Lawyers representing the National Association for Fixed Annuities told a U.S. District judge Thursday that individual insurance agents would be forced to become registered investment advisors under the Department of Labor’s fiduciary rule and that the current distribution system for fixed indexed annuities would have to be reworked.
Judge Randolph Moss, U.S. District judge for the District of Columbia, heard oral arguments for close to three hours Thursday in the first hearing against DOL’s rule, but did not immediately render a decision.
Philip Bartz, a partner at Bryan Cave and a former U.S. Justice Department lawyer, said during his arguments that DOL’s rule embodies “overreach” by DOL to “do things that Congress never intended” and that it’s “at odds” with state insurance law.
Bartz argued that the Employee Retirement Income Security Act would now pre-empt state law under the rule and that the rule improperly created a private right of action that could set up class-action lawsuits against insurance companies and agents.
“They are going to have their butts sued off,” he said.
Bartz in representing NAFA maintained that DOL’s “new” fiduciary definition is “overbroad” and that DOL “threw” fixed indexed annuities into the fiduciary rule’s best interest contract exemption “at the last minute.”
The rule would cause “extraordinary” harm to the $50 billion industry, Bartz said, noting that 60% of fixed indexed annuity sales go through individual insurance agents.
The DOL disagreed with the assertion that the rule creates a new private right to sue, “arguing that the applicable cause of action is breach of contract, which already exists under state law,” said Erin Sweeney, counsel at Miller & Chevalier, who has also served as senior benefit law specialist at DOL.
Under the Employee Retirement Income Security Act, a fiduciary investment advisor is defined as one who “renders investment advice for a fee or other compensation.”
“NAFA contended the DOL exceeded its authority because neither the statute nor its legislative history indicates that Congress meant to conflate ‘advice’ with ‘sales,’” Sweeney said.
NAFA argued in its brief that “as has been recognized forever until now, the investor who buys the annuity is paying for a product, not investment advice, and the salesperson is not a fiduciary,” Sweeney added.
In addressing the lawsuits currently pending in Texas, Kansas and Washington against DOL’s fiduciary rule, Labor Secretary Thomas Perez said on a Thursday call with reporters to announce a final rule on state-run retirement plans that “the status quo has worked well” for these groups that are suing. “Read the lawsuits; the claim that’s most remarkable is that they have a First Amendment right to give conflicted advice to people. I’d love to see that rule applied to doctors and lawyers.”