Administration wins first battle over financial adviser rule

Administration wins first battle over financial adviser rule
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The Obama Administration earned a victory in the fight over its strong new rules for financial advisers on Friday. The U.S. District Court for the District of Columbia struck down an insurance group’s motion calling for an injunction against the rules and summary judgment.


The National Association of Fixed Annuities (NAFA) brought its lawsuit against the Department of Labor's (DOL) fiduciary rule on multiple grounds, but Judge Randolph Moss ruled in favor of the administration. That means the D.C. court will not prevent the rule from taking effect on April 10, 2017.

Once effective, the rule will dramatically heighten the regulatory standards for financial advisers who work with retirement savers. 

DOL takedown. 

“Basically, it was a slam down,” Marcia Wagner, managing director of The Wagner Law Group, told The Hill Extra. “If they want to win, they’re going to have to really fight this and not do it at the early stages of litigation. Injunction was struck down, summary judgment was struck down, but that doesn’t mean NAFA can’t fight. They can fight, but it’s not going to be decided on these preliminary parts of litigation." 

In addition, Moss granted the Labor Department's cross-motion for summary judgment, meaning it ruled in favor of the department on the merits in upholding the rule. NAFA stated in a letter to its clients on Nov. 7 that it will appeal the decision to the D.C. Circuit Court of Appeals. 

Regular or irregular. 

In the new rule, the DOL discarded the “on a regular basis” limitation with respect to the definition of a “fiduciary,” which is relevant because fixed annuities are often acquired in a single transaction. Thus, insurance companies that sell fixed annuities will be subject to heightened costs associated with fiduciary registration.  

The DOL decided to remove the “regular basis” clause because many employees engage in one-time rollovers of funds into individual retirement accounts (IRAs) as they approach retirement. Many of those choosing to rollover will seek advice on how to allocate their funds.

Judge Moss supported the DOL’s claim in his written opinion.

“Given changes in the retirement investment advice market since 1975, the Department reasonably concluded that limiting fiduciary status to those who render investment advice to a plan or IRA 'on a regular basis' risked leaving retirement investors inadequately protected — particularly when one-time transactions like rollovers will involve trillions of dollars over the next five years and can be among the most significant financial decisions investors will ever make," he said. 


The industry group also challenged the DOL’s decision to move fixed indexed annuities from Prohibited Transaction Exemption (PTE) 84-24 to the Best Interest Contract (BIC) Exemption, stating the move was both arbitrary and capricious.

PTE 84-24 allows insurance agents and insurance companies who qualify as fiduciaries to sell variable and fixed indexed annuities and receive variable compensation, like commission. Under the BIC Exemption, variable and fixed indexed annuities dealers will have to comply with significantly higher standards in order to continue receiving variable compensation. 

James Angel, associate professor at Georgetown University’s McDonough School of Business, said annuities salespeople receive compensation based on the complexity of the product.

“The old saying goes that annuities tend to be sold, not bought,” he said. “Meaning, your average person who could benefit from an annuity product probably doesn’t know what they are and probably doesn’t understand how they can benefit from them. It’s the kind of product that really does require a lot of individual counseling and individual selling,” Angel said. 

The insurance group raised five challenges to the PTE/BIC aspect of the rule — treatment of fixed-income annuities as “securities,” lack of notice and opportunity to comment, lack of reasoned explanation, workability and rationality issues and lack of cost-benefit analysis — all of which were rejected by Judge Moss. 

First of four.

The Nov. 4 ruling is the first of four court decisions to be made regarding the fiduciary rule. The Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce are part of a nine-plaintiff suit against the DOL scheduled for oral arguments on Nov. 17 in the U.S. District Court for the Northern District of Texas. 


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This story was updated at 3:27 p.m.