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Annuity Sellers Challenge Fiduciary Rule in Federal Court


Noting that “pouring the same old wine into a new bottle does not change the result,” a new lawsuit seeks to vacate the Labor Department’s fiduciary rule as expressed in PTE 2020-02.

The suit—filed by the Federation of Americans for Consumer Choice Inc., joined by several advisors and advisory firms that sell annuities as part of their practice(s) (all of which are said to be licensed insurance agents in the State of Texas and members of the FACC—explains that “the Agent Plaintiffs oftentimes make rollover recommendations for purchase of annuities to IRA owners and participants in employer-sponsored 401k and similar benefit plans, for which they receive commissions or other compensation from annuity issuers. The Agent Plaintiffs will thus be directly and adversely affected by the DOL’s New Interpretation suddenly categorizing their status as investment advice fiduciaries under ERISA or the Code, as applicable.”

Fifth ‘Take’

“Undeterred by the Fifth Circuit’s rebuke” in their decision in the Chamber of Commerce case, the suit (Federation of Americans for Consumer Choice, Inc. v. U.S. Dep’t of Labor, N.D. Tex., No. 3:22-cv-00243, complaint 2/2/22) notes that “the DOL has now sought to resurrect and repackage the substance of its vacated Fiduciary Rule through adoption of a new Prohibited Transaction Exemption, No. 2020-02…” This, they note the DOL claimed to have left in place the 1975 five-part test for investment advice. “However, the text of the Revised Exemption is accompanied by a 64-page preamble, much of which is devoted to the DOL’s newly devised interpretation of who will be categorized as an investment advice fiduciary under the 1975 rule…”—and this, the suit alleges, “…carries forward the core problem the Fifth Circuit identified in vacating the Fiduciary Rule the first time: DOL’s impermissible effort to rewrite and expand the definition of a fiduciary under ERISA and the Code.”

The plaintiffs here note that the Chamber of Commerce decision “did not turn on the question of how many instances of investment advice would be sufficient to demonstrate the existence of a fiduciary relationship,” but rather emphasized the “special relationship of trust and confidence that is the sine qua non of a fiduciary relationship”—the basis “on which the common law has long distinguished between a fee-based investment adviser and a securities or insurance salesperson.” The suit notes that “the New Interpretation, however, continues to ignore these well-settled concepts, opting instead for a simplistic artificial analysis that distinguishes only between one-time advice (not fiduciary) and one-time advice plus any ongoing or hoped for future relationship (fiduciary).”

New Interpretation(s)

“That DOL now seeks to impose that same interpretation via the New Interpretation rather than by formal rule does not cure this unreasonableness,” they write. “Indeed, as if to underscore that the DOL intends to get to the same place it did in 2016 with its ill-fated Fiduciary Rule, but by a different route, the New Interpretation also expressly disavows the DOL’s longstanding position regarding application of ERISA to employer plan to IRA rollover transactions as set forth in the so-called “Deseret Letter[i].”

More specifically, the suit claims that “like the Fiduciary Rule before it, the New Interpretation radically changes who will be deemed a fiduciary for purposes of ERISA and the Code.” The hot spot for these plaintiffs is the “New Interpretation” as to when an Investment Professional will be deemed a fiduciary covered by ERISA in connection with an ERISA plan participant’s rollover of assets to an IRA.

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“Ostensibly deferring to the ruling in Chamber of Commerce, the DOL “acknowledges that single instance of advice to take a distribution from [an ERISA] Plan and roll over the assets” would fail to meet the “regular basis” element of the five-part test in the reinstated 1975 rule,” they write. “However, the New Interpretation provides that such advice rendered by someone who has not previously provided advice to the plan participant but may do so in the future would constitute the start of an investment advice relationship and, therefore, render him or her a fiduciary.”

‘Semantic Distinction’?

The suit claims this “semantic distinction is meaningless from a practical standpoint, as all Investment Professionals seek to establish and maintain relationships with customers and potential customers, not avoid them.”

The suit also takes issue with the Best Interest Contract (BIC) exemption—more specifically the “Revised Exemption” fiduciary acknowledgement requirement. “Thus, as with the BIC Exemption, insurance agents can preserve their ability to receive commissions on the sale of annuities under the Revised Exemption only by declaring themselves to be fiduciary and exposing themselves to whatever other regulation and liabilities that may entail,” the plaintiffs state.

“The DOL’s New Interpretation of the five-part test, combined with its disavowal of the Deseret Letter, makes clear the overarching intent of the agency: the DOL seeks broad authority over the individual IRA market particularly with respect to rollovers from ERISA Title I plans. However, Congress never granted the DOL the authority it now seeks to usurp, even now still undaunted by the Fifth Circuit’s prior ruling striking down its first attempt. This egregious overreach by DOL is particularly significant to Plaintiffs because, as DOL was advised in public comments during its review of the New Interpretation, approximately one-half of annuity products sold by insurance agents are IRA or tax-qualified products. 

“In sum,” the suit concludes, “just as surely as it attempted to do with the now-vacated Fiduciary Rule, the DOL is attempting to fundamentally reshape “over fifty years of settled and hitherto legal practices in a large swath of the financial services and insurance industries” through its New Interpretation—and asks the court to “intervene to uphold the ruling of the Fifth Circuit as it applies to the DOL’s thinly disguised repackage of the Fiduciary Rule.”

How will the Fifth Circuit view these arguments? Stay tuned.

[i] The suit expands on this, noting that “In the Deseret Letter, the DOL concluded that advising a plan participant to take a distribution from the participant’s account in an ERISA plan, even when combined with a recommendation as to how such distribution should be invested, would not constitute investment advice by a fiduciary relative to assets of the ERISA plan—“that any “investment recommendations regarding the proceeds of distributions would be advice with respect to the funds that are no longer assets of the plan.”