Plaintiffs suing to kill the Department of Labor fiduciary rule seized on a new exemption offered by the department last week as evidence of the flawed process.
U.S. Chamber of Commerce attorneys argue that the DOL is conceding the futility of its rule by publishing a new exemption allowing independent marketing organizations to participate in the sale of fixed indexed annuities.
The response was filed in a Dallas federal court, where the chamber is the lead plaintiff. Judge Barbara M.G. Lynn heard arguments in the case Nov. 17, but has yet to rule.
On Jan. 18, the DOL proposed that IMOs with an average of $1.5 billion in annual fixed annuity premium over each of the three previous fiscal years could be issued a “financial institution” exemption under the DOL’s fiduciary rule.
Only a financial institution can assume the liability for selling FIAs and variable annuities targeted for tougher standards under the fiduciary rule. Banks, broker/dealers, insurance companies and registered investment advisors were granted FI status as the rule was published.
That left IMOs out in the cold. The DOL is attempting to address that with an exemption that officials got published one day before President Donald J. Trump took office.
The exemption “confirms that the Rule will upend the distribution system for fixed indexed annuities, including the role played by independent marketing organizations,” plaintiffs argue in the new brief. “The department failed to consider these deleterious effects or account for the resulting costs in its cost-benefit analysis.
“Instead, the department played down these problems, speculating that they could be addressed on an ad hoc basis if every IMO separately sought (and succeeded in receiving) an individual exemption from the prohibited transaction rules.”
After receiving nearly two dozen applications for these ad hoc exemptions, the DOL “now tacitly acknowledges that the fix the department advocated in litigation is not feasible and that the rule’s impact on IMOs requires promulgation of a new rule,” plaintiffs wrote.
The exemption is not popular with anyone, it seems. IMOs are unhappy with the $1.5 billion threshold.
DOL regulators apparently wanted to make sure IMOs using the financial institution exemption were well-established distributors with a track record, financial stability and “operational capacity” to implement anti-conflict of interest policies and procedures.
“The proposed $1.5 billion threshold was based on the representation in the applications,” the DOL said in its 220-page proposal. “Not all applicants provided this information, but the applicants that did generally indicated sales of this amount or more.”
DOL regulators also have proposed a transition period for IMOs that qualify as financial institutions from the applicability date of the exemption to Aug. 15, 2018.
Whether the rule even survives remains a political question. Trump put a hold on all Obama regulations that haven’t taken effect, but the 60-day on published regulations will not impact the April 10, 2017, applicability date for the fiduciary rule.
Waiting on a Ruling
The Trump team could still put the rule on ice and eventually kill it through a number of different means. Working with Congress to pass legislation is one way, although that might require securing Democratic votes. Also, the administration could simply promulgate a new rule reversing the fiduciary mandates, although that is a lengthy process.
Meanwhile, the industry awaits a ruling from Judge Lynn. Industry officials who attended the Dallas hearing were pleased by the judge’s questioning, although Lynn cautioned everyone present not to read anything into her comments.
Of the four lawsuits filed against the DOL rule, the government received favorable rulings on two – from judges in Kansas and Washington, D.C. A fourth lawsuit will be heard March 3 in a Minnesota court.
Judge Randolph D. Moss of District of Columbia district court took an extraordinary 71 days before he denied an injunction request by the National Association for Fixed Annuities on Nov. 4.
Noting Moss’s 92-page ruling, Lynn indicated she would operate on a quicker timeframe. Friday will be 71 days since the Dallas hearing.
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