The Department of Labor did what everyone expected with its fiduciary rule: came out swinging, took in comments and criticism with a smile, then backed off in the final rule.
It’s classic, tried-and-true policymaking. So how does that explain the DOL’s curious decision to take an opposite tack with fixed indexed annuities?
While the department’s preliminary rule left FIAs in the Prohibited Transaction Exemption 84-24, the final rule was a different story. It was published with FIAs moved into the much tougher Best Interest Contract Exemption.
Even after studying the move for 24 hours, Washington, D.C. attorney James F. Jorden was still confused.
“They don’t cite any basis for saying that or any study that demonstrates the necessity,” said Jorden, a shareholder of Carlton Fields Jorden Burt. “Frankly, the DOL’s analysis is flawed and it’s just not supportable.”
The issue is whether FIAs should be regulated as an insurance product of a security.
“Inherent in the purchase of a security is the prospect of loss,” Jorden explained. “Inherent in the purchase of an annuity is no loss and inherent in the purchase of a fixed indexed annuity is no loss. So clearly this product is more akin to a fixed annuity than a security.”
The DOL’s only explanation is that FIAs are a “complicated” product, but that does not mean they should be regulated as a security, Jorden said. A DOL spokesman did not return a message seeking comment.
The DOL stance on FIAs is similar to a 2008 Securities and Exchange Commission effort to regulate all indexed annuities as securities. After a long fight, Rule 151A was thrown out by a U.S. Court of Appeals, leaving indexed annuities under state regulation as an insurance product.
The District of Columbia Circuit Court of Appeals ruled that the SEC failed to analyze the rule’s impact on the indexed annuity market that the commission sought to regulate.
One could argue the DOL is guilty of the same misstep, Jorden said.
“They believe one is more complicated than another and that is not a sound basis,” he said. “There are potential arguments for overturning this, on that basis, as well as on the basis of there is no sound argument for distinguishing between these (fixed and fixed indexed annuities).”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].