Three Things that Could Impact the DOL Rule’s Final Outcome

Americans for Annuity Protection (AAP) is dismayed by the chatter and reporting that the class action provision has been or will be removed and we can all “live” with the Rule as long as there’s no class action.

Causing this complacency is a flurry of legal activity. First, with letters submitted from both sides in the Thrivent Financial for Lutherans v. R. Alexander Acosta and U.S. Department of Labor lawsuit filed in the United States District Court of Minnesota. The case is being overseen by the Honorable Judge Susan Nelson.

Second, and seemingly unrelated, is a friend of the court brief filed by Fidelity & Guaranty Life and MV Group. AAP believes nothing has changed. We’ll explain why.

But first, let’s look at these events and discuss what they mean how they are connected, and how they might impact the annuity marketplace.

First There's the Thrivent Letter

In its letter to Judge Nelson, Thrivent responded to the anti-arbitration argument made by the Department of Justice. In Thrivent’s letter, they claim that DOL’s statement of non-enforcement does not change the fact that the regulation “remains on the books, making it impossible for Thrivent to make required certifications of its regulatory compliance, including required certifications to state regulators that Thrivent complies with all federal laws."

In addition, Thrivent reminded the court that the fiduciary rule and related exemptions are to be enforced, in part, through excise taxes collected by the Treasury Department. Thrivent reminded the court that the DOL does not have any enforcement authority.

“Unlike eliminating the rule or enjoining its enforcement, DOL’s statement of nonenforcement provides no guarantee that the Department of Treasury (a separate federal agency) would refrain from enforcing the rule once in effect,” the letter reads.

Then There's the Department of Justice Letter

The Trump administration, via its Department of Justice, is reportedly seeking to remove the class-action-litigation provision from the fiduciary rule. However, this is not accurate and potentially harmful to advisors, distributors and carriers who are trying to get complete compliance requirements in preparation for Jan. 1, 2018.

What the Aug. 23 letter to Minnesota district court actually says is that the DOJ “continues to believe that a stay of the litigation is the most efficient way to address [the] claim regarding a provision that is not currently applicable to Plaintiff and which will likely be mooted in the near future.”

A stay of litigation is not removing the litigation provision. In effect, the DOJ says that the Department of Labor will not seek to enforce the class action provision.

And, finally, there’s the Fidelity & Guaranty Life and MV Group amicus brief. In a friend of the court brief, Fidelity & Guaranty Life and MV Group asserted:

1. The reasonable compensation standard is unconstitutionally vague; and,
2. The sudden switch of FIAs to BICE was an arbitrary and capricious action by DOL creating a severely tilted playing field favoring the securities industry over the FIA industry.

Let’s Connect the Dots

On the surface, the dispute between Thrivent and DOL does not seem to directly affect most insurers and agents because insurance policies do not have anti-class action provisions.

However, if the DOJ keeps its promise to “moot” the class action provision, how much will that help the liability cloud hovering over IRA annuity sales?

Actually, not so much! While this specific case may not have much impact on the retail annuity marketplace, the threat of class-action lawsuits remains and the threat is significant.

As we all know too well, any lawyer can bring a class-action lawsuit on annuity sales. At www.classaction.org we learn a person may be able to start a class action if he or she is injured, either financially or physically, because of the wrongful actions of a corporation and believes others were harmed in the same way.

Meanwhile, over at the American Bar Association (ABA) lawyers can take courses and attend conferences in “Class Action 101.” The Federal Rules of Civil Procedure addressing class-action lawsuits is Rule 23 noting that most states have included a similar rule in their procedural codes.

What we learned from the suitability lawsuits of the early and mid-2000’s is they were prolific, expensive and the catalyst for change. As a member of the Suitability Model Working Group at the NAIC, we were all too aware that carriers were well on their way to implementing enhanced suitability compliance requirements (more along the lines of the FINRA Suitability requirements) above and beyond the prior 2005 and 2008 Models.

Independent of the NAIC, carriers were investing in procedures, processes and systems before the ink was dry on the final draft. In fact, it was this early work that influenced the final product. Change was initiated by industry and incorporated by regulators.

Fast forward to today, the suitability class action well is dry. Lawyers need a new watering hole. Now, they have a new claim – violation of impartial conduct standards, including unreasonable compensation.

Meanwhile, the OMB has approved a delay of the Jan. 1, 2018 implementation date proposal. Regardless of the delay, all IRA recommendations still must be made in compliance with the Impartial Conduct Standards.

Americans for Annuity Protection believes that carriers will see the need to protect themselves and adopt impartial conduct standards for all annuities and life insurance sales. AAP thinks that if the industry defines impartial conduct standards instead of letting the courts do it, all annuity and life customers will be better served. At AAP, we are working on various fronts to pull industry together and address best practice standards BEFORE the courts do it for us.

What’s Next?

As of right now, ALL IRA Advisors must follow impartial conduct standards. You are a fiduciary under the DOL Rule – regardless of any delay. You must demonstrate that you understood your client’s needs, risk tolerance and planning timeline.

You must document that you looked at all the products available to you and that you recommended the product that was in your client’s best interest – not yours. That means if you receive higher compensation for the product you recommend, you’d better have the backup documentation of how and why you arrived at that over the other choices.

And finally, you must retain your records to insure privacy and protection of sensitive information.

A software system that does this for you is your most cost effective and resource efficient approach. For information on systems available check out the options here, or visit www.assessbest.com for our own unique solution.

Please join us at www.aapnow.org and remain active and engaged so you may be a part of this change and influence its outcome and impact on YOU.

Kim O’Brien is a 35-year veteran of the insurance industry specializing in guaranteed annuities and life insurance. She is the current CEO of Americans for Annuity Protection and Founder of AssessBEST, Inc., a sales and compliance software system. Visit www.AAPnow.com or www.AssessBEST.com for more information.

This article is provided for educational and informative purposes only and not for the purpose of providing legal advice. Readers should consult with their own legal and compliance counsels to obtain guidance and direction with respect to any issue or question. Contact Kim at [email protected].

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