This post was written by James A. Rolfes.
Last week, the Tenth Circuit Court of Appeals, in a matter of first impression, held that a life insurance company sales agent, who referred to himself as a Financial Services Representative (FSR), did not have to fulfill the fiduciary duties imposed on investment advisers under the Investment Advisers Act. Instead, the incidental nature of the investment advice given and the manner in which the sales agent was compensated, qualified the agent for the broker-dealer exemption to the Act’s definition of an investment advisor.
In Thomas v. Metropolitan Life Ins. Co., — F.3d —, 2001 WL 310371 (10th Cir. Feb. 2, 2011), the Met Life sales agent analyzed the plaintiffs’ financial situation, gave advice on how to allocate their 401(k) funds, conducted an investment/insurance product “suitability analysis” and recommended the plaintiffs’ purchase of a variable universal life insurance policy. In doing so, alleged the plaintiffs, the agent and, vicariously, his life insurance company employer, failed to disclose the strong incentives the agent had to sell the Met Life proprietary products — a purported violation of an investment advisor’s statutory duty to give unbiased advice.
The Tenth Circuit, however, rejected the notion that the Act imposed fiduciary obligations on a life insurance agent’s provision of investment advice in the context of the sale of insurance products. The court instead held that the agent’s actions met the two pronged definition of a broker-dealer whose advice the statute explicitly exempts. In particular, the court found that (i) the agent gave advice “solely incidental to” his sale of the life insurance product; and (ii) his compensation (i.e., a $500 brokerage commission) derived from the sale of the insurance policy, and not from his provision of investment advice. In so holding, the court expressed its belief that the plain language of the statute, the legislative history and SEC interpretations all supported the court’s conclusion that the statute’s reference to advice “solely incidental” to the brokerage services meant advice “solely attendant to,” or “given in connection with,” the brokerage service provided, and not to the amount or import of the advice given. Consequently, even though the agent’s advice purportedly served as the “central component” of the sale transaction, he gave such advice in connection with, and thus incidental to, the sale of the insurance product. He therefore did not owe the plaintiffs a fiduciary duty under the Investment Advisers Act.
Ironically, this decision follows on the heels of the SEC’s release of the January 2011 SEC Staff’s Study on Investment Advisers and Broker-Dealers. Pursuant to the Congressional mandate in Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC Staff evaluated the effectiveness of existing legal and regulatory standards of care for providing personalized investment advice and securities recommendations to retail customers. Contrary to the court’s analysis, the Staff suggests that the amount of advice a broker-dealer provides is relevant in analyzing the applicability of the broker-dealer exemption. But of even greater importance, the Staff strongly recommended consideration of regulatory enacted rules that would do away with the broker-dealer exemption altogether, and instead impose a uniform fiduciary standard on both investment advisers and broker-dealers who provide personalized investment advice about securities to retail customers. In particular, the Staff called for a uniform fiduciary standard that would, among other things, require broker-dealers to disclose conflicts of interest – the issue at the heart of the plaintiffs’ claims in Thomas v. Met Life.
Thus, while the Thomas v. Met Life decision provides comfort to insurance companies and their sales agents, such comfort may be short lived.