Federal Court to Hear Challenges to the DOL's Fiduciary Rule
Employee Benefits Alert
On August 25, 2016, the United States District Court for the District of Columbia will be the first court to hear challenges to the Department of Labor's (DOL's) final conflict of interest regulation and related exemptions (Fiduciary Rule). In the wake of five lawsuits filed against the DOL to vacate the Fiduciary Rule, the National Association for Fixed Annuities (NAFA), a trade association representing insurance interests, and the DOL will present arguments addressing NAFA's demand for an interim order, or preliminary injunction, suspending the Fiduciary Rule's applicable date until the court determines its validity on a full record.
Below, we highlight the five major battlegrounds for this week's hearing.
- Are insurance agents who sell annuities "fiduciaries" under ERISA?
The Employee Retirement Income Security Act (ERISA) defines a fiduciary investment adviser as one who "renders investment advice for a fee or other compensation." NAFA contends in their brief that the DOL exceeded its authority because neither the statute nor its legislative history indicates that Congress meant to conflate "advice" with "sales." "Congress did not intend agents who sell insurance products for a commission – typically on a one-time basis – to be treated as ERISA fiduciaries merely for recommending that an IRA owner purchase a fixed annuity." According to NAFA, "[a]s has been recognized forever until now, the investor who buys the annuity is paying for a product, not investment advice, and the salesperson is not a fiduciary." In response, the DOL countered that "sales and investment advice go hand-in-hand" and that no special relationship is required to create fiduciary status. The DOL insists that the Fiduciary Rule is consistent with congressional intent and necessary to protect participants and beneficiaries from conflicted advice inherent in the sale of annuities. Therefore, according to the DOL, its broad interpretation is entitled to deference.
- The Internal Revenue Code (Code), which governs Individual Retirement Accounts (IRAs), does not impose fiduciary duties on IRAs, so how can ERISA impose fiduciary duties on IRAs?
NAFA argues that Congress did not intend to impose fiduciary duties on IRAs. While ERISA imposes fiduciary duties in connection with employee benefit plans, the Code does not impose parallel fiduciary duties on transactions with IRAs. NAFA argues that the statutory language is an "explicit" commandment from Congress that such fiduciary duties do not apply to IRAs. The DOL, however, asserts that this statutory discrepancy only shows Congress did not mandate that IRA transactions comply with fiduciary duties, and does not address whether IRA transactions could be subject to fiduciary duties. By granting the DOL discretion to craft exemptions from prohibited transactions, the DOL argues, Congress delegated to the DOL the authority to determine whether fiduciary duties should apply to IRA transactions. NAFA disagrees, remarking that "[i]n other words, the [DOL] claims that its limited authority to issue ‘conditional' exemptions to the prohibited transaction rules . . . gives it the authority to condition such exemptions on adherence to the very same fiduciary standards that Congress deliberately chose not to apply to IRA transactions." Such an interpretation, according to NAFA, is "absurd" in light of the plain language of the statute.
- Does the Best Interest Contract (BIC) Exemption improperly create a private cause of action?
NAFA contends that the BIC Exemption impermissibly creates a private right of action by requiring IRA advisers – who are otherwise not subject to private lawsuits under the Code – to enter into customer contracts imposing fiduciary duties on those advisers. The DOL disagrees, arguing that the applicable cause of action is breach of contract, which already exists under state law.
- Did the DOL violate the Administrative Procedures Act (APA) by imposing greater burdens on Fixed Indexed Annuities (FIAs) without following the notice and comment requirements?
According to NAFA, the DOL imposed greater burdens on FIAs without first soliciting comment on this issue. Specifically, NAFA contends that under the proposed regulation, FIAs were not subject to the BIC Exemption, but the final regulation nevertheless required that persons receiving commissions in connection with FIAs must comply with the more onerous BIC Exemption, instead of the previously applicable prohibited transaction exemption (PTE) 84-24. The DOL staunchly defends the change, arguing that industry representatives did in fact comment on FIAs, which the DOL carefully considered before determining that FIAs will be subject to the BIC Exemption.
- Is the Fiduciary Rule causing "immediate and irreparable harm" warranting a preliminary injunction?
The BIC Exemption depends on the existence of a "financial institution" to sign the required best interest contract with individual investors. NAFA argues that FIAs are typically distributed through independent marketing organizations (IMOs), which are not considered to be "financial institutions" under the BIC Exemption. According to NAFA, IMOs therefore cannot comply with the BIC Exemption, forcing IMOs out of business and cutting off individual investors from an important retirement product. The DOL proposed four solutions in its brief: (1) IMOs could affiliate with broker dealers; (2) IMOs could establish a captive agent model; (3) insurance carriers could outsource some or all of their monitoring duties under the BIC Exemption to affiliated IMOs; and (4) IMOs may seek individual exemptions to become financial institutions under the BIC Exemption. NAFA rejects the DOL's solutions as post-hoc rationalizations, asserting that the DOL "suggests that the solution for insurance carriers is to sell FIAs through securities brokers and essentially do away with independent insurance agents, who can simply sell other products or go out of business. That argument misses the point of the APA, which requires that agencies engage in reasoned decision-making after taking account of important market realities during the rulemaking itself, not after the fact in a brief."
Conclusion
NAFA's preliminary injunction hearing is the opening skirmish in the five lawsuits filed against the DOL seeking to set aside the Fiduciary Rule. How the judge evaluates and decides the positions of the parties will set the stage for future hearings. We will apprise you of developments at the NAFA hearing and continue to monitor each of the lawsuits to provide regular updates.
For more information, please contact one of the following:
Theresa S. Gee, tgee@milchev.com, 202-626-5928
Erin M. Sweeney*
Yongo Ding*
Nicholas P. Wamsley*
*Former Miller & Chevalier attorney
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