DOL Wins First Round of Fiduciary Regulation Litigation

The first federal judge to rule on litigation regarding the Labor Department’s fiduciary regulation found just about everything plaintiffs raised to be “unpersuasive.”

In denying the motions of the National Association for Fixed Annuities (NAFA) for both a preliminary injunction against the fiduciary rule and summary judgement, Judge Randolph Moss of the U.S. District Court for the District of Columbia succinctly (well, as succinctly as you can be in a 92-page ruling) took apart every argument plaintiffs had made.

NAFA Challenges

NAFA had challenged the new rules on numerous grounds:

  • that the new definition of “fiduciary” – and, in particular, the Department’s decision to drop the “on a regular basis” condition in the so-called five-part test exceeded its statutory authority, as did its extension of ERISA fiduciary duties to IRAs and other plans that are not subject to title I of ERISA;
  • that the BIC Exemption “impermissibly creates a private cause of action,” and the condition contained in the BIC Exemption limiting compensation to a “reasonable” level should be voided for vagueness; and
  • that the Labor Department’s decision to move fixed indexed annuities from PTE 84-24 to the BIC Exemption was “arbitrary and capricious,” and that the agency didn’t adequately consider the cost and benefits of imposing the regulation.

In arguments made prior to the hearing in late August, NAFA had gone so far as to claim that the Labor Department “hopes to prevail here through the ‘fog of rulemaking’, i.e., the issues are so complicated and murky that the Court will throw up its hands and defer to the agency.”

Judge Moss noted that, prior to the present rulemaking, it was permissible for insurance companies to compensate their employees and agents on a commission basis for sales of variable and fixed annuity products held in ERISA employee benefit plans and IRAs, as long as either: (1) the relevant investment advice was not provided “on a regular basis;” or (2) the terms of the transaction were at least as favorable as those offered in arm’s-length transactions and the relevant fees and commissions were reasonable. But he embraced the Labor Department’s assertions that, since those rules were implemented, much has changed – resulting in a need for change – and that the ensuing process of developing regulations responding to that change was long, thorough, and that in crafting its final regulation, the Labor Department listened to stakeholders.

Judicial ‘Review’

In refuting the plaintiffs’ arguments, Judge Moss noted the following.

Nothing in the statutory text forecloses the Department’s current interpretation of fiduciary advice, that the statute does not define the phrase “investment advice,” and that “ERISA expressly authorizes the Secretary to adopt regulations defining ‘technical and trade terms used’ in the statute” – specifically that “…nothing in the phrase ‘renders investment advice’ suggests that the statute applies only to advice provided ‘on a regular basis.’”

While NAFA argues that title I of ERISA does not authorize the Department to impose fiduciary duties on those who advise IRAs, when the Labor Department regulates IRA advisers, “PTE 84-24 and the BIC exemption rely on the Department’s authority under title II.”

While NAFA argues that title II does not impose fiduciary duties on those who advise IRAs and that “[t]he Department’s limited [exemption] authority does not extend beyond the ability to issue regulations clarifying the circumstances under which an excise tax may be imposed on …. disqualified persons under Section 4975 … that contention ignores the plain language of the statute, which grants the Department authority to do far more than ‘clarify’ the scope of section 4975,” and that “…the statute grants the Department broad authority to adopt non-statutory exemptions and to impose conditions on any such exemptions.”

While NAFA argued that the Department’s use of its exemption authority will lead to “an absurd and irrational result” because it will subject those IRA advisers who are paid on a commission basis (and who must, accordingly, rely on the exemption) to ERISA fiduciary duties, but will not extend those same duties to those who are paid an asset management fee (and who, accordingly, need not rely on the exemption). “But, far from irrational, that is precisely the point,” noted Moss.

“The fact that Congress required that all title I plans adhere to the duties of a fiduciary says little, if anything, about whether it intended to foreclose the Department from requiring adherence to those duties as a condition of granting an exemption from the prohibited transaction rule,” he wrote.

The DOL has “long exercised jurisdiction over those who provide investment advice to IRAs and other plans,” had “…long asserted that variable compensation gives rise to a conflict of interest,” and “…long imposed conditions on the exercise of its exemption authority,” and “…the fact that the conditions imposed by the current rule cover more advisers and institutions, and are more onerous than past conditions” did not serve to bring this rule under the kinds of judicial scrutiny required under FDA v. Brown & Williamson, a 2000 U.S. Supreme Court decision that addressed regulatory authority.


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The BIC Exemption does not create a private cause of action, but “…merely dictates terms that otherwise-conflicted financial institutions must include in written contracts with IRA and other non-title I owners in order to qualify for the exemption.” Prior to adoption of the BIC Exemption, Moss noted, financial institutions selling annuities already entered into contracts with their customers and, at least with respect to annuities held in IRAs, “…were already subject to suit for breaches of those contracts.”

The “reasonable” fee requirement under the BIC met a legal standard that requires that such terms “sufficiently specific that a reasonably prudent person, familiar with the conditions the regulations are meant to address and the objectives the regulations are meant to achieve, would have fair warning of what the regulations require.” The court held that the objectives intended by the requirement were articulated, and that the case law is “…replete with decisions rejecting vagueness challenges, like that raised here, to the words ‘reasonable,’ ‘reasonably,’ and ‘unreasonably’…”

‘Admittedly Imprecise’

Not that the court didn’t see some issues here. “This guidance is, admittedly, imprecise,” Judge Moss wrote, “…But that is as much a product of the endeavor as the standard; assessing whether a fiduciary is charging more than the relevant services demand is an inherently imprecise undertaking.” He went on to note that there might be issues with a more precise standard; that it might either “preclude legitimate payments or invite evasion.” That said, he ruled that a regulation would not be considered “…impermissibly vague because it is marked by flexibility and reasonable breadth, rather than meticulous specificity.”

NAFA raised five challenges to the Department’s decision to require that fixed indexed annuities proceed under the BIC Exemption rather than under PTE 84-24, all of which, according to Judge Moss, “…assert that the Department’s treatment of fixed indexed annuities was ‘arbitrary and capricious’ within the meaning of the APA,” though he noted that the scope of judicial review under that standard is “narrow.”

How narrow? Well, a determination that the agency has “examine[d] the relevant data and [has] articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Specifically, that the agency has relied on factors which Congress has not intended it to consider”: whether the agency “entirely failed to consider an important aspect of the problem,” and whether the agency “offered an explanation for its decision that runs counter to the evidence before the agency[] or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.”

Judge Moss went on to summarily dismiss NAFA’s claims that:

  • the Labor Department’s treatment of fixed index annuities as securities was arbitrary and capricious (the court said the DOL “simply decided” that, regardless of their treatment under federal securities laws, they warranted the more “protective conditions”);
  • there had been no opportunity to comment (the court said the final rule didn’t have to be the same as the proposed, just a “logical outgrowth” of it, and that there was fair notice of the Labor Department’s inclinations here in its seeking comments);
  • subjecting them to the BIC was “unworkable and irrational” (the court says that NAFA had “ample opportunity” to raise this concern during the comment period and didn’t, and that in any event NAFA’s arguments were “unconvincing”); and
  • the Labor Department failed to consider the marginal costs and benefits of regulating fixed indexed annuities through the BIC, rather than PTE 84-24 (“those concerns were not lost on the Department, which concluded that the risk that retirement investors would suffer significant losses due to conflicted investment advice raised even greater concerns”).

As for the effect on their business, Judge Moss stated that, “nothing in the BIC Exemption – or PTE 84-24 – requires that insurance-only agents provide IRAs or other plans with advice regarding the purchase of securities.”

Will the other cases pending in federal court fare as poorly?

Time will tell.

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