NAFA Attorney Says Fiduciary Rule Would be ‘Catastrophic’ for Agent, Brokers
August 27, 2016 by Frank Klimko
WASHINGTON – The U.S. Department of Labor’s new fiduciary rule will expose independent brokers and agents to potentially expensive lawsuits from dissatisfied customers if their retirement products do not perform as they expected, creating marketwide turmoil, an industry attorney said.
“What we have here is a rule that could lead to rescission that would be catastrophic for the industry,” said Philip Dean Bartz, attorney for the National Association for Fixed Annuities. “They have made a rule that is impossible to comply with. They (independent agents) are going to get their butts sued off.”
Bartz spoke at an Aug. 25 hearing over the DOL rule before Judge Randolph Moss, of the U.S. District Court for the District of Columbia. NAFA asked Moss to put an immediate stop to the rule.
Moss did not rule from the bench, but took their request under advisement. This is the first of five lawsuits to be heard regarding the constitutionality of the rule.
NAFA filed a lawsuit in June complaining the rule, which is to go into effect in April, would upend the retirement advice industry, specifically for agents who sell fixed annuities (Best’s News Service, Aug. 19, 2016).
In his questions from the bench, Moss focused on NAFA’s claim the DOL overstepped its authority when it required fiduciaries using the Best Interest Contract exemption to agree to be sued for breach of contract related to the best interest standards created in the rule. The BIC was designed to permit broker-dealers to continue to receive commissions. The BIC created a new private right of legal action, which is legally reserved for Congress and is not within the authority of the DOL, Bartz said.
“Collectively, it’s really just an assumption of regulatory authority that is based on way too thin a slice of congressional authority,” Bartz said. “They don’t get to be the sorcerer, but they are they are the sorcerer’s apprentice.”
However, Moss noted any potential BIC litigation will be heard by state courts, over which he has no jurisdiction. The judge also questioned Bartz’ argument the rule expanded an agent’s exposure to litigation.
“If I had a client that was following what the DOL said was in the rule,” Moss told Bartz, “I would feel confident in saying that this is what the DOL says the rule means.”
“You are asking me to declare it unconstitutional before it is implemented,” Moss said.
Bartz also noted fixed index annuities are insurance products, not securities. Agents and brokers who distribute and sell them stand to be uniquely harmed by this rule, Bartz said.
“They are creating a whole new regime and the industry has no way of knowing how to comply,” Bartz said. “The rule is forcing the industry to change its distribution system in a way that is way beyond the compliance costs.”
“When you look at where they started and where they ended up, that really is a bridge too far,” Bartz said. “It is shocking, just shocking to me the way this rule was developed.”
Galen Thorp, a U.S. Department of Justice attorney representing the DOL, said the rule was not regulatory overreach. Agents and brokers can still be paid by commission if they qualify under the BIC, Thorp said.
“We are not imposing a one-size-fits-all rule,” Thorp said. “If an institution is aware that they are charging a higher commission, then they must have a good reason that they are offering (agents) a higher commission,” for the sale of their retirement products.
Other lawsuits are also pending; a hearing on the Market Synergy lawsuit is to be heard Sept. 21 in U.S. District Court for the District of Kansas. And three consolidated lawsuits filed by financial services groups will be heard Nov. 17 in the U.S. District Court for the Northern District of Texas.
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)
