The DOL Fiduciary Rule: Charting a Course, Avoiding Collisions & Potential Litigation Q&A #4 - Q&As on Annuity Sales Practices, ‘Investment Advice’ and Litigation

by Carlton Fields
Contact

Carlton Fields

For the past several months, we have written about potential litigation issues under the “revised temporary” DOL Rule involving the offer and sale of annuities in the IRA market. This article continues that discussion. Recall that while the Rule’s revised broad definition of “fiduciary” was adopted effective June 9, 2017, the Rule’s exemptions were made available for a temporary transition period, by adherence only to the Rule’s Impartial Conduct Standards. As in the past, the answers below are limited to the Rule’s impact during this “temporary” period. In particular this Q&A addresses issues raised in the Department’s recent release which provides for an 18-month Extension of Transition Period and Delay of Applicability Dates for the Best Interest Contract Exemption; the Class Exemption for Principal Transactions; and PTE 84-24 (“Release”) (29 CFR Part 2550, 11/29/17) .

In particular, we focus on the issues the Department (and consumer groups) raised regarding the status of “enforcement” procedures during the transition period, with an emphasis on the comments in the Release on potential implications for both regulatory enforcement and litigation during this period and beyond. In last month’s Q&As we also suggested some measures to protect against exposure in connection with advising on or effecting a transaction involving advice on IRA purchases or distributions from an ERISA plan to an IRA. We now focus on recent comments from the Department that may be relevant to that analysis. The issues we have been discussing relate primarily to potential litigation involving the sale of annuities to IRAs or advice regarding such a sale. Such litigation, during this transition period can only be brought, if at all, as state law claims (presumably under a state law fiduciary standard) because ERISA does not provide a cause of action for breach of an alleged fiduciary duty unless the advice or sale is to an ERISA qualified plan. However, in this discussion, we will address the IRA only transactions as well as potential litigation in federal court when advice or sales are made to ERISA plans.

Q. Has the Department revised or provided additional direction in the Release regarding its “enforcement” position during this temporary transitional period?

A. Yes, in several respects; first, early in the Release, the Department notes that the primary reason for the comment letters opposing the proposed delay was that investors would be harmed because “there would not be any meaningful enforcement mechanism in the PTE’s without the contract, warranty, disclosure and other enforcement and accountability conditions.”[i] The same commenters urged that the Department “at a bare minimum, should add the specific disclosure and representation of fiduciary compliance conditions originally required for transition relief.”[ii]

Q. How did the Department respond to these criticisms of the delay?

A. First, the Department referenced the strong and substantial comments from the industry that “investors are sufficiently protected by the imposition of the Impartial Conduct Standards along with many applicable non-ERISA consumer protections.” [iii] The extensive footnote references in the release which support these comments include a comment that, in addition to the existence of the Impartial Conduct Standards, “there is an additional existing and overlapping robust infrastructure of regulations that are enforced by the SEC, FINRA, Treasury and the IRS, not to mention the Department” to provide continuing protection to investors.

Q. What was the Department’s ultimate rationale for not requiring the disclosures requested by those opposing the delay?

A. The Release provides the following reasons for not including these requirements:

    Many financial institutions are already “using their compliance infrastructures” to meet the requirements of the Impartial Conduct Standards.
    There are two enforcement mechanisms that remain in place: the imposition of excise taxes, and the existing cause of action under ERISA for improper fiduciary advice to ERISA plan assets, including advice concerning rollovers of plan assets into non plan investments.[iv]

Q. Why are these comments relevant to an analysis of litigation risk and the steps necessary to reduce that risk?

A. A response to that question involves a three-step evaluation. 

    To the extent the Department has provided guidance on the conduct expected of those parties deemed to be “fiduciaries,” the failure to adhere to that conduct would logically result in consequences. For example when the Department says it “expects that advisers and financial institutions will adopt prudent supervisory mechanisms to prevent violations of the Impartial Conduct Standards,”[v] then the decision by financial institutions not to adopt such “supervisory procedures” might cause the Department to pursue enforcement.
    The second step is mere conjecture: Would this failure to act also increase the likelihood of private litigation? Bearing in mind the obstacles to such litigation outlined in our prior Q&As, it is nonetheless certainly plausible that an individual or class action alleging improper sales practices would likely allege the failure to adopt such special “prudent supervisory mechanisms” aimed at preventing violations of the Impartial Conduct Standards as a crucial element to its cause of actions. Moreover, the Department’s statement of its view that “the impartial Conduct Standards require that fiduciaries, during the Transition Period, exercise care in their communications with investors, including a duty to fairly and accurately describe recommended transactions and compensation practices”[vi] would suggest current obligations not contemplated by many of these financial institutions, as noted by the footnote references in the DOL release.[vii]
    The third step requires even more conjecture: Would these allegations only be relevant in private litigation that involves an ERISA violation? For example assume there is an allegation of improper advice from a financial institution annuity representative to move assets from a 401k plan — in which case, the argument, hypothetically, would be that the failure to adhere to the Department’s clear mandate in the Release involves a fiduciary breach under ERISA (whether it does or not is not the issue here, we are simply noting the potential argument).

    Another hypothetical: What about private litigation allegations that do not involve a violation of ERISA — such as a class action alleging widespread elder abuse or fraud and misrepresentation in the sale of “unsuitable” annuities? Given the history of the plaintiff’s bar in connection with class actions against both life insurers and their life insurance sales agents, it obviously should not be surprising if such claims were to be made. Would the failure to meet the standards articulated by the Department advance such claims? I doubt it. Most state court judges attempting to analyze the merits of a garden variety fraud, misrepresentation or abuse claim will likely be constrained to rely on state law and state court precedents.

FINAL QUESTION: Does the Department’s comment that it will not pursue claims against investment advice fiduciaries who are working diligently and in good faith to comply with their fiduciary duties and to meet the conditions of the Prohibited Transaction Exemptions impose an obligation on such fiduciaries to make good faith efforts to implement the delayed provisions of these PTEs?

A. No. The DOL’s release makes clear that there is no such specific obligation imposed on these fiduciaries during the transition period. Instead, the DOL stated it will “focus on the affirmative steps that firms have taken to comply with the Impartial Conduct Standards and to reduce the scope and severity of conflicts of interest that could lead to violations of those standards.”[viii] Nonetheless, the Department goes on to note that for those institutions that choose to adhere to the “detailed standards” set forth in various portions of the delayed PTE’s, such adherence “would certainly constitute good faith compliance.”[ix]


[[i] Release at 14.
[ii] Release at 15.
[iii] Release at 16.
[iv] Release at 17. Of note, however is that the Department’s release goes on to state that it will “reevaluate this issue as part of the reexamination of the Fiduciary rule and PTW’s in the context of considering the development of additional and more streamlined approaches.”
[v] Release at 18.
[vi] Release at 19.
[vii] See f.n. 29 to the Release and comments therein, including reference to Comment Letter 48 of the ACLI, to wit; “we strongly oppose a delay approach, based on undefined and ambiguous factors, such as whether firm has taken ‘concrete steps’ to ‘harness market developments’, would require the Department to subjectively and inappropriately pick and choose among providers and products based on vague factors.”
[viii] Release at 30.

[ix] Id.  
 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Carlton Fields | Attorney Advertising

Written by:

Carlton Fields
Contact
more
less

Carlton Fields on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.