FIDUCIARY RULE OPPONENTS TAKE THEIR FIGHT TO THE COURTS
June 21, 2016 by ANDREA L. BEN-YOSEF
Even though the fiduciary rule was released in April, opponents are still continuing their attack, this time through the courts.
In early June, five different lawsuits were filed against the Department of Labor. They make some allegations that are similar and some that are different. The complaints pull in several federal statutes and the U.S. Constitution, alleging violations of the Administrative Procedure Act, the Regulatory Flexibility Act, the Dodd-Frank Act, the Federal Arbitration Act and violations of the First and Fifth Amendments.
One thing every complaint has in common is the issue of fixed index annuities. These annuities are linked to a market index, and are more risky than fixed annuities (but with a potentially higher rate of return) but less risky than variable annuities. The DOL’s rule provides that fixed index annuities come under the best interest contract exemption (BICE), surprising many who thought they would stay under a more lenient standard.
The BICE requires that parties adhere to certain standards of conduct and create a contract with the investor. Generally, financial institutions and advisers must give prudent advice that is in the customer’s best interest, avoid misleading statements about investment transactions, compensation and conflicts of interest, and receive no more than reasonable compensation. Under the final rule, advisers selling fixed index annuities must comply with the new requirements beginning in April 2017.
It is too early to tell which, if any of these claims, will get any traction in the courts. The five lawsuits, with their specific allegations, are listed below:
Chamber of Commerce v. Perez, N.D. Texas, alleges, among other things, that the DOL exceeded its authority under ERISA, the Internal Revenue Code, and the APA; unlawfully created a private right of action for IRA and other non-ERISA plan participants to sue financial institutions; failed to provide adequate notice and consideration of comments; violated the Federal Arbitration Act by not allowing reliance on the BICE if a financial institution includes an arbitration agreement with a class action waiver in their contract with customers; failed to allow the public to comment on the regulation of fixed index annuities; and violated the First Amendment by imposing the BICE on communications between financial advisers and their clients.
American Council of Life Insurers v. Perez, N.D. Texas, alleges, among other things, that the fiduciary rule imposes fiduciary duties on non-fiduciary communications; the BICE violates the APA by creating private rights and remedies not authorized by Congress; the rule arbitrarily disfavors fixed index annuities; and the rule violates the First Amendment as applied to truthful, non-misleading commercial speech about retirement by non-fiduciary salespersons.
Indexed Annuity Leadership Council v. Perez, N.D. Texas, alleges that, among other things, the DOL violated the APA and exceeded its statutory authority by expanding the definition of fiduciary to include sellers of fixed index annuities; unlawfully created a private cause of action under the BICE; acted arbitrarily in making a distinction between fixed index annuities and other annuities; failed to give proper notice of revoking the BICE for fixed indexed annuities; and violated the First Amendment by severely burdening commercial speech between sellers of fixed income annuities and consumers.
The National Association for Fixed Annuities v. Perez, D. D.C., alleges, among other things, that the DOL violated the APA by imposing ERISA fiduciary duties on IRAs; unlawfully created a private right of action through the BICE; violated the due process clause of the Fifth Amendment by its “vague” references to “reasonable compensation”; violated the Dodd-Frank Act by treating fixed indexed annuities as securities and thus including them in the BICE; and violated the Regulatory Flexibility Act by failing to consider the rule’s impact on small businesses.
Market Synergy Group Inc. v. Perez, D. Kan., alleges that, among other things, the DOL violated the APA by failing to give the public adequate notice that it might include fixed index annuities in the BICE; and violated the APA and the Regulatory Flexibility Act by failing to consider the economic impact on including fixed index annuities in the BICE.
