Seeking to enjoin enforcement of the final conflict of interest regulation and related exemptions (Fiduciary Rule), attorneys for the National Association for Fixed Annuities (NAFA) contended that the Department of Labor (DOL) overstepped its authority by seeking to be the "sorcerer instead of the sorcerer's apprentice" at the preliminary injunction hearing in the United States District Court for the District of Columbia on August 25, 2016, in one of the five lawsuits filed against the Fiduciary Rule.

NAFA contended that the DOL's "irrational decision making" has "literally turned the industry upside down." NAFA asserted that the Fiduciary Rule would make it impossible for fixed interest annuity (FIA) providers to comply with both the Fiduciary Rule and state law.

Judge Randolph D. Moss, a 2014 Obama appointee and former Department of Justice attorney, was sympathetic to the DOL from the very first set of questions. Judge Moss pressed NAFA to concede that they could rely on a series of statements made by the DOL in their briefs to reconcile the state and federal regimes, asking "wouldn't you argue in court that you are just doing what the DOL said it's OK to do in their briefs?" NAFA pushed back, insisting that "the rule is the rule" and stating that even if the United States might be bound by the statements in their briefs, because private litigants would not be bound, FIA providers would remain in an impossible situation.

Under the Employee Retirement Income Security Act (ERISA), a fiduciary investment adviser is defined as one who "renders investment advice for a fee or other compensation." NAFA contended the DOL exceeded its authority because neither the statute nor its legislative history indicates that Congress meant to conflate "advice" with "sales." 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."

NAFA also argued that Congress did not intend to impose fiduciary duties on individual retirement accounts (IRAs). While ERISA imposes fiduciary duties in connection with employee benefit plans, the Internal Revenue Code (Code) does not impose parallel fiduciary duties on transactions with IRAs because IRAs are not subject to employer oversight and therefore not subject to potential employer abuses. NAFA opined that the statutory language is an "explicit" commandment from Congress that such fiduciary duties do not apply to IRAs.

When Judge Moss, who previously served as the chair of WilmerHale's Regulatory and Government Affairs Department, suggested that perhaps the influx of additional assets into IRAs has changed the landscape, NAFA responded that "if the world has changed so much, the answer is that Congress should enact new legislation."

NAFA further contended that the Fiduciary Rule impermissibly created 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. NAFA also pointed out that the usual situation is that Congress creates an enforcement action for an agency, and then a private right of action may be added. In this case, there is no agency enforcement action, but the DOL nevertheless improperly created a private right of action. The DOL disagreed, arguing that the applicable cause of action is breach of contract, which already exists under state law.

NAFA then hammered the DOL for imposing greater burdens on FIAs without first soliciting comment on this issue. Specifically, NAFA contended that under the proposed regulation, FIAs were not subject to the Best Interest Contract (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 BIC Exemption depends on the existence of a "financial institution" to sign the required best interest contract with individual investors. NAFA argued 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.

At the hearing, the DOL proposed four solutions to assist IMOs in complying with the rule: (1) insurance carriers could affiliate with broker dealers; (2) insurance carriers 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 rejected the DOL's solutions, calling them "a day late and a dollar short." NAFA contended that the failure to include the solutions in the rulemaking is a fatal flaw. According to NAFA, "counsel cannot fill in reasoning that the agency did not offer" in the rulemaking.

Although the FIA providers have the strongest irreparable harm argument of all providers impacted by the Fiduciary Rule, Judge Moss' questioning in the grueling three-hour-long standing-room-only hearing suggested that he is likely to deny the injunction and uphold the Fiduciary Rule on the grounds that NAFA was unable to make the required irreparable harm showing. The likely outcome is a quick decision, sometime within the next thirty days. Next up on the Fiduciary Rule challenge front is the preliminary injunction hearing before Judge Daniel D. Crabtree in the District of Kansas -- historically a more hostile venue for the DOL -- on September 21, 2016. If Judge Moss denies the injunction and Judge Crabtree grants an injunction, expect the battle to move quickly to the circuit courts, and likely march on to the Supreme Court.

For more information, please contact:

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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