Dallas judge in DOL fiduciary rule suit deals yet another blow to indexed annuities

The judge affirmed that inclusion of indexed annuities in the BICE was reasonable.

Feb 10, 2017 @ 1:34 pm

By Greg Iacurci

The federal judge who this week dealt plaintiffs fighting the Department of Labor's fiduciary rule a stinging defeat also dealt a blow to indexed annuities, a product that has taken quite a beating since the DOL issued its final rule last spring.

The treatment of indexed annuities under the DOL's fiduciary rule was one of the stand-out stories for insurance industry observers when the agency issued its final rule.

In a shocking twist, indexed annuities were, along with variable annuities, ultimately included in the best-interest contract exemption, seen by many as being the most onerous provision in the rule.

Opponents challenged the decision, calling it and other parts of the rule “arbitrary and capricious."

But the judge in the Dallas suit, Barbara M.G. Lynn, supported the DOL's contention that fixed-indexed annuity products are worthy of inclusion in the BICE rather a less-stringent exemption known as Prohibited Transaction Exemption 84-24, which also covers fixed-rate annuities.

“Contrary to Plaintiffs' argument, the DOL drew a reasonable distinction between FIAs and fixed rate annuities and justified moving FIAs from PTE 84-24 to BICE,” according to the judge.

She also supported the DOL's notion that “variable annuities and FIAs share common complexity, high commissions, and resulting conflicts of interest.”

While the judge says the DOL acknowledged similarities between indexed and fixed rate annuities, it found the differences between them “sufficient to justify different treatment,” and said the DOL's notice and comment period prior to switching indexed annuities into BICE was “adequate.”

“Because the DOL's determinations are supported by substantial evidence in the administrative record, the Court should defer to the DOL's judgment,” the court said.

The DOL, in its initial 2015 rule proposal, made a distinction between variable and indexed annuities, placing the variable variety in the BICE and indexed annuities in PTE 84-24, which, among other differences, doesn't expose firms to class-action litigation like BICE does.

The DOL's reasoning for the distinction was because variable annuities are securities products, whereas indexed annuities aren't. But the DOL changed its calculus in the final rule, hinging its decision to lump both into the BICE on the complexity of the products.

Rule opponents seized on this switcheroo as an opening for attack.

Aside from a higher level of risk the BICE places on product recommendations by brokers and agents, inclusion in the BICE has sown doubt as to how distribution of the products through independent insurance agents, which account for the majority of product sales, could continue once the rule is implemented.

Some such as Knut Rostad, president of the Institute for the Fiduciary Standard, believe the Dallas court was right to uphold the Labor Department's argument concerning indexed annuities.

“I think the court's reasoning and analysis was pretty on target,” according to Mr. Rostad. “Should they have been there in the first place? Yes,” he added, referring to their inclusion in the BICE.

Some observers believe, however, the court and DOL erred in their judgment about indexed annuities deserving similar treatment to variable annuities.

“Ultimately, the judge must not know that much about fixed rate annuities. Because an indexed annuity is more like a fixed rate annuity than a variable annuity,” said Sheryl Moore, president and CEO of Moore Market Intelligence, a market research firm.

For example, unlike with a variable annuity, but similar to a fixed rate annuity, an indexed annuity (without an income rider) doesn't carry risk of loss of principal. Further, like fixed rate annuities, product terms such as minimum and maximum cap levels can change on an annual basis subject to approval by insurance regulators.

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