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.