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Important Industry Win in Illinois Securities Case

The fixed annuity industry has been following the developments in the Illinois Department of Securities case against insurance producer and registered investment advisor Dick Van Dyke over the past several years. NAFA has closely monitored the case, and, in fact, twice submitted amicus curiae (‘friend of the court’) briefs: first, to the Illinois circuit court, and, subsequently, to the Illinois Court of Appeals. As of this writing, there is very good news to report: On July 29, 2016, a three-judge panel for the Illinois Appellate Court for the Fourth District issued a unanimous decision reversing the lower (circuit) court’s December 2014 decision and held inter alia that fixed indexed annuities are not securities under Illinois law. (A more complete summary of the Court’s decision is found below.)

However, the July 29 order was not a published appellate court decision, which was problematic because unpublished decisions do not have the precedential weight or importance of published decisions. Accordingly, in August, Van Dyke filed a Motion with the Court to have the decision published, and NAFA and Fidelity and Guaranty Life Company each filed a ‘Joinder’ to Van Dyke’s Motion to Publish the July 29 Order. On September 7, 2016, the Court granted the motions and officially published the decision.

The State of Illinois may still decide to appeal this decision to the Illinois Supreme Court, but it must do so no later than October 12, 2016.
Below is a timeline and summary of the proceedings in this matter.

March 13, 2013
Illinois Department of Securities Files Notice of Hearing Against Van Dyke
After conducting an audit and investigation in 2011, the Secretary of State for the State of Illinois, on behalf of the Illinois Securities Department, filed an administrative action against Richard Van Dyke (d/b/a Dick Van Dyke Registered Investment Advisor) alleging that Van Dyke had defrauded 21 clients in recommending the surrender of their existing indexed annuities in order to purchase new indexed annuities. According to the notice of hearing, the Department alleged that Van Dyke had defrauded these clients of over $263,000.00.

March 24, 2014
Administrative Hearing Office Files Report and Recommendation
At the conclusion of six days of hearing, the Administrative Hearing Officer issued his report, finding that between February 2009 and October 2010 Van Dyke had effected 33 indexed annuity purchase transactions (involving 21 clients, between the ages of 61 and 82) that were in violation of Section 12 of the Illinois Securities Act, concluding that his actions were fraudulent, deceptive, or manipulative.

April 9, 2014
Administrative Order Entered
One month later, the Illinois Secretary of State/Illinois Securities Department entered a Final Order against Van Dyke, adopting, in relevant part, the hearing officer’s recommended findings of fact and conclusion of law. In the final Administrative Order, the Department found that Van Dyke had violated numerous sections of the Illinois Securities Law (including Section 12J relating to fraud and misrepresentation) and that the products at issue – fixed indexed annuities, which the Department called “equity” indexed annuities – were, in fact, securities and not insurance products under Illinois law. Pursuant to the Order, Van Dyke’s investment adviser registration was revoked, he was permanently prohibited from selling securities in Illinois, and he was fined $330,000 – $10,000 for each of the 33 replacement annuities – in addition to $23,500 in expert witness fees.

April 16, 2014
Van Dyke Requests Court to Review Administrative Decision
On April 16, Van Dyke filed a Complaint for administrative review in the Sangamon County Circuit Court, requesting the Court to review and overturn the final administrative order entered against him, arguing that the State’s decision was entered into without jurisdiction and was contrary to the law and to the preponderance of the evidence.

October 24, 2014
NAFA joins with IALC to File Amicus Curiae Brief in Illinois Matter

October 31, 2014
Circuit Court Hears Oral Arguments in the Case
NAFA and the Indexed Annuity Leadership Council (IALC) filed a motion for leave to submit an amicus curiae brief in the Circuit Court for the Seventh Judicial Circuit, Sangamon County, Illinois in the Van Dyke case. The NAFA/IALC brief endorsed a lengthier brief filed by Fidelity & Guaranty Life Insurance Company (F&G), and the amici parties shared legal representation at the October 31 hearing on the case. We argued that fixed indexed annuities are properly classified under Illinois law as insurance products and that calling them securities is erroneous and, if adopted, would cause substantial harm to the insurance industry and, more importantly, to Illinois residents who own, or wish to own, fixed indexed annuities as part of their retirement and financial plans.

December 3, 2014
Circuit Court Ruling
On December 3, 2014, Circuit Court Judge John W. Belz issued an order from the bench (a docket order), affirming the final Administrative Order of the Illinois Secretary of State. In his decision,1 Judge Belz found the following:

  • Van Dyke was a registered investment advisor and while acting in that capacity caused significant financial losses to his clients by providing false and misleading investment advice;
  • The “equity indexed annuities” at issue are securities under Illinois Securities law as demonstrated by the character and nature of the annuities, including the manner in which the annuities were promoted and the risk assumed by the clients;
  • The annuities in question are not entitled to exemption for the securities law as a form of insurance; and
  • Van Dyke’s conduct violated Section 12.J of the Illinois Securities Law (engaging in fraudulent, deceptive or manipulative acts).

December 23, 2014
Notice of Appeal Filed
On December 23, Van Dyke appealed the circuit court’s decision to the Illinois Appellate Court for the Fourth District.

April 14, 2015
NAFA Files Second Amicus Brief
During the first six months of 2015, parties in the case filed numerous back-and-forth briefs with the Court in which they set forth their legal arguments. Understanding the importance of a positive outcome for the industry and the Association, NAFA determined it would file an amicus brief with the Illinois Court of Appeals. NAFA convened an internal working group and hired outside Illinois counsel to represent the Association in this matter. NAFA filed its brief on April 14, 2015. F&G, along with the IALC, also filed an amicus brief. As with the earlier briefs, the primary argument again was that the Department’s legal conclusion that fixed indexed annuities are securities was unsupported and erroneous.

June 7, 2016
Motion Hearing before Appellate Court
The Illinois Court of Appeals for the Fourth District held a hearing on June 7. Attorneys for Van Dyke and the Appellee State of Illinois/Illinois Securities Department argued before a three-judge panel for the Court. Much of the questioning from the panel was directed at whether the Securities Department had jurisdiction over Van Dyke in the sale of the FIAs and whether the FIAs in question were not properly considered insurance products rather than securities products.

July 29, 2016
Illinois Appellate Court Reverses Circuit Court’s Decision
On July 29, 2016, a three-judge panel of the Appellate Court of Illinois for the Fourth District issued a unanimous Order reversing the circuit court’s decision and the Illinois Secretary of State’s final order against Van Dyke, holding that the evidence presented failed to establish that Van Dyke had violated the Illinois Securities Law of 1953 (“the Act”) in the sale of the fixed indexed annuities at issue in the case and that he perpetrated a fraud on his clients.
Importantly, the Court found that fixed indexed annuities are not securities under Illinois securities law.
Importantly, the Court found that fixed indexed annuities are not securities under Illinois securities law.

The Court’s opinion echoed arguments set forth in NAFA’s amicus curiae brief (and in the amicus brief submitted by F&G/IALC), finding that under the Act:

[T]he term ‘security’ is defined to include a ‘face amount certificate’… [which includes] any form of annuity contract (other than an annuity contract issued by a life insurance company authorized to transact business in [Illinois]. Here, the indexed annuities in question are annuities issued by insurance companies authorized to transact business in Illinois. Thus, they are not securities under Illinois law. To hold otherwise would go against the plain language of the Act.

The Court also found that because Van Dyke was acting as both an investment adviser and a licensed insurance producer that he was subject to the legal duties under the Illinois securities and insurance regulatory regimes, including the Act’s anti-fraud provisions – in other words, the Illinois Securities Department did have jurisdiction over Van Dyke’s activities as he was registered as an Illinois investment adviser and marketed and held himself out to clients as an RIA.

However, the Court ultimately found that the Secretary failed to prove fraud and that the Department’s findings of fraud were arbitrary, capricious, and against the manifest weight of the evidence. In so finding, the Court reversed in its entirety the Secretary’s April 9, 2014 final administrative order.

August 18, 2016
On August 18, 2016, NAFA filed a Joinder Motion in support of the appellant Van Dyke’s request to have the July 29, 2016 Order issued in this matter and made a published appellate court decision. In so finding, the Court reversed in its entirety the Secretary’s April 9, 2014 final administrative order.Having the decision published will give the Illinois Appellate Court’s holdings greater precedential weight in any future court proceeding. Fidelity and Guaranty Life also filed a Joinder Motion in support of Van Dyke’s Motion to Publish. Under Court rule, the State of Illinois has 30 days from the July 29 date of the Rule 23 Order to file an appeal; however, the 30-day time period is tolled during the pendency of the Motion to Publish.

September 7, 2016
July 29 Order is Filed as a Published Appellate Court Decision
On September 7, the Court granted Van Dyke’s Motion for Request to Publish (joined by NAFA and F&G) and published the July 29 Order.

October 12, 2016
Deadline for State to Petition for Leave to Appeal
The State of Illinois has 35 days from the date of the published decision (September 7) to petition for leave to appeal the decision to the Illinois Supreme Court, making the deadline October 12, 2016. Time will tell if the State will pursue this course of action. NAFA will continue to monitor.

1 The court issued a corrected order on December 26, 2014, correcting the December 3 docket
entry in which the court called the annuities “amenities.”

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