Court Rules in Favor of DOL Fiduciary Restrictions on Annuity Products

In the latest episode of what has become an ironic series of Department of Labor (DOL) enforcement and federal judicial events, the U.S. 10th Circuit Court of Appeals has ruled against plaintiffs who oppose DOL restrictions on annuity products sold to retirement savers.

Since the issuance of final DOL regulations governing fiduciary investment advice in 2016, several lawsuits have been filed by opponents of these more restrictive regulations and their several accompanying prohibited transaction exemptions. In every court decision to date, the plaintiffs opposing the tighter fiduciary investment advice guidelines have lost, and DOL has won. The irony is that, with the change from Obama to Trump administrations, enforcement of the new regulations and exemptions under a Trump-led DOL has been delayed and liberalized. Many believe they will never be implemented in their issued form. The DOL under current leadership is seen by some as having essentially switched sides in the enforcement scenario, but the courts have proceeded to hear the existing cases on their merits, and not in light of current DOL enforcement intentions.

The 10th Circuit opinion just issued specifically upholds the guidance’s new restrictions on fixed-income annuities and variable annuities. The guidance places these annuity products under the new Best Interest Contract (BIC) exemption, requiring certain contractual agreements and enforcement recourse that opponents argued made the use of these annuities by providers and sales representatives more complex and fraught with liability risk. In its opinion, the Court described these annuity products’ characteristics as not only complex, but creating more investment risk for savers, being less predictable than other investments, and offering more opportunity for advisor conflicts of interest in the sales process. The court cited these factors in finding that there was justification in the DOL’s 2016 guidance requiring them to be sold under the terms of the more restrictive BIC exemption.