Supreme Court Sides With Retirement Planning Advisor
June 23, 2018 by Allison Bell
The U.S. Supreme Court ruled 6-3 Thursday in favor of a retirement planning advisor who has been a strong advocate for use of annuities, and against the U.S. Securities and Exchange Commission, in connection with marketing compliance.
But the court backed the advisor because of concerns about how the SEC had been appointing its administrative law judges, not because of any thoughts about the merits of the SEC’s case.
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The advisor involved in the case, Raymond J. Lucia Sr., may still have to face another hearing, before another administrative law judge at the SEC.
Lucia had been promoting his own, homegrown version of a popular retirement planning strategy: allocating assets between several different pools of money, with each pool devoted to financial needs with a different time horizon.
Lucia’s Strategy
In books and seminars, Lucia called the different pools of retirement planning money “buckets of money.”
He suggested that consumers consider allocating one bucket for immediate and near-term expenses, a second for intermediate-term expenses, and a third for long-term expenses.
He recommended that the assets in the near-term obligation bucket offer fixed returns, and principal guarantees, and that the assets in the long-term obligation bucket offer the opportunity for asset growth.
He identified annuities, along with other products, as products that could go into the buckets. He said consumers might consider putting immediate annuities in the near-term obligation bucket, fixed annuities and indexed annuities in the bucket for intermediate-term obligations, and variable annuities in the bucket for long-term obligations.
The SEC’s Case
Lucia and related parties said they had verified that the strategy would work by “backtesting” the strategy to see how the strategy would have worked in the past.
The SEC argued, when it sent Lucia a deficiency letter in 2010, that Lucia and related parties had not done enough testing to show that they had validated the strategy.
Lucia has argued, in documents filed with the SEC administrative law system, that the SEC has made no allegations of misappropriation, investor losses, or complaints from seminar attendees.
He also has argued that he stopped talking about backtesting immediately when the SEC sent him the deficiency letter.
An administrative law judge imposed $300,000 in civil penalties and a lifetime bar from the investment industry. Lucia appealed to the SEC itself, arguing that the administrative law judge who ruled on the matter was not constitutionally appointed.
The SEC, and a three-judge panel at the U.S. Court of Appeals for the D.C. Circuit, rejected Lucia’s appeal.
When Lucia asked all of the appellate court judges at the D.C. Circuit to hear the case together, “en banc,” the 10 available judges split 5-5.
The Supreme Court
The Supreme Court majority held that, under the U.S. Constitution, SEC administrative law judges must be appointed by the president, the head of the SEC, or courts of law.
Justice Elena Kagan, writing in an opinion for the majority, did not find that the SEC’s own administrative law judge system has the authority to appoint administrative law judges.
The remedy is for the Lucia to get a new hearing under a properly appointed judge, Kagan writes.
Implications
Financial professionals who want to talk about how they have tested a proposed investment strategy, and what the results of the tests mean, should work closely with legal advisors with a detailed understanding of how the SEC sees assertions about investment strategy testing.
