WASHINGTON — The National Association of Fixed Annuities closed its Annuity Leadership conference Thursday with many attendees wondering about the future of the industry under the U.S. Department of Labor’s fiduciary rule.
While NAFA members gathered in Washington, D.C., to discuss the Labor Department rule and meet with their senators and representatives during the Hill Walk conference, just a few blocks away, President Obama vetoed a Congressional resolution aimed at blocking the rule. And around the country, new legal challenges were lobbed at the Labor Department, bringing to five the total number of lawsuits targeting the fiduciary rule.
In Kansas, Market Synergy Group is seeking an injunction under the Administrative Procedure Act and Regulatory Flexibility Act of 1980, claiming an unlawful and improper exercise of federal agency rulemaking authority. The lawsuit’s chief complaint is that the Labor Department moved fixed indexed annuities from the PTE 84-24 umbrella, where they were in the proposed rule, to the Best Interest Contract Exemption umbrella in the final rule without adequate opportunity for industry comment.
“In doing so, the department’s actions have endangered the livelihoods of thousands of hard-working individuals and thousands of small businesses in an important segment of the insurance industry,” the lawsuit says.
In addition to the complaint in Kansas, two additional lawsuits were filed in the Northern District of Texas, including one filed by the American Council of Life Insurers, the National Association of Insurance and Financial Advisors and six of its Texas chapters. The second was filed by the Indexed Annuity Leadership Council, Life Insurance Co. of the Southwest, American Equity Investment Life Insurance Co., Midland National Life Insurance Co. and North American Co. for Life and Health Insurance. Those lawsuits join a multiparty lawsuit filed in the same court last week and all of them could be combined.
Meanwhile, NAFA’s lawsuit, filed in a Washington, D.C., district court last week has been assigned to District Judge Randolph D. Moss and is scheduled for a hearing Aug. 25. No matter which way the judge rules in the case, the losing side is expected to appeal. That could extend the litigation process beyond the 2016 election, which could bring changes to the White House, Congress and Labor Department leadership that could alter the course of the rule litigation.
At NAFA’s conference, Phil Bartz, a partner at Bryan Cave LLP who represents NAFA in its lawsuit, said not only has NAFA challenged the rule under the Administrative Procedures Act but also has asked for a preliminary injunction to delay the April 2017 compliance deadline. As part of the legal process, NAFA filed nine briefs demonstrating irreparable harm to the industry. Bartz outlined the five arguments raised in the complaint, including:
- The new definition of fiduciary under the rule violates the intent of Congress in creating the Employee Retirement Income Security Act of 1974, and the idea of an insurance agent selling a product being considered a fiduciary is contrary to common law, which is what ERISA is derived from.
- Neither ERISA nor the internal revenue code gives the Labor Department or the Treasury Department the ability to regulate IRA transactions, and is a backdoor attempt to regulate IRAs that was denied by Congress.
- The Best Interest Contract Exemption creates a litigation right to allow people to sue the financial institution that is the signatory on the contract, creating litigation rights that agencies don’t have the authority to create.
- The definition of reasonable compensation is not meaningful under the rule.
- The Labor Department moved fixed indexed annuities to the Best Interest Contract Exemption at the last minute without explanation after the notice of proposed rulemaking had deemed the products not to be appropriate for the Best Interest Contract Exemption, an idea that was affirmed in comments.
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Bartz said a decision could come by mid-September. “I think we have been able to convey and impress upon the judge the need for speed, to quote ‘Top Gun,’” said Bartz.
Rep. Blaine Luetkemeyer (R-Mo.) praised NAFA’s lawsuit and encouraged attendees at the conference to continue pushing back against the rule, which he called a solution looking for a problem. As to whether the House would consider a new legislative challenge to the Labor Department rule in the wake of Obama’s veto, Luetkemeyer was doubtful.
“We don’t have the votes to override it, so I doubt we’ll take it up,” he said. “I’m not sure, because we’ve tried this issue a number of times, if the leadership will give it more time. Personally I doubt it.”
Sen. Johnny Isakson (R-Ga.), who introduced the resolution of disapproval of the fiduciary rule in the Senate, called the rule well intended but with terrible consequences.
Rep. Phil Roe (R-Tenn.), who led the house resolution to overturn the rule, addressed conference attendees, saying the burden of complying with government rules and regulations must be reined in.
“If conforming to government regulations in this country were a country, it would be the fourth largest economy in the world, behind the United States, China and Japan,” said Roe, who noted $1.4 trillion is spent annually by companies and organizations to comply with government regulations. Roe joked that a dictionary, which defines every word in the English language, is only a few pages longer than the 1,000-plus page Labor Department rule, which defines only the word fiduciary.
While NAFA members are clearly focused on securing a successful outcome for the association’s lawsuit against the Labor Department as well as trying to convince members of Congress to continue efforts to challenge the rule, they are also considering their options for surviving under the rule if it is not overturned.
This is particularly true for independent marketing organizations, which are not designated as financial institutions under the rule, leaving them in a vulnerable position. One option independent marketing organizations might consider is applying for an exemption to become designated financial institutions, while another option is to incorporate or partner with Registered Investment Advisor firms or broker-dealers, both of which are designated financial institutions under the rule.
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