DOL Fiduciary Rule Posts a Key Victory in District Court

The U.S. District Court for the District of Columbia has rejected a lawsuit filed by the National Association for Fixed Annuities (NAFA), which had asked the court for “declaratory, injunctive, and other appropriate relief” that would have halted the implementation of the Department of Labor’s (DOL) new fiduciary rule.

The suit sought relief under the Regulatory Flexibility Act (RFA), suggesting the DOL conflict of interest rule, with its sweeping advice reforms, moves far too quickly to install overly broad restrictions to currently accepted business practices. “Specifically, in promulgating the Rule and the Exemptions, the Department exceeded the authority granted to it by Congress under ERISA, the Code, and Reorganization Plan No. 4 of 1978,” the suit contended. “In addition, the Rule and the Exemptions are arbitrary and capricious, not in accordance with law, impermissibly vague, and otherwise promulgated in violation of federal law.”

The text of the defeated complaint shows NAFA member firms are clearly worried about potential consequences of the DOL rulemaking. While they have not traditionally considered themselves as trusted fiduciary advisers for their clients, instead serving more in a commission-based product broker/distributor role, they feel the new rulemaking will forcibly treat them as fiduciaries—thereby restricting their ability to recommend products that would increase their own compensation. Indeed, the majority of Employee Retirement Income Security Act (ERISA) compliance experts have opined that essentially anyone receiving any type of valuable compensation for any type of advice—even a one-time recommendation from an insurance broker—will be deemed a DOL fiduciary and thus be subject to compensation restrictions.

“NAFA’s members have been adversely affected by the Department’s actions in that the Rule and Exemptions will, in many cases, threaten the very existence of their business, result in immediate and unrecoverable losses of market share, and result in unrecoverable economic losses for which no adequate relief can later be granted,” the complaint argued, asking the court to halt the rulemaking prior to implementation next year. 

A variety of arguments were leveled in the NAFA complaint along these lines, but clearly they did not prevail, given that the D.C. District Court has flatly opposed NAFA’s dual requests for preliminary injunction and summary judgment. Instead, the court actually granted the DOL’s cross-motion for summary judgment, which argued naturally that all of the tenets of the rulemaking fit squarely within the DOL’s existing authority.

NEXT: Details from the text of the decision are telling  

The lengthy text of the summary judgement decision shows the court is cognizant of the fact that, prior to the promulgation of the new rules, most NAFA members were able to avoid the fiduciary duty and its associated prohibited transaction restrictions that make selling in a variable commission environment very difficult. This is because the governing regulations previously defined a “fiduciary” as someone who renders investment advice on a regular basis, and fixed annuities are typically acquired in a single transaction.

Moreover, the court explains, in those cases in which advice regarding the sale of a fixed annuity might have otherwise fallen within the prohibited transaction rules, the relevant transactions were exempted under Prohibited Transaction Exemption 84-24 (PTE 84-24), subject to certain conditions. Simply put, this paradigm is changed significantly by the new DOL fiduciary rule, such that even a single recommendation to a client investing under the umbrella of ERISA will likely trigger fiduciary status.

Most significant in the new DOL fiduciary standard, according to NAFA, is the fact that variable and fixed indexed annuities (but not fixed-rate annuities) were outright removed from PTE 84-24. Put another way, the final 84-24 exemption applies only to “fixed-rate annuity contracts,” a term defined in the exemption to encompass annuities whose “benefits do not vary, in part on in whole, based on the investment experience of a separate account or accounts maintained by the insurer or the investment experience of an index or investment model.”

As such, any sale and service of variable/indexed products to ERISA clients on a commission-basis moving forward will have to be conducted under the Best-Interest Contract Exemption (BICE)—a situation which NAFA suggests will be prohibitively risky and administratively burdensome for its member firms.

Examining the text of the current decision, it seems the court understands these arguments in detail, but it does not have much sympathy for them. The decision concludes that the new advice standards, while sweeping, do not contradict Congress’ initial intent in crafting ERISA and its enforcement mechanisms. In fact, the court again and again suggests “nothing in the statutory text forecloses the Department’s current interpretation. The statute does not define the phrase ‘investment advice,’ and ERISA expressly authorizes the DOL Secretary to adopt regulations defining technical and trade terms used in the statute.”

The full text of the decision, including the in-depth rationale touching on important differences between how Title I and Title II of ERISA differ with respect to the implementation of the new fiduciary rule and its various prohibited transaction exemptions, is here.