A Case for Suing the DOL Over its Fiduciary Rule

By Kim O'Brien InsuranceNewsNet

Commentary

At a recent Americans for Annuity Protection (AAP) board meeting, the board authorized AAP’s support of litigating the negative impacts of the DOL Fiduciary Rule and its continued engagement in litigation efforts.

In addition, we will continue to support legislation efforts to fix this rule to protect annuity consumers’ access to affordable and qualified annuity advice while helping consumers get improved understanding and access to retirement savings advice.

But, let’s talk litigation! To begin at the beginning, it is instructive to review the U.S. District Court’s 2009 decision on Rule 151A.

As you recall, the U.S. Court of Appeals for the District of Columbia Circuit issued an order vacating Rule 151A under the Securities Act of 1933. The U.S. District Court’s final decision in the 151A lawsuit was predicated on the SEC’s failure to complete its market analysis.

Specifically, the court ruled that the SEC failed to properly consider the effect of Rule 151A on the efficient, competition and capital formation and remanded the rule to the SEC. In its decision, the court found that the SEC “cannot justify the adoption of a particular rule based solely on the assertion that the existence of a rule provides greater clarity to an area that remained unclear in the absence of any rule.” (emphasis added).

This is very similar to the DOL’s two main arguments that the Fiduciary Rule was necessary: 1). to give a “makeover” to a 42-year-old law; and, 2). because consumers were “confused about which standard applied to them.”

Other than old age, they never adequately proved that annuity consumers were being harmed under the rule nor did they demonstrate any confusion by annuity consumers with reliable studies or research. As Maurice Chevalier famously said, “old age isn't so bad when you consider the alternative.”

The U.S. District Court in 2009 also found that the analysis failed because the SEC did not make any findings on the existing level of competition in the marketplace under the state law regime. The court further determined that the SEC’s analysis was incomplete because the SEC failed to determine, whether, under the existing regime, sufficient protections existed to enable investors to make informed investment decisions and sellers to make suitable recommendations to investors

Likewise, in creating the Fiduciary Rule, the Department of Labor never analyzed the impact on the fixed annuity marketplace, including the fixed indexed annuity marketplace. Also, by their own admission, in the flawed impact analysis they did conduct, they did only a cursory review of variable annuities (which were noted in a short footnote).

As a result, they failed in their primary duty to Congress to provide a thorough analysis of both the costs and the benefits the rule will provide in the marketplace(s) it will affect. The department used selective and inconclusive analysis and arrived at their predetermined justification ignoring the multibillion dollar marketplace of IRA annuities.

But don’t take our word for it. Craig M. Lewis, a finance professor at Vanderbilt’s Owen School of Business and formerly the SEC’s chief economist, explains it best in a Forbes article:

To drum up support for the proposal, the White House and the DOL have repeatedly claimed that conflicted advice from brokers costs investors $17 billion a year — despite a number of significant concerns about the reliability of the estimate and the results-oriented process that produced it.

To reach its estimate, CEA asserts that several academic studies show that assets subject to broker commissions underperform similar products sold directly to investors (that is, without a broker and without a sales load) by approximately 1%.

You don’t have to be an economist [or even a kindergartner] to recognize the Administration’s $17 billion talking point significantly overestimates the costs, if any, to investors relying on the “conflicted advice” of brokers. And you don’t have to be a regulator to recognize that an independent and objective economic analysis should be performed during the public comment process, especially when the regulatory agency making the decision is not a subject matter expert. This is particularly true here given the significant impact that the rulemaking will have on tens of millions of investors.

In a recent column for InsuranceNewsNet we discussed the court decision on the government’s determination of Met Life’s SIFI status. The reasons the judge ruled in the courts favor were strikingly similar to the department’s actions (or lack of actions like their inadequate and prejudiced impact analysis).

So the potential for successful litigation is strong. Also, we believe, including the non-security fixed indexed annuity with security products while carving-out their fixed annuity brethren is extremely problematic for the department and a boon to litigation efforts.

Let the litigation begin! AAP supports it and we’re engaged.

Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A.

Contact Kim at [email protected].