Fiduciary Rule Compensation Standard Should Be Void, Groups Say

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By Carmen Castro-Pagan

The “reasonable compensation” standard in the fiduciary rule’s best-interest-contract exemption is so vague that it’s unconstitutional, annuity providers Fidelity & Guaranty Life Insurance Co. and MV Group Inc. told a federal appeals court ( Nat’l Ass’n for Fixed Annuities v. DOL , D.C. Cir., No. 16-05345, amicus brief filed 8/22/17 ).

Fidelity and MV Group made their argument in a friend-of-the-court brief filed Aug. 22 in the U.S. Court of Appeals for the District of Columbia Circuit in support of the National Association for Fixed Annuities—a group that is challenging a 2016 district court decision that upheld the Labor Department’s fiduciary rule.

Under the rule’s best-interest-contract exemption, financial institutions must agree in writing that a recommended transaction won’t provide them with more than “reasonable compensation” under federal benefit law.

The fiduciary rule requires financial advisers to act in their client’s best interest when giving retirement investment advice. Portions of the rule went into effect June 9. The Trump administration has delayed other parts of the rule on several occasions. Earlier this month, the department proposed delaying portions of the rule until July 2019.

District Court Erred

In their brief, Fidelity and MV Group argued the lower court’s ruling erred by not holding the term “reasonable compensation” unconstitutionally vague. The district court failed to account for the severe consequences of noncompliance—specifically what may happen if insurers, in their role as financial institutions, are found to be paying their agents unreasonable compensation, the annuity providers said.

The lower court didn’t assess the toll that would be exacted on insurance companies, including tax penalties, claims of rescission, and even punitive damages, they said. For companies like Fidelity and MV Group, the consequences of incorrectly estimating what constitutes “reasonable compensation” could be disastrous, largely because of how the standard is enforced, the providers said. Breach of the “reasonable compensation” warranty “could render all sales transactions voidable and subject to disgorgement based on principles of rescission” applied on a classwide basis, the companies argued.

Fidelity and MV Group also took issue with the DOL’s guidance on reasonable compensation. There is “no touchstone and no practical guidance” to determine what is reasonable in the industry, the annuity providers said. The DOL’s guidance leaves companies like Fidelity and MV Group with “great uncertainty” on what is reasonable compensation.

Both companies are members of NAFA. Currently, Fidelity has more than 700,000 policyholders and sells insurance products throughout the country. Its network includes more than 250 independent marketing organizations that recruit and train more than 25,000 independent agents, according to court documents. MV Group is a consortium of independent marketing organizations that sell annuities nationwide.

Lindquist & Vennum LLP represented Fidelity and MV Group.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at ccastro-pagan@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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