NAFA: DOL Relying on ‘Fog of Rulemaking’ to Prevail

By Nevin Adams • July 26, 2016 • 0 Comments
Asserting its claim for summary judgement in the fiduciary rule litigation, one set of plaintiffs says that the Department of Labor (DOL) is counting on the sheer complexity of the issues to prevail in court.

After taking the DOL to task for its lack of care in constructing the justification for the fiduciary regulation or its impact on the fixed annuity industry, the filing on behalf of the National Association for Fixed Annuities notes that, “It is evident that the 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.”

The filing, in the case that will likely wind up with the first shot at oral arguments, notes that while the DOL’s response to the litigation is largely “devoted to making broad policy arguments,” this “is not a policy debate, it is a lawsuit. In an Administrative Procedure Act (‘APA’) case, as the Court knows, there are legal questions to be decided.”

It goes on to note that the DOL arguments “devote substantial time discussing supposed widespread ‘conflicts of interest’ in the fixed annuity industry, and basically how retirement investors must be protected from insurance salesmen,” but that the assertions of injury (“conflicts of interest are widespread and could cost investors in individual retirement accounts (in one segment of the market alone) between $95 billion and $189 billion over the next ten years”) are based on the sale of mutual funds, not fixed annuities. “Critically, the administrative record is completely devoid of any study quantifying any harm to consumers from ‘conflicted advice’ in the sale of fixed annuities, which are the subject of this lawsuit,” it continues.

Fiduciary Definition Challenge

The filing asserts that the DOL exceeded its statutory authority by altering its definition of “investment advice for a fee or other compensation” and expanding the meaning of “fiduciary” “far beyond what Congress intended when it enacted ERISA.” The NAFA filing goes on to note that “Congress did not intend insurance agents who sell insurance products for a commission to be treated as ERISA fiduciaries merely for recommending that an IRA owner purchase a fixed annuity.” Later NAFA goes on to point out that those salesmen lack discretion or control over the assets, and thus cannot be deemed to be fiduciaries here. “They do not have a special relationship of trust and confidence with their customers, they are not paid for investment advice, and they do not have power or control over plan assets,” the filing claims.

It goes on to note that while judicial deference to a regulatory agency might be expected when the agency is acting within the scope of its authority, but that in exceeding that reach, the DOL is not entitled to that consideration.

As for the extension of the fiduciary regulation to IRAs, the NAFA cites the DOL’s statement that “all that can be inferred” from Congress’ decision not to impose fiduciary duties on IRA fiduciaries “is that Congress did not intend to mandate such obligations.” That, in the words of the plaintiffs here, “is absurd,” going on to describe that action as “manifestly an end run around congressional intent.”

The plaintiffs here argue that, having extended ERISA fiduciary duties to IRA fiduciaries, the DOL “takes yet another giant leap by effectively requiring that FIA sales to IRAs be made pursuant to a ‘Best Interest Contract’ that incorporates the ERISA fiduciary duties copied and pasted into the BICE,” creating a private right of action against IRA fiduciaries for breach of fiduciary duty, “where Congress authorized no such action.”

What’s Reasonable?

The issue of “reasonable compensation” also comes under scrutiny in the filing, first taking issue with the commonality of the reference in ERISA, going on to note that “the Department simply says that reasonable compensation is “measured by the market value of the particular services, rights, and benefits the Adviser and Financial Institution are delivering to the retirement investor.” While NAFA concedes that “superficially that makes some sense,” it goes on to note that the DOL “clearly indicates it is unwilling to acknowledge that ‘customary compensation’ is reasonable,” though NAFA asserts that customary compensation is market compensation. “To be sure, the Department plainly does not like customary compensation (i.e., market pricing as it currently exists) and therefore rejects it,” the filing explains.

“But having eschewed market pricing as reasonable, the Department cannot plausibly say that reasonable compensation is ‘reasonably understood’ as ‘measured by market value,’” the filing notes, going on to assert that at this point in time, “the Department plainly has no idea what constitutes reasonable compensation.” The NAFA filing cautions that “if the Rule stands, the Department and state courts will decide — at some future time — whether compensation was reasonable after the fact, while the insurance industry is required now to include that term in BICE contracts.” And that, the plaintiffs claim, violates due process.

In closing, NAFA notes that it is asking the court to stay the applicability date of the rule “not because of what will happen on some future date, but because of what is happening to NAFA’s members right now,” because the rulemaking requires the fixed annuity industry “totally to remake its distribution system,” and that in view of the April 10, 2017 applicability date, “the industry needs to do that immediately.”