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March 19, 2018 at 02:10 PM
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.
