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5 Things 5th Circuit Judges Said About Annuity Sellers

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U.S. Circuit Judge Edith Jones has given some thought to the compliance headaches facing insurance agents who sell annuities.

Jones was part of the 5th U.S. Circuit Court of Appeals panel that ruled 2-1 last week in favor of financial services industry groups, and against the U. S. Department of Labor’s fiduciary rule implementation guidelines, in U.S. Chamber of Commerce et al. v. DOL et al.

Many news organizations emphasized the potential effects of the Chamber v. DOL ruling on the financial services community as a whole.

(Related: DOL Fiduciary Rule Struck Down by Appeals Court)

But the plaintiffs in the Chamber v. DOL case were fighting mainly against the DOL’s best interest contract Exemption (BICE), which, in part, explained how the DOL intended to apply the fiduciary rule to indexed annuities, and, possibly, to some types of life insurance.

The full list of plaintiffs and appellants includes many life insurance and annuity companies and groups: the Insured Retirement Institute; the American Council of Life Insurers; the National Association of Insurance and Financial Advisors; the National Association of Insurance and Financial Advisors – Texas; the National Association of Insurance and Financial Advisors – Amarillo; the National Association of Iinsurance and Financial Advisors – Dallas; the National Association of Insurance and Financial Advisors – Fort Worth; the National Association of Insurance and Financial Advisors – Great Southwest; the National Association of Insurance and Financial Advisors – Wichita Falls; the Indexed Annuity Leadership Council; the Life Insurance Company of the Southwest; the American Equity Investment Life Insurance Company; the Midland National Life Insurance Company; and the North American Company for Life And Health Insurance.

Jones refers directly to annuities, and to insurance agents who sell annuities, many times in the opinion for the majority.

Chief Judge Carl Stewart, who dissented, refers to “sales persons compensated only for their sales” in his own opinion.

It’s not clear how well the 5th Circuit ruling will stick. A three-judge panel at the 10th U.S. Circuit Court of Appeals ruled in favor of the DOL, and against an annuity distributor, just a few days before the 5th Circuit ruling came out. Lawyers are predicting the matter will end up at the U.S. Supreme Court.

A copy of a file that includes both the majority opinion and the dissenting opinion is available here.

Here’s a look at five things the judges wrote in their opinions.

1. Jones says the compliance burden on agents is important.

She says the DOL BICE guidelines have caused a great deal of confusion.

How, for instance, does a company wishing to comply with the BICE exemption document and prove that its salesman fostered the “best interests” of the individual retirement investor client? The technological costs and difficulty of compliance compound the inherent complexity of the new regulations. Throughout the financial services industry, thousands of brokers and  insurance agents who deal with IRA investors must either forgo commission-based transactions and move to fees for account management or accept the burdensome regulations and heightened lawsuit exposure required by the BICE contract provisions. It is likely that many financial service providers will exit the market for retirement investors rather than accept the new regulatory regime.

Further, as DOL itself recognized, millions of IRA investors with small accounts prefer commission-based fees because they engage in few annual trading transactions. Yet these are the investors potentially deprived of all investment advice as a result of the fiduciary rule, because they cannot afford to pay account management fees, or brokerage and insurance firms cannot afford to service small accounts, given the regulatory burdens, for management fees alone.

2. Jones says classifying stockbrokers and insurance agents as fiduciaries conflicts with the structure of the financial services industry.

Jones contends that the drafters and implementers of the Employee Retirement Income Security Act of 1974 (ERISA), the law that has governed retirement plans, clearly distinguished between investment advisers, who were considered fiduciaries, and stockbrokers and insurance agents, who were not fiduciaries.

The fiduciary rule improperly dispenses with this distinction. Had Congress intended to include as a fiduciary any financial services provider to investment plans, it could have written ERISA to cover any person who renders “any investment advice for a fee….” The word “any” would have embodied DOL’s expansive interpretation, and it is a word used five times in ERISA’s tripartite fiduciary definition, e.g. “any authority or responsibility.” … That Congress did not say “any investment advice” signals the intentional omission of this adjective….

“[W]here Congress includes particular language in one section of a statute but omits it in another. . ., it is presumed that Congress acts intentionally and purposely. . . .”). Further, DOL’s interpretation conjoins “advice” with a “fee or other compensation, direct or indirect,” but it ignores the preposition “for,” which indicates that the purpose of the fee is not “sales” but “advice.” Therefore, taken at face value, the provision rejects “any advice” in favor of the activity of “render[ing] investment advice for a fee.” Stockbrokers and insurance agents are compensated only for completed sales (“directly or indirectly”), not on the basis of their pitch to the client. Investment advisers, on the other hand, are paid fees because they “render advice.” The statutory language preserves this important distinction.

3. Jones says any intentional congressional move to classify insurance agents as fiduciaries should be easier to find in the text ERISA.

Jones says the DOL and the U.S. Securities and Exchange Commission always tied fiduciary status to ongoing, fee-based relationships between the advisers and the clients.

That DOL contradicts its own longstanding, contemporary interpretation of an “investment advice fiduciary” and cannot point to a single contemporary source that interprets the term to include stockbrokers and insurance agents indicates that the rule is far afield from its enabling legislation. DOL admits as much in conceding that the new rule would “sweep in some relationships” that “the department does not believe Congress intended to cover as fiduciary.”

Congress does not “hide elephants in mouseholes.” …. Had Congress intended to abrogate both the cornerstone of fiduciary status—the relationship of trust and confidence—and the widely shared understanding that financial salespeople are not fiduciaries absent that special relationship, one would reasonably expect Congress to say so. This is particularly true where such abrogation portends consequences that “are undeniably significant.” Accordingly, the fiduciary rule’s interpretation of “investment advice fiduciary” fatally conflicts with the statutory text and contemporary understandings.

4. Jones disagrees with the idea of applying fiduciary standards to one-time transactions.

Jones says the DOL’s own 1975 regulations for ERISA applied only to investment advisers who rendered advice regularly, and as the primary basis for clients’ investment decisions.

The fiduciary rule extends regulation to any financial transaction involving an ERISA or IRA plan in which “advice” plays a part, and a fee, “direct or indirect,” is received. The rule expressly includes one-time IRA rollover or annuity transactions where it is ordinarily inconceivable that financial salespeople or insurance agents will have an intimate relationship of trust and confidence with prospective purchasers. Through the [BICE], the rule undertakes to regulate these and myriad other transactions as if there were little difference between them and the activities of ERISA employer-sponsored plan fiduciaries. Finally, in failing to grant certain annuities the long-established protection of [Prohibited Transaction Exemption] 84-24, the rule competitively disadvantages their market because DOL believes these annuities are unsuitable for IRA investors.

5. Stewart argues that the majority has misread ERISA.

Stewart contends that his two colleagues focused too much on trust law and too little on the language of ERISA and the new DOL regulations.

That the SEC and case law have interpreted investment advice for a fee as implicating ongoing relationships between an adviser and his client does not take the entire statutory provision into consideration. ERISA defines “investment-advice fiduciary” as one who renders investment advice “for a fee or other compensation, direct or indirect.” … This phrase contemplates compensation structures other than those incorporating fees, i.e. commissions, and which are built on relationships that are more than mere buyer-seller interactions, but which do not require ongoing intimate relationships.

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