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.
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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 percent of fixed indexed annuity sales go through individual insurance agents.
NAFA’s suit asks for a preliminary injunction to stay the rule, which is currently set to take effect in April.
Bartz told the judge that the fixed indexed annuity industry must “change its entire distribution model in 10 months. It’s clear there’s irreparable harm here.” He suggested the industry needed at least another 10 months to comply after the April effective date.
NAFA also argues that the DOL’s rule is invalid on grounds that the agency exceeded its authority to regulate IRAs.