New DOL Fiduciary Rule Defies Court Ruling, Insurance Groups Argue

A coalition of trade groups for life insurance and annuity issuers told a federal court in Texas on Friday that the Labor Department’s new fiduciary rule should be halted because DOL exibited “outright defiance” of the court’s decision to vacate the 2016 rule in crafting the new one.

“DOL’s lead argument — that ERISA’s text is broad and authorizes DOL to go beyond the common law — all but ignores” the court’s 2018 decision, the insurance groups said, in ”relying on the same authorities the Fifth Circuit considered in holding precisely the opposite when invalidating the 2016 rule.”

The trade groups filed suit against Labor on May 24. Their latest filing is a response to Labor’s answer, filed June 28.

With the briefs filed, the next step is the court decision on the injunction. The court could decide to hold a hearing on the matter or make a decision based on the briefs.

At times, the insurance groups state, Labor’s rule “constitutes outright defiance” of the Fifth Circuit’s decision, referring to the March 15, 2018, ruling in Chamber of Commerce v. U.S. Department of Labor.

Ultimately, the groups told the court, “two straightforward points are sufficient to decide the merits” of their case against the rule.

First, the Fifth Circuit established in Chamber that ERISA “codified the touchstone of common law fiduciary status — the parties’ underlying relationship of trust and confidence.”

However, like the 2016 rule, Labor’s new rule “seeks to transform virtually all insurance agents and brokers who recommend retirement products in compliance with existing state and federal laws into fiduciaries without regard to whether those relationships actually are or would be ‘fiduciary’ at common law,” the filing states.

Second, the Fifth Circuit held in Chamber ”that the statutory standard does not permit DOL to ‘dispense’ with the well-established ‘distinction between investment advisers,’ who render advice for a fee and have long been deemed fiduciaries, ‘and stockbrokers and insurance agents, who generally assumed no such status in selling products to their clients.’”

Like the 2016 rule, Labor’s new rule “does precisely what Chamber forbids: it ignores the core distinction between investment advice paid for by a client and sales speech engaged in by insurance agents, brokers, and others incidental to the sale of retirement products,” the insurance groups’ filing states.

“In these ways and others, the Rule overrides the common law and exceeds DOL’s statutory authority, just as the 2016 rule did,” the insurance groups maintain.

Annuity Access

In a joint statement when filing their original lawsuit against the rule, the insurance groups argued that Labor’s “latest regulation will block retirement savers from accessing information about annuities at a time when the lifetime income these products provide is needed more than ever before” as the rule reduces “consumer access to professional financial guidance and critical protected lifetime income solutions.”

In their May 24 court filing, the insurance groups explain, starting on page 12, that most annuities are ”sold by independent agents and brokers” who “must educate themselves about the many available products in the market and consumers’ financial situations. This takes time.”

To help compensate “for the time and effort required to provide useful information and complete an annuity transaction, the insurance company — not the retail customer — typically pays the agent or broker-dealer a sales commission,” the filing states.

The principal alternative to the commission-based compensation structure is a fee-for-advice model, the filing goes on to state. However, the groups maintain that a “fee for-advice model is relatively more expensive over time than a commission-based model,” and therefore would effectively place the information needed for rational decision-making for many middle- and lower-income consumers out of reach.

DOL Rebuttal

Labor, meanwhile, told the court on June 28 that the insurance groups — national associations that represent life insurance companies, insurance agents, brokers, and distributors, and Texas-based affiliates of one of those associations — “do not dispute that insurance agents frequently provide investment advice, and they enthusiastically trumpet how important their advice and products are for retirement investors.”

Yet, the groups maintain that the 2018 ruling that torpedoed Labor’s 2016 rule “means that insurance professionals are seldom, if ever, subject to the ERISA fiduciary standard.”

The groups want the department “to be bound to provisions in its original 1975 regulation that have no basis in ERISA’s text,” Labor said.

“Their arguments cannot be reconciled with ERISA’s text, the Department’s long history of regulating insurance professionals who provide advice to ERISA plans, or the reasonable expectations of retirement investors in the current insurance marketplace,” Labor wrote.

The department, Labor continued, ”has reasonably construed ERISA’s text and crafted an objective facts-and-circumstances test that treats insurance professionals as ERISA fiduciaries only under conditions where it is objectively clear that the professionals are holding themselves out as trusted advisors worthy of retirement investors’ trust and confidence,” Labor’s filing states.

Labor’s new fiduciary rule “applies a uniform standard to all compensated investment advice regarding ERISA plan assets, without favoring or disfavoring any particular investment product or type of advice provider,” Labor wrote.

The court should deny the insurance groups’ motion for a preliminary injunction and stay of the rule’s effective date, Labor said.

The plaintiffs are the American Council of Life Insurers; the Insured Retirement Institute; the National Association for Fixed Annuities; Finseca; the National Association of Insurance and Financial Advisors; and the NAIFA chapters of Texas, Dallas, Fort Worth and Pineywoods of East Texas (known as NAIFA-POET).