FIAs) subject to this exemption. In the final PTE 84-24, only fixed annuities remain for the exemption, i.e., both variable annuities and FIAs were removed from coverage under 84-24.”

In conclusion, NAFA warns that “without adequate notice as required under the APA, in the final rule the DOL moved FIAs out of PTE 84-24 and into the best-interest contract exemption (BICE) ... All fixed annuities—including FIAs—have heretofore been treated as insurance products, exempt from federal securities laws and regulated under state insurance laws. Yet the Department lumped FIAs in with securities products like variable annuities when it promulgated the rule and the exemptions.  Because FIAs are an insurance product, the FIA sellers represented by NAFA—including carriers, IMOs, and agents—are ill-equipped to suddenly be subjected to the onerous compliance obligations required by the BICE, which more closely resemble the types of requirements imposed on the securities industry.”

The full text of the complaint is available here