DOL fiduciary rule: 5th Circuit decision could be big win for indexed annuities

The fiduciary rule may be taken off the books as a result of the ruling, and an SEC fiduciary standard wouldn't cover products not registered as securities

Mar 21, 2018 @ 2:07 pm

By Greg Iacurci

Indexed annuities — and the intermediaries that sell them — appear to be the biggest benefactors of an appellate court's decision last week to vacate the Department of Labor fiduciary rule.

While observers are divided on the ruling's implications, a consensus seems to be growing that the fiduciary rule would be erased nationwide if the DOL doesn't appeal — a potential outcome given the Trump administration's deregulatory agenda.

The Securities and Exchange Commission is working on its own fiduciary standard, but it would only cover products registered as securities. This creates a situation in which, absent the DOL rule, products not registered as securities, like indexed annuities, would fall into a sort of regulatory gap — not covered by any fiduciary standard.

"It's certainly good news for those who were under the thumb of this [DOL] regulation where the SEC doesn't have any authority," said Andrew Oringer, a partner at Dechert.

Last Thursday, the 5th Circuit Court of Appeals shot down the fiduciary rule in a split 2-1 vote, arguing the DOL didn't have the authority to promulgate the regulation.

(More: What to watch for next with the DOL fiduciary rule)

The rule, which partially went into effect in June, raises investment-advice standard in retirement accounts likes 401(k)s and IRAs. Overnight, thousands of brokers and insurance agents who faced a "suitability" requirement when selling annuities to clients became fiduciaries beholden to a more stringent standard.

The ruling by the 5th Circuit judges has some investor protection advocates worried that intermediaries will revert to the less-stringent standard for some product sales, even if the SEC issues its own fiduciary rule.

"It is a big win for fixed indexed annuities and other non-securities products," said Barbara Roper, director of investor protection at the Consumer Federation of America.

"We could go back to a situation where different products sold within the same [types of] retirement accounts could be subject to different standards — indexed annuities, for example, being right at the top of the list," Ms. Roper said. "And that's a concern for us."

For some context regarding what could be at stake, consider that roughly 60% — more than $7.5 billion — of indexed-annuity sales in the third quarter last year were sold into a qualified account, the type covered by the DOL fiduciary rule, according to Wink Inc., a market research firm.

The products have become much more popular over the past decade, with annual sales more than doubling, to just shy of $60 billion in 2017.

There are other products that would fall outside of the SEC's jurisdiction, too, Ms. Roper said, including fixed annuities, gold and artwork sold in individual retirement accounts, for example, and potentially bitcoin as well.

Variable annuities are securities products, so their sales would be covered by an SEC fiduciary rule.

The National Association of Insurance Commissioners is working to draft its own "best-interest" standard covering all types of annuity sales, but investor advocates are concerned that it won't offer protections much beyond state rules currently on the books.

Gary Hughes, executive vice president and chief operating officer at the American Council of Life Insurers, explained on a recent conference call that the NAIC rule would not be a fiduciary standard.

"This is not something that's intended to mirror what the DOL came up with [through] a fiduciary standard," Mr. Hughes said.

States such as New York could also theoretically impose their own fiduciary rules to cover insurance product sales in their respective territories that fall into a regulatory gap.

Lawyers don't all agree that the Justice Department will let the 5th Circuit ruling stand. Some expect the DOL to appeal, either by asking for a rehearing from the full 17-judge 5th Circuit or by petitioning the Supreme Court. This wouldn't necessarily be because the Trump administration officials dislike the case's outcome for the fiduciary rule itself, but because they wouldn't want the court to infringe on their rule-making authority more broadly, attorneys say.

But if that doesn't happen, expect to hear cheers from the insurance industry and intermediaries that sell their products.


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