As of press deadline, there was no resolution in sight to the many lawsuits seeking to stop the DOL rule. For agents/advisors, insurers, IMOs and everyone in between — that presents a problem.
Only five months remain before the first mandates are due to take effect.
The barrier to resolution isn’t just the hearings and rulings, but also the appeals that the losing side will inevitably file.
The first lawsuit by the National Association for Fixed Annuities (NAFA) — requesting a preliminary injunction stopping the entire rule — was heard Aug. 25 in U.S. District Court for the District of Columbia. The judge’s decision was expected at the end of September, but as of early October, it had not been released.
Erin Sweeney, a Washington lawyer who is not involved in the case, said she expects Judge Randolph D. Moss’ decision will be appealed. Even in the best-case scenario, that could drag the case out for months.
“It is likely that the losing party will file a motion for an expedited appeal,” said Sweeney, of the firm Miller & Chevalier. “Even if the circuit court agrees to an expedited appeal, obtaining a decision on appeal would, at a minimum, take several months.”
Sweeney attended the NAFA hearing and is among those who say the judge seemed unconvinced by the plaintiff’s case. If NAFA does not obtain an injunction from the district court, it “will find itself in front of the D.C. Circuit, which is unlikely to reverse the district court,” she explained.
Another option may emerge as a middle ground of sorts. Plaintiffs could appeal to a judge to push back the applicability date on which the new rules take effect. Should Hillary Clinton win the election, government attorneys might not be so opposed to that idea.
If Donald Trump wins, he is expected to assist congressional Republicans in dismantling the rule.
BIC Compliance Affected
The second lawsuit to be heard — on Sept. 21 before Judge Daniel Crabtree in U.S. District Court for the District of Kansas — might be a bigger source of uncertainty for agents and insurers scurrying to comply with the DOL rule.
Market Synergy Group is the plaintiff in this case.
The DOL rule is due to take effect in two parts — April 10, 2017, and Jan. 1, 2018. Commission-based sales of certain products, fixed indexed and variable annuities among them, will require the Best Interest Contract Exemption (BICE) starting in April.
The BICE mandates hefty disclosures, a signed contract between financial institution and client, and a vow to accept no more than “reasonable” compensation.
Agents and insurers need to proceed as if the BICE will be enforced as published. In the meantime, the Market Synergy lawsuit is aimed at overturning fixed indexed annuities’ (FIAs’) inclusion in the exemption.
In its request for a preliminary injunction, Market Synergy cited irreparable harm if FIA sales require compliance with the BICE.
Under the DOL’s preliminary rule, FIAs were placed under the Prohibited Transaction Exemption 84-24. When its final rule was published in April, FIAs surprisingly turned up under the more stringent BICE.
Crabtree was receptive to the plaintiff’s arguments, said Sweeney, who also attended the Kansas City hearing.
Changes in the regulatory regime must be “foreshadowed” by a regulatory proposal in order to provide adequate notice to stakeholders, according to Market Synergy’s attorneys.
When government attorneys contended that notice was adequate, Crabtree expressed skepticism, Sweeney said.
If the only notice an agency gives the public is that it seeks comments on whether the agency has “drawn the line in the right place,” Crabtree asked, “isn’t that notice of everything and notice of nothing at the same time?”
The DOL contended that the court should invoke the doctrine of “harmless error,” which forgives an agency’s notice failure as long as public comments on a rulemaking were actually considered by the agency and the public was not prejudiced by the notice failure.
Insurers will be given until Jan. 1, 2018, to implement the compliance, operational, technology, and process changes to support the exemption requirements and new advice standards.
A New Claim
In early October, Thrivent Financial filed a surprise lawsuit against the DOL rule. A Christian-based financial services company, Thrivent claimed the DOL rule will render its dispute resolution mechanism obsolete.
What makes Thrivent’s suit different is that the organization takes no issue with the overall rule. The complaint specifically asks the court to overturn the class-action component.
“Nothing in ERISA gives DOL authority to preclude financial institutions and their clients from entering into and enforcing arbitration agreements that include class action waivers,” Thrivent’s complaint reads.
Thrivent — represented by the Washington law firm Cozen O’Connor — seeks a preliminary and permanent injunction against the class-action provision of the DOL rule.
Elsewhere, three lawsuits were consolidated in U.S. District Court for the Northern District of Texas, with a hearing date of Nov. 17. Plaintiffs in that case, led by the U.S. Chamber of Commerce, also seek a preliminary injunction and are challenging the entire rule.
Path for IMOs
In addition to looming decisions from the bench, the future of sales will be affected by whether independent marketing organizations (IMOs) can get a foot in the door.
The new fiduciary rules prohibit agents from selling commission-based life and annuity products unless IMOs with which agents have a relationship are granted “Financial Institution” status by the DOL.
The BICE allows agents to accept “reasonable” commissions on recommendations for investment or insurance products to retirement plans or individual retirement accounts (IRAs). But it requires a contract signed by a Financial Institution.
Only banks, insurance companies, broker-dealers and registered investment advisors (RIAs) were designated by the DOL as financial institutions.
IMOs, who have contracts with independent agents, were left out, as they are not regulated in the same way. But they were allowed to apply for FI status.
At least eight companies have made applications, including Clarity 2 Prosperity, Gradient Insurance Brokerage, Legacy Marketing Group, InForce Solutions, Financial Independent Group, Futurity First Financial, Brokers International and AmeriLife.
More IMOs are expected to file for financial institution status, and IMO executives interviewed earlier over the summer said they expect an answer from regulators by the end of the year at the latest.
“The most important aspect is what each of the [IMO] entities say about how they are going to supervise the agents that are going to work for them and whether an IMO can serve as a financial institution,” said Bruce L. Ashton, a partner with the law firm Drinker Biddle, which is representing several IMOs in their applications before DOL.