Van Dyke v. White

2019 IL 121452
IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
(Docket No. 121452)
RICHARD LEE VAN DYKE, Appellee, v. JESSE WHITE, Secretary of State,
State of Illinois, Appellant.
Opinion filed March 21, 2019.
JUSTICE NEVILLE delivered the judgment of the court, with opinion.
Chief Justice Karmeier and Justices Thomas, Kilbride, Garman, Burke, and
Theis concurred in the judgment and opinion.
OPINION
¶1 The Illinois Secretary of State Securities Department (Department) initiated
administrative proceedings against Richard Lee Van Dyke based on charges that he
had engaged in fraudulent and misleading conduct in violation of the Illinois
Securities Law of 1953 (Act) (815 ILCS 5/1 et seq. (West 2012)). Following a
hearing, Secretary of State Jesse White (Secretary) issued a final administrative
decision finding that Van Dyke had violated several sections of the Act. Based on
that decision, the Secretary revoked Van Dyke’s registration as an investment
adviser, prohibited him from selling securities in Illinois, and ordered him to pay
certain fines and costs. The circuit court of Sangamon County affirmed that
decision, and Van Dyke appealed. The appellate court reversed, holding that the
Department had failed to prove that Van Dyke violated the Act. 2016 IL App (4th)
141109. This court allowed the petition for leave to appeal filed by the Secretary,
the Department, and its director, Tanya Solov. Ill. S. Ct. R. 315 (eff. Mar. 15,
2016). For the following reasons, we affirm the judgment of the appellate court.
¶2 I. BACKGROUND
¶3 At all relevant times, Van Dyke was licensed by the Department of Insurance as
an insurance producer. Insurance producers are licensed and regulated by the
Department of Insurance under the Illinois Insurance Code (215 ILCS 5/1 et seq.
(West 2012)). Van Dyke was also registered with the Illinois Secretary of State
Securities Department as an investment adviser. Investment advisers are regulated
by the Department under the Act (815 ILCS 5/1 et seq. (West 2012)).
¶4 In August 2011, two Department auditors, Herb Clausen and Ray DeWitt,
appeared at Van Dyke’s place of business to conduct an investment adviser audit.
The auditors received instructions from the Department’s senior enforcement
attorney, David Finnigan, to conduct the audit after the agency received a
complaint from the adult children of one of Van Dyke’s deceased clients. The
auditors first reviewed Van Dyke’s investment adviser files and found nothing
wrong. They then reviewed Van Dyke’s insurance files.
¶5 In March 2013, the Department filed a notice of hearing to determine whether
Van Dyke’s registration as an investment adviser should be retroactively revoked
or suspended and whether he should be prohibited from offering or selling
securities in the state of Illinois. As grounds for the proposed action, the
Department alleged that Van Dyke had “defrauded over 21 clients, all of whom are
senior citizens, of $263,822.13.”
¶6 The Department charged that Van Dyke obtained investment clients through
seminars, his website, and advertisements and that he later provided investment
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advice, financial planning, and recommendations to purchase financial products,
including indexed annuities.
¶7 In particular, the Department alleged that, from February 2009 through October
2010, Van Dyke effectuated 31 purchase transactions involving the liquidation of
the clients’ previously owned indexed annuities to purchase one or more new
indexed annuities. The Department further alleged that, as a result of these
transactions, Van Dyke received $160,937.05 in commissions. 1 In all but one
transaction, the original indexed annuity had been sold to the clients by Van Dyke,
and he earned $155,341.51 in commissions. 2 In total, Van Dyke earned
$316,278.56 in commissions from the sale of these indexed annuities while his
clients lost $263,822.13 in surrender charges, penalties, and other fees. The
Department charged that all of the purchase transactions reviewed “involved
persons age 58 or older at the time of the transactions, with the oldest person being
82.”
¶8 The Department also alleged that Van Dyke violated section 130.853 of the
Department’s administrative regulations under the Act, which prohibits an
investment adviser from effectuating any transactions of purchase or sale that are
excessive in size or frequency or unsuitable and constitute a fraudulent, deceptive,
or manipulative act. 14 Ill. Adm. Code 130.853 (1997).
¶9 Finally, the Department alleged that the indexed annuities are securities and
that Van Dyke violated the Act by acting as an investment adviser and engaging in
transactions, a practice, or a course of business that tended to work a fraud or deceit
upon his clients. The Department charged that Van Dyke violated sections 12(A),
(F), (G), (I), and (J) of the Act (815 ILCS 5/12(A), (F), (G), (I), (J) (West 2012)).
