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Posts Tagged ‘insurance agents’

Has Fiduciary Rule Suffered a Fatal Blow?

Posted on: April 4th, 2018

By: Theodore C. Peters

The Employee Retirement Income Security Act of 1974 (“ERISA”) defined a “fiduciary” as someone who provides investment advice for a fee.  The following year, the U.S. Department of Labor (“DOL”) promulgated regulations that provided a five-part test for assessing whether someone was a fiduciary as defined by ERISA.  Seeking to implement a uniform fiduciary rule for all retail investment accounts, the DOL issued the Fiduciary Rule on April 6, 2016.  The Fiduciary Rule re-defined who is an “investment advice fiduciary” under ERISA and heightened the fiduciary duty to a “best interest” standard for those clients with ERISA plans and IRAs.  Previously, brokers were bound only to make “suitable” recommendations.  The Fiduciary Rule also created a “Best Interest Contract Exemption” that permitted financial advisors to avoid penalties stemming from prohibited transactions so long as they contractually affirmed their fiduciary status.

Several industry groups brought suit against the DOL, opposing implementation of the Fiduciary Rule.  In 2017, the United States District Court for the Northern District of Texas, in an 81-page ruling, ruled in favor of the DOL.  Chief Judge Barbara M.G. Lynn concluded that the DOL had not exceeded its authority and had not created a private right of action for clients. On March 15, 2018, in Chamber of Commerce v. United States Department of Labor, the Court of Appeals for the Fifth Circuit invalidated the Fiduciary Rule in a 2-1 decision.

In reversing the lower court, the Court addressed a simple but critical issue: whether the DOL exceeded its rulemaking authority by expanding the definition of “investment advice fiduciary.” The Court concluded that the new definition was in conflict with ERISA and the Internal Revenue Code because it was inconsistent with the common meaning of “fiduciary.”  The Court noted that the DOL arbitrarily and improperly sought to broaden the scope of its authority through the concept of investment “advice,” that included products sold by financial salespersons and even insurance agents. Further, the Court criticized the best interest contract exemption, which permitted brokers to receive compensation for investment products they recommend (thereby creating potential conflicts), provided they agree by contract to act in the investor’s “best interests.”

By vacating the Fiduciary Rule under the Administrative Procedures Act, the Fifth Circuit effectively voided the entire rule nationwide.  The DOL could possibly request a hearing en banc before the entire Fifth Circuit, or alternatively, petition for a writ of certiorari to the United State Supreme Court.  Or perhaps, the DOL will take no action at all, in which case the Fiduciary Rule will presumably die on the vine, and the five-step test enunciated in 1975 would be resurrected. Of note, however, mere days before the Fifth Circuit’s decision, the Tenth Circuit ruled in favor of the DOL in the context of a more limited challenge to the Fiduciary Rule highlighting a split between federal circuits – which may in turn spur the DOL to seek Supreme Court review.

Regardless of what action the DOL takes, the Securities Exchange Commission (“SEC”) is likely to seek to implement its own rules.  Commencing in October 2017, the SEC began reviewing the DOL’s Fiduciary Rule with a goal of introducing its own new rule governing investment advice.   SEC Chairman Jay Clayton testified before the Senate Banking Committee that the drafting of an SEC rule that harmonizes with the DOL’s Fiduciary Rule was a priority.  Despite the Fifth Circuit ruling, the SEC’s resolve appears to remain steadfast.  During a Q&A session at the SIFMA compliance conference just days after the ruling, Jay Clayton said “I’m not sitting on this… [and] as far as I’m concerned, we’re moving forward.”

If you have questions or would like more information, please contact Ted Peters at [email protected].

Avoiding the #%&^%!& Swearing Contest

Posted on: March 9th, 2018

By: Seth F. Kirby

In the course of defending professionals in all manner of disputes, a common theme is often repeated.  It usually involves some variation of the former client (now plaintiff) claiming that they “were told” or that it was “their understanding” that the professional would do something different than what actually occurred.  While these claims are obviously self-serving, if the client is willing to swear under oath that oral communications with the professional occurred, we can end up in a swearing contest in which a jury may have to determine the credibility of the competing testimony.

Thankfully, the law does not always allow alleged oral communications to alter contractual relationships or create legal duties.  Indeed, depending upon the circumstances and applicable law, claims of oral representations may not be allowed to impact the duty owed to the client at all.  Nevertheless, the ability to attack the credibility of claims based upon oral representations in as many way as possible is an invaluable asset in the defense of the professional.

As defense counsel, I am always pleased to review a file in which the professional has taken careful steps to outline the scope of their representation and to confirm, in writing, what was discussed or agreed upon in the transaction.  For attorneys this usually takes the form of engagement letters issued at the outset of the representation that are followed up with reports to the client in which the various options are presented and the decision on how to proceed is confirmed.  For insurance agents, it can be policy summaries (assuming that they are accurate) that discuss the policies that were considered, obtained and/or rejected.  That summary is then followed up by a letter which forwards the actual policy issued and a warning to the client to read the policy and ensure that it conforms to the client’s expectations.  The existence of these types of confirming documents often stop a threatened claim in their tracks (i.e. pre-suit).  When claims of oral representations are made which contradict the written confirmations, they are met with great skepticism, if not outright rejection, by judges and juries.

As they say, an ounce of prevention is worth a pound of cure.  Professionals of all stripes should create and implement procedures in which their scope of responsibility is defined from the outset and the client’s buy-in to decisions is confirmed contemporaneously.  Let us know if we can help you with implementing such procedures.

If you have any questions or would like more information, please contact Seth Kirby at [email protected].