Two more lawsuits have been filed charging the Department of Labor’s (DOL) fiduciary regulation with a host of “sins” and shortcomings.
the Indexed Annuity Leadership Council (IALC), an association of insurance companies that offer fixed indexed annuities, along with several providers of these insurance products, in the U.S. District Court for the Northern District of Texas, where two other suits have already been filed.
The other suit
was filed by Market Synergy Group, Inc. in the U.S. District Court for the District of Kansas. Market Synergy Group a for-profit corporation and licensed insurance agency with its principal place of business in Topeka.
Those suits join three already filed: one brought by the American Council of Life Insurers, the National Association of Insurance and Financial Advisors (NAIFA) and six NAIFA chapters in Texas that was filed in the U.S. District Court for the Northern District of Texas, as was the first one, brought by the Chamber of Commerce of the United States of America, the Financial Services Institute, Inc., the Financial Services Roundtable, the Insured Retirement Institute, and the Securities Industry and Financial Markets Association, among others. A suit has also been filed in the U.S. District Court for the District of Columbia by the National Association for Fixed Annuities.
A Reversal of Position?
Both suits challenge how the DOL dealt with fixed indexed annuities in the final regulation. More specifically, they describe a situation in which they had been led to expect as part of the 2015 proposed regulation, as well as the ensuing discussions and comment period, that the sale of those products to ERISA plans and IRAs would continue to occur under PTE 84-24, and would not be subject to the conditions of the Best Interest Contract Exemption (BICE), only to discover upon publication of the final regulation that the DOL “reversing the regulatory position it expressed with respect to treatment of fixed indexed annuities in the proposed rulemaking, and announcing its new regulatory position for the first time in the final rulemaking, the Department simply stated: ‘Given the complexity, investment risks, and conflicted sales practices associated with’ fixed indexed annuities and variable annuities, the Department has determined that recommendations to purchase such annuities should be subject to the greater protections of the Best Interest Contract Exemption.’”
In so doing, Market Synergy plaintiffs allege that “the Department made the implicit judgment, apparently at some point during the intervening year between the proposed rulemaking and the final rulemaking, that state insurance regulators are inadequate or somehow ill-equipped to regulate fixed indexed annuities.”
The suit brought by the IALC makes similar claims, noting the “sharp contrast to the proposed rule” where it says the DOL “abruptly changed course with regard to the partial revocation of the 84-24 exemption.” They claim that the final regulation abandoned the securities-based distinction in the proposed regulation, and “revoked the 84-24 exemption for sales of one type of annuity not regulated as a security — fixed indexed annuities — and revoked the exemption for sales both to IRAs and to ERISA plans.” Consequently, the suit claims that “the only annuities that continue to qualify for the 84-24 exemption are ‘Fixed Rate Annuity Contracts’ — a new term introduced for the first time in the final rule,” with sales of all other annuities, including fixed indexed annuities and variable annuities limited to relief under the BIC.
Arbitrary and Capricious
Ultimately, both suits allege that the DOL (in the words of the IALC litigation) “acted without providing adequate notice and an opportunity for comment, reflecting arbitrary and capricious conduct in excess of its statutory authority and in clear violation of its obligations to make necessary findings under applicable law.” The IALC cites the endangerment of the “livelihood of tens of thousands of hard-working individuals and thousands of small businesses in an important segment of the insurance industry.”
The Market Synergy suit claims that the DOL’s actions “will substantially harm, and already have harmed, the recruiting efforts of IMOs and others like Market Synergy and its members,” noting that “independent insurance agents and IMOs are likely to exit the annuity marketplace, whether voluntarily or not,” citing “anecdotal evidence that agents are exiting the marketplace and industry analysts are forecasting that tens of thousands more may eventually exit.”
Despite their similarities, the IALC lists four counts, the Market Synergy only three.
As have the other lawsuits filed to date, these ask for a declaration that the DOL’s fiduciary rule and exemptions are unlawful, that the court vacate and set aside the rules, that the DOL be enjoined from implementing or enforcing the rules, and — of course — awarding plaintiffs their reasonable costs, including attorney’s fees, incurred in bringing these actions.
Note: The complaint notes that fixed indexed annuities differ from traditional fixed annuities in only one respect — the method of calculating the amount of interest to be credited. With a traditional fixed annuity, earnings accrue at an interest rate that may be guaranteed for a term of years or periodically declared by the insurer. With a fixed indexed annuity, the interest rate is calculated using a formula tied to an established market index, such as the S&P 500 Composite Stock Price Index. The formulas typically come with a cap, so the owner will not see the value of the annuity rise as much as the index rises, but at the same time (and unlike investing in the stock market), the contract sets a “floor,” so the owner will not lose any principal if the index declines.