Federal Court Denies Motion to Block DOL Fiduciary Rule

The U.S. Circuit Court of Appeals for the District of Columbia recently denied a motion brought by the National Association for Fixed Annuities (NAFA) to enjoin the implementation of the new Department of Labor (DOL) fiduciary rule. This is the first court decision on a legal challenge to the rule. There are currently several other lawsuits against the DOL seeking to overrule the new DOL fiduciary rule that await decision.

NAFA is an insurance trade association that represents insurance companies, independent marketing organizations, and individual insurance agents. NAFA has been very vocal in its opposition to the new DOL fiduciary rule, stating that the new rule will have “catastrophic consequences for the fixed indexed annuities industry” and that meeting the April 2017 deadline is “almost an impossibility for the industry.” Along with other opponents to the rule, NAFA believes the rule will lead to higher compliance costs and will greatly increase litigation risk.

NAFA’s primary argument in its motion against the DOL was to argue that the new rule is invalid on the grounds that the DOL exceeded its authority to regulate Individual Retirement Accounts (IRAs) by extending Employee Retirement Income Security Act (ERISA) fiduciary duties to IRAs and other plans not subject to ERISA. NAFA also argued that the new rule improperly categorized insurance agents as fiduciaries, improperly created a private right of action under the new Best Interest Contract (BIC) exemption which only Congress can do, improperly categorized fixed indexed annuities under the final BIC exemption, and that the term “reasonable compensation” was unconstitutionally vague. NAFA sought a preliminary injunction to enjoin the rule, which will become operational on April 10, 2017.

The D.C. Court of Appeals denied NAFA’s motion for a preliminary injunction, finding that the DOL did have the regulatory authority to promulgate the new DOL fiduciary rule and require advisers to IRAs to sign a contract stating that they will act in their client’s best interest. The Court also noted that the DOL did not create a private cause of action, and that any action brought to enforce the terms of the BIC contract would be brought under state law. Furthermore, the Court stated that the decision to categorize fixed indexed annuities under the final BIC exemption was proper and that the industry had adequate notice of this possibility.

Finally, the Court concluded that “reasonable compensation” was not void for vagueness under the Due Process clause of the Constitution. The Court noted that perfect clarity and precise guidance has never been required, and that a law would only be found to be void for vagueness if it fails to a “person of ordinary intelligence a reasonable opportunity to know what is prohibited.” Here, the term “reasonable compensation” appears repeatedly in the Internal Revenue Code and ERISA. Furthermore, the DOL has since clarified that it is to be interpreted in accordance with ERISA 408(b)(2) and Rule 408b-2 thereunder.

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