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Second Lawsuit Filed Against Fiduciary Rule

Less than 24 hours after the filing of litigation challenging the Department of Labor’s (DOL) fiduciary regulation, a second lawsuit was filed June 2.

This one, filed in the U.S. District Court for the District of Columbia by the National Association for Fixed Annuities, seeks to “challenge and vacate” the fiduciary rule, with an arguably narrower focus than the lawsuit filed the day before, but making many of the same arguments.

Relief Sought

The suit, which asks the court to not only vacate and set aside both the fiduciary regulation and the Best Interest Contract (BIC) exemption, also asks that the court enjoin “the DOL and its officers, employees, and agents from effectuating, implementing, applying, or taking any action whatsoever to enforce the Rule and the Exemptions.

In support of its request, the lawsuit claims (among other things) that:

  • The DOL exceeded its statutory authority under ERISA and acted in an arbitrary and capricious manner in promulgating its new definitions of “investment advice to a plan” and “fiduciary.”

  • The DOL’s redefinition of “fiduciary” based on what constitutes “investment advice to a plan” is “contrary to the plain meaning of ERISA and extends the scope of ERISA fiduciary obligations to persons whom Congress never intended to subject such obligations, including insurance agents selling fixed annuity contracts.”

  • The new fiduciary rule is not a reasonable construction of the phrase “investment advice to a plan” under ERISA, because the DOL “provided no coherent rational for abandoning the five-part test in making an unprecedented shift that will assign fiduciary status to insurance agents selling fixed annuities, and others who have never been thought of as fiduciaries in any context, including under ERISA or the common-law of trusts.”

  • The DOL “exceeded its limited statutory authority and jurisdiction under Code Section 4975 by promulgating a Rule that imposes ERISA fiduciary duties on parties to transactions involving IRAs.”

  • The DOL exceeded its statutory authority under ERISA and the federal income tax Code by creating a private cause of action through the BIC, which is integral to the rule.

  • The DOL’s treatment of FIAs as securities conflicts with the Dodd-Frank Act, which clarified that FIAs are to be treated as exempt from regulation under federal securities law.

  • The DOL failed to consider the impact of the fiduciary rule and BIC on small businesses.

  • The DOL’s mandate that fiduciaries under the BICE and PTE 84-24 be paid no more than “reasonable compensation” is “so vague as to be without meaning.”

  • The rule and its exemptions “are void for vagueness under the Fifth Amendment of the U.S. Constitution.”

As it relates to the impact of the fiduciary regulation on fixed income annuities (FIA), the filing notes that in the DOL’s NOPR, both declared rate fixed annuities and FIAs were included in PTE 84-24, but that “without adequate notice as required under the APA, in the final Rule the Department moved FIAs out of PTE 84-24 and into the BICE.” The plaintiffs go on to note that all fixed annuities — including FIAs — had previously 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.”

Impact on FIAs

The plaintiffs here note that 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.” They go on to say that the FIA industry was “blind-sided by this last-minute switch” and that the impact to the industry and its clientele would be “highly detrimental.”

The suit notes that, as a result, insurance carriers will need to restructure their distribution models “because they will not be able to guarantee in a BIC that independent agents selling insurance products from different carriers have acted in the best interest of purchasers.” Moreover, in order to avoid this problem, the suit claims that insurers may need to work only with agents registered as broker-dealers, or to “work only with “captive” agents (i.e., agents that sell products from only a single carrier), eliminating “independent” agents able to offer a variety of different carriers’ fixed annuity products to consumers.”

The DOL’s last-minute decision to switch FIAs from PTE 84-24 to the BICE, “without adequate notice, was arbitrary, capricious, unsupported, and contrary to law,” the suit alleges, and the DOL “failed to analyze, discuss, or even acknowledge how moving FIAs into the BICE will affect the FIA industry, including carriers, IMOs, and agents.”

As a result of the foregoing, as well as the distribution changes made by carriers, an estimated 20,000 independent insurance agents will exit the business of selling fixed annuities, the suit alleges, stating that “fewer independent agents and fixed annuity products will be available to middle income retirement savers” and that “many lower and middle-class Americans will not be able to obtain affordable advice and products with respect to their retirement savings.” In sum, the suit alleges, “the Rule will hurt the very people the Department is trying to help.”