¶ 10 Van Dyke moved to dismiss the charges against him, arguing that the
Department had no jurisdiction because section 2.14 of the Act (id. § 2.14)
excluded indexed annuities from the Act’s definition of “security” and because he
did not act as an investment adviser in the alleged transactions. The hearing officer
denied Van Dyke’s motion, finding the indexed annuities were subject to the Act’s
1
Agents earn a commission from the issuing company for each contract sold. The commission
is paid by the company and is not deducted from the premiums paid for the contract.
2
One original contract was a fixed annuity used to purchase the replacement contract, which we
include with the other surrendered contracts.
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provisions and that the notice of hearing alleged sufficient facts to impose sanctions
against Van Dyke as an investment adviser.
¶ 11 Also in March 2013, the Department of Insurance filed a separate
administrative action seeking to discipline Van Dyke based on the same annuity
transactions. Following investigation and amended charges by the Department of
Insurance, Van Dyke settled the insurance action, with no admission of guilt, for
$6000 to resolve allegations he failed to complete 4 annuity replacement forms and
answered questions incorrectly on 22 suitability forms submitted to an insurance
company.
¶ 12 Beginning in April 2013 and continuing through August 2013, a six-day
administrative hearing ensued. Evidence presented at the hearing indicated that
Van Dyke prepared financial plans for certain clients, in which he provided
investment advice and recommendations for the purchase and sale of financial
products including the original indexed annuity contracts (original contracts) and
the replacement indexed annuity contracts (replacement contracts).
¶ 13 The Department’s witnesses included DeWitt, the Department’s auditor;
Edward O’Neal, Ph.D., who was admitted as an expert in financial analysis;
Department of Insurance actuary Susan Lamb; and four of Van Dyke’s clients. The
Department also presented 172 exhibits, including financial planning documents,
duplicates of three different types of original contracts and a duplicate of a
replacement contract, and documents used in the applications and surrenders of the
contracts.
¶ 14 DeWitt, who has an associate’s degree in accounting, testified that he prepared
several spreadsheets to compare the aggregate dollar amounts of the original
contracts to the replacement contracts. One of the spreadsheets, identified as
exhibit 145, included columns comparing (1) the surrendered original contract
totals plus their market value adjustments (MVAs) to the replacement contracts
with bonuses, which calculated a total loss of $99,480.95 for all 21 clients and
(2) the surrendered original contract totals plus MVAs to the replacement contracts
without bonuses, which calculated a total loss of $297,457.06 for all 21 clients. In
explaining exhibit 145, DeWitt testified that he was told by Finnigan to distinguish
between the values of the replacement contracts with bonuses and without bonuses.
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DeWitt also testified that “the Department doesn’t recognize a bonus as a reason for
switching an annuity.”
¶ 15 DeWitt further explained that the MVA is not a credit or offset against the
surrender charges but, rather, is a device that the issuing company uses to pass its
interest-rate risk to the purchaser by causing the annuity’s cash surrender value to
fluctuate based on any changes in the prevailing interest rates. If interest rates have
risen since the purchase, the MVA is negative; the MVA is positive if interest rates
have dropped during that time. DeWitt acknowledged that the MVA applies only if
there is a surrender of the insurance annuity within the surrender charge period.
¶ 16 When questioned by Van Dyke’s attorney regarding exhibit 145 and his
decision to add the MVAs to the values of the original contracts, DeWitt conceded
that a contract does not have an MVA prior to surrender. DeWitt acknowledged
that surrender charges applied to the value of the original contracts and that his
calculations did not include any surrender charges. He admitted that this
circumstance called into question the calculations referred to in exhibit 145 and that
he did not take into consideration all of the applicable factors. Also, although
DeWitt had read the “base contracts,” he stated that he did not use the formula
specified by the issuer to determine the relevant calculation for surrender of the
annuities. DeWitt testified that his calculations represented by exhibit 145 showed
a loss for every individual, but he admitted that those calculations were “faulty.”
Yet when later questioned by Finnigan as to the accuracy of exhibit 145, DeWitt
stated his numbers were correct and reflected the figures at a “snapshot in time.”
¶ 17 DeWitt testified that he had compared the annual fees and guaranteed minimum
rates of return for the original contracts and replacement contracts. The
replacement contracts imposed higher fees than the original contracts for all but
one client. According to DeWitt, Van Dyke had made various misrepresentations
in the replacement contract transactions, including suitability confirmation
worksheets representing that 17 of the original contracts would impose no
surrender penalties and that 6 other original contracts would impose lower
surrender penalties than the actual amounts. 3 DeWitt further testified that he was
looking at the transactions strictly from an economic dollar standpoint and did not
3
These were the same contract forms that were at issue in the Department of Insurance
proceedings.
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take into consideration any of the features, such as bonus recapture, of the
replacement contracts that were not included in the original contracts. He also
acknowledged that he did not conduct any individualized analysis.
¶ 18 Susan Lamb, the Department of Insurance actuary, described the suitability
factors applicable when recommending a replacement contract. She also testified
that a financial adviser “needs to consider the individual’s financial situation. Every
individual’s financial situation is unique, they have different needs, they have
different expectations. They also need to very clearly consider the features in the
current annuity contract versus the features in the potential replaced contract.”
¶ 19 At Finnigan’s request, O’Neal conducted a financial analysis of the
replacement transactions. In preparing his analysis, O’Neal reviewed
approximately 12 pages of documents that he received from Finnigan. These
documents consisted of exhibit 143, a spreadsheet prepared by auditor DeWitt,
showing surrender amounts, surrender charges, and MVA; exhibit 6, a spreadsheet
listing surrendered original contracts, issued by ING, with corresponding
adjustments; three pages of a replacement contract from Aviva explaining the
MVA; and surrender charge schedules for the original contracts and replacement
contracts for four of Van Dyke’s clients. O’Neal testified that he did not check the
accuracy of exhibit 143 but assumed that the numbers were correct. When asked if
he considered the new features that were in the replacement contracts versus the
original contracts, O’Neal testified that he had not looked at the bonus recapture
provision, income roll-up provision, income rider, withdrawal without penalties
provision, or the death benefit rider in the replacement contracts.
¶ 20 O’Neal prepared a 33-page PowerPoint presentation to explain his analysis. He
analyzed the transactions by comparing the predicted cash values of the original
contracts and replacement contracts by projecting their future annual values over
the course of 25 years. For the sake of analysis, he presented a slide titled
“Assumptions,” which included a 3% guaranteed contract interest rate and identical
annual fees for both the original contracts and the replacement contracts. He did not
include the bonus in the replacement contract, as he determined that it was not a
financial advantage for the client. He explained that the actual interest rate would
change the particular quantitative results but would “not make a difference
qualitatively to the findings.” He adjusted the cash flow values for the “time-value
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of money” and life expectancy of the purchaser to determine the present cash value
of each contract. Based on his analysis, O’Neal determined that the present day
cash values of the original contracts, at the time of the replacement transactions,
were always higher than the replacement contracts’ present day cash value.
¶ 21 O’Neal also analyzed four sample individualized transactions and determined
that for two of the four, the original contracts had a higher cash value than the
replacement contracts. For the other two sample transactions, the original contract
had a higher cash value for the first 10 years. He opined that none of the sample
individualized transactions or any of the other challenged transactions were in the
best interests of the clients.
¶ 22 The Department presented four of Van Dyke’s clients, who were subpoenaed
and testified at the hearing. Three of Van Dyke’s clients testified that they could not
remember if Van Dyke discussed the surrender fee and MVA. However, all of his
clients testified that they were pleased with the replacement contracts, and none
had any complaints or concerns with Van Dyke.
¶ 23 Van Dyke presented Bruce Sartain, another Department of Insurance actuary,
who stated that, absent surrender, an MVA does not increase the value of the
annuity nor does it earn interest or have value. He further testified that a positive
MVA increases the net surrender value, and it is one of several factors the
Department of Insurance considers relevant for any annuitant contemplating “when
or if to surrender an annuity.”
¶ 24 Several of Van Dyke’s clients testified on his behalf. Marilyn Klee testified that
Van Dyke had explained everything thoroughly. She and her husband consulted
Van Dyke, who discussed a number of benefits that were not available in the
original contract, including various rider options. George Perry testified that he
understood that an annuity is insurance and not a security and he was aware that he
would incur surrender penalties. He also testified that the replacement contract had
a bonus feature that immediately increased the accumulated value to allow more
growth from day one, something he “definitely” considered beneficial. The
Sawyers testified that at no time did they feel that Van Dyke had taken advantage of
them and they were more than satisfied with the results because the replacement
contracts served their interests better than the original contracts.
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¶ 25 Several other clients gave similar testimony, stating that they were aware of
surrender charges but felt the replacement contract provided more benefits than the
original contract. A few clients could not remember whether Van Dyke went over
the charges but thought it could have happened. They were all happy with
Van Dyke and had no concerns or complaints.
¶ 26 In March 2014, the hearing officer issued his report and recommendation,
including his findings of fact and conclusions of law, as well as his recommended
sanctions. In April 2014, the Secretary issued a final order adopting virtually all of
the hearing officers findings of fact and conclusions of law. In particular, he found
that the documents disclosed that “from February 2009 through October 2010,
Van Dyke effected 33 indexed annuity purchase transactions involving the
liquidation of 30 previously owned indexed annuity contracts by 21 of his clients,
resulting in surrendered annuity contract commissions of $183,161.58, and
$177,417.42 in new annuity contract commissions.” The Secretary also found that
the contract values for the 30 surrendered indexed annuities totaled $2,327,904.95
but that the final amount credited to the 21 clients only totaled $2,246,897.59. He
further found that 11 of the 30 surrendered annuities resulted in eight clients having
taxable income reported.
¶ 27 The Secretary determined that “all of the 33 new Indexed Annuity purchase
transactions reviewed by the Department involved persons from 61 to 82 years of
age.” The Secretary also determined that all but one of the 33 replacement contracts
featured higher fees and the start of new surrender penalty periods. The Secretary
found that all 33 transactions were solicited and made at Van Dyke’s
recommendation or as part of investment advice or financial planning provided by
Van Dyke.
¶ 28 Considering the statutory definitions of the terms “security,” “sale,” and
“offer,” the Secretary found that the subject indexed annuities were securities under
the Act and that, although an indexed annuity is exempt from registration with the
Department, the offer or sale of an indexed annuity is still subject to the other
provisions of the Act. The Secretary further determined that section 130.853 of the
Department’s administrative regulations under the Act (14 Ill. Adm. Code 130.853
(1997)) was applicable and that, as a registered investment adviser, Van Dyke was
held to a fiduciary standard who must act in the best interests of his clients. The
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Secretary also found that the subject indexed annuity transactions were both
unsuitable and not in the best interests of the clients, due to the age of the clients,
the surrender penalties incurred due to the early liquidation of the existing indexed
annuity contracts, the frequency of the commissions paid, and no derivation of
additional tax benefits.
¶ 29 The Secretary determined that Van Dyke engaged in a transaction, practice, or
course of business in connection with the sale of at least 33 indexed annuity
contracts that worked or tended to work a fraud or deceit upon the purchasers by
representing to and misleading his clients who liquidated an existing annuity
contract to purchase a new annuity contract that (1) the surrender penalty charges
incurred would be recovered by a positive market value adjustment; (2) the new
annuity provided favorable bonuses and interest; (3) the new annuity was a better
investment over the current annuity and in the client’s best interests; (4) the new
annuity would not be a replacement annuity; (5) funds to purchase the new annuity
did not come from an existing annuity; and (6) there were not any settlement fees,
surrender charges, or penalties of any kind.
¶ 30 The Secretary concluded that Van Dyke violated sections 12(A), (F), (G), (I),
and (J) of the Act. As a consequence, the Secretary revoked Van Dyke’s investment
adviser registration, permanently prohibited him from offering or selling securities
in Illinois, fined him $330,000 ($10,000 for each replacement annuity), and ordered
him to pay $23,500 as costs of the investigation and the expert witness.
¶ 31 Van Dyke filed a complaint for administrative review. Therein, Van Dyke
argued the Secretary’s decision was entered without jurisdiction and was “contrary
to the preponderance of the evidence.” The circuit court affirmed the Secretary’s
final administrative order, and Van Dyke appealed.
¶ 32 On appeal, Van Dyke argued that the Department and Secretary had no
jurisdiction over the marketing and sale of indexed annuities by insurance
producers and insurance companies authorized to transact business in Illinois.
Van Dyke contended that an indexed annuity is not a security under section 2.14 of
the Act (815 ILCS 5/2.14) (West 2012)) and that it falls under the authority of the
Department of Insurance to regulate annuity policies.
¶ 33 The appellate court agreed, reasoning:
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“Under section 2.1 of the Act (815 ILCS 5/2.1 (West 2012)), the term ‘security’
is defined to include a ‘face-amount certificate.’ Section 2.14 of the Act (815
ILCS 5/2.14 (West 2012)) defines ‘face amount certificate’ to include ‘any
form of annuity contract (other than an annuity contract issued by a life
insurance company authorized to transact business in this State).’ 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.”
2016 IL App (4th) 141109, ¶ 24.
¶ 34 The court noted that its conclusion was further supported by the fact that the
General Assembly declared variable annuities, which do not provide minimum
guarantees and are the type of annuities most susceptible to being classified as
securities, fall under the sole jurisdiction of the Department of Insurance. See 215
ILCS 5/245.24 (West 2012). The court also explained that it would make little
sense for the legislature to place variable annuities out of the reach of the Securities
Department but then subject annuity products such as indexed annuities to
securities regulation. 2016 IL App (4th) 141109, ¶ 25. The court noted that the
Department’s ruling that indexed annuities are securities lacked any reasoned
explanation in its administrative order. Id. ¶ 26.
¶ 35 The court further held that Van Dyke acted both as a registered investment
adviser under the Act and as a licensed insurance producer under the Insurance
Code. Id. ¶ 30. Accordingly, he was subject to the legal duties under each
regulatory regime, including the Act’s antifraud provisions. Id.
¶ 36 In addressing the Secretary’s finding that Van Dyke had violated section 12(J)
of the Act, the court determined that the Secretary’s decision was arbitrary,
capricious, and against the manifest weight of the evidence. The court observed
that the Secretary failed to set forth any applicable rules or written criteria to
evaluate insurance annuities that would indicate its expertise in that area, whereas
the Department of Insurance has enacted detailed regulations addressing suitability
factors that insurance producers and insurance companies must adhere to when
offering or selling annuities, including replacement annuities, to Illinois
consumers.
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¶ 37 The court explained that, in his final order, the Secretary did not identify any
regulation other than section 130.853 of the Illinois Administrative Code (14 Ill.
Adm. Code 130.853 (1997)), which refers to unsuitable transactions effectuated by
a registered agent for a client’s account. The court explained that section 130.853
has nothing to do with an insurance producer selling an annuity to an insurance
client. 2016 IL App (4th) 141109, ¶ 37.
¶ 38 The court concluded that the evidence presented by the Department also failed
to show Van Dyke fraudulently induced 21 clients to purchase replacement
contracts. Id. ¶ 39. The court reasoned that, here, there was no consideration as to
whether the replacement contracts were suitable based on each individual client’s
unique needs and financial status. The court also determined that the Secretary’s
witnesses were not asked to perform the individualized suitability comparison
described by the insurance expert Lamb. Id. ¶ 40. The court further noted that of the
14 Van Dyke clients who testified, none of them had any complaints. Id. ¶ 41.
¶ 39 The court found that the evidence presented failed to establish Van Dyke
violated the Act in the sale of the replacement contracts or that he perpetrated a
fraud on his clients. The court reversed the Secretary’s final order revoking
Van Dyke’s investment adviser registration, prohibiting him from offering or
selling securities in Illinois, fining him $330,000, and requiring him to pay witness
fees of $23,500. Id. ¶ 42.
¶ 40 The Secretary appeals to this court, and Van Dyke seeks cross-relief. We also
allowed the Public Investors Arbitration Bar Association et al. to file briefs as
amici curiae in support of the Secretary’s position. We further allowed the Fidelity
& Guaranty Life Insurance Company et al. to file briefs as amici curiae in support
of Van Dyke’s position. Ill. S. Ct. R. 345 (eff. Sept. 20, 2010). Additional pertinent
facts will be discussed in the context of the issues raised on appeal.
¶ 41 II. ANALYSIS
¶ 42 Before this court, the Secretary contends that the appellate court erred in
holding that the indexed annuities at issue are not “securities” as that term is
defined by the Act. In the alternative, the Secretary contends that, even if the
indexed annuities do not qualify as securities, he had authority to bring the
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administrative action against Van Dyke under section 12(J) of the Act, which does
not require that a security be involved in the fraudulent transaction. The Secretary
also asserts that the appellate court erroneously concluded that the evidence
presented at the administrative hearing was insufficient to establish that Van Dyke
violated section 12 of the Act by engaging in fraudulent, deceptive, or manipulative
conduct in recommending the purchase of the indexed annuities at issue.
¶ 43 Van Dyke responds by contending that the indexed annuities are not
“securities” under the Act and, therefore, the Department lacked authority to bring
the administrative action against him. 4 Van Dyke further contends that the
appellate court properly reversed the Secretary’s administrative decision because
the Department acted arbitrarily in bringing the enforcement action against him and
failed to prove fraud with respect to the subject transactions. In addition, Van Dyke
argues that section 12(J) of the Act does not apply because he was not acting as an
investment adviser when he recommended that his clients purchase the subject
