The new U.S. Department of Labor fiduciary rule ruling from the 5th U.S. Circuit Court of Appeals is a vindication for insurers, distributors and agents who are active in the indexed annuity market.
A three judge panel at the 5th U.S. Circuit Court of Appeals today ruled 2-1 that the DOL rule is invalid, in part because DOL officials exceeded their authority, and in part because of the DOL fiduciary rule’s “arbitrary and capricious treatment of variable and fixed indexed annuities.”
The administration of President Donald Trump has declined to defend the DOL fiduciary rule, which was developed under former President Barack Obama, and it appears that the rule is dead, unless an outside party can persuade the U.S. Supreme Court to take up matter in spite of the lack of support from the Trump administration.
Judge Edith Jones, who was appointed by former President Ronald Reagan, and Judge Edith Brown Clement, who was appointed by former President George W. Bush, favored throwing out the fiduciary rule, and Jones wrote the opinion for the majority.
Chief Judge Carl Stewart, who was appointed by former President Bill Clinton, favored keeping the rule in place.
The DOL rule and related batches of guidance would set new restrictions on use of commission-based compensation arrangements for indexed annuity sales, allow only giant distributors to oversee agents who sell indexed annuities, and expose indexed annuity sellers to the possibility that they might face new types of lawsuits from unhappy annuity buyers, even if the annuities appeared to be suitable for the purchasers when purchased and performed as the issuers promised in the annuity contract.
The Majority Opinion
Jones, in her opinion, echoed some of the criticisms annuity and insurance groups have made in briefs filed with the court.
“In a novel assertion of DOL’s power, the fiduciary rule directly disadvantages the market for fixed indexed annuities in comparison with competing annuity products,” Jones writes.
In the guidelines DOL officials developed to show companies how to implement the DOL fiduciary rule, officials shielded fixed-rate annuities from their new compensation standards and while exposing indexed annuities to the new standards, Jones writes.
“In practice, this action places a disproportionate burden on the market for fixed indexed annuities, as opposed to competing annuity products,” Jones writes.
Congress included a provision in the Dodd-Frank Act of 2010 that classified indexed annuities as products subject to oversight by state insurance regulators and exempt from oversight by securities regulators.
By trying to regulate indexed annuities through the fiduciary rule and fiduciary rule implementation guidelines, “DOL is occupying the Dodd-Frank turf,” Jones writes.
“DOL has made no secret of its intent to transform the trillion-dollar market for [individual retirement account] investments, annuities and insurance products, and to regulate in a new way the thousands of people and organizations working in that market,” Jones writes. “And, although lacking direct regulatory authority over IRA ‘fiduciaries,’ DOL impermissibly bootstrapped what should have been safe harbor criteria into ‘backdoor regulation.’”
Stewart writes in the dissent that the Employee Retirement Income Security Act of 1974 gives the DOL authority to regulate financial service providers in the retirement investment industry.
When developing the DOL fiduciary rule and implementation guidelines, DOL officials “comprehensively assessed existing securities regulation for variable annuities, state insurance regulation of all annuities, and consulted with numerous government and industry officials, including the [U.S. Securities and Exchange Commission], the Department of the Treasury, and the Consumer Financial Protection Bureau, among others,” Stewart writes. “The DOL found the protections prior to the current rulemaking insufficient to protect investors and acted within its prerogative to modify the regulatory regime as it deemed necessary.”
The list of “plaintiff appellants” in the case includes many life and annuity organizations, including the Insured Retirement Institute; the American Council of Life Insurers; the National Association of Insurance and Financial Advisors (NAIFA); a number of local and state NAIFA chapters; the Indexed Annuity Leadership Council; Life Insurance Company of the Southwest; American Equity Investment Life Insurance Company; Midland National Life Insurance Company; and North American Company for Life and Health Insurance.
Chip Anderson, executive director of the National Association for Fixed Annuities, put out an alert to tell NAFA members about the ruling.
“As you know, NAFA has worked tirelessly on defeating this rule since it was first proposed in draft form back in April 2015, and we are grateful for the unwavering support of NAFA members in carrying this fight,” Anderson writes. “Today we should celebrate, but we know that there are many challenges and threats facing our industry, and we will need to continue to work together to protect fixed annuities, the market that supports our products, and the consumers that we ultimately serve.”
One cloud is that there could still be a tiny possibility that some party might figure out a strategy for getting the U.S. Supreme Court to review the case.
Another cloud is that the rule died partly because the Trump administration refused to defend it. A lack of bipartisan consensus on indexed annuity sales standards could lead to wild swings in policy whenever control of the White House and Congress passes from one party to another.
— Read 6 Questions for Sheryl Moore, a Life and Annuity Tracking Rockstar, on ThinkAdvisor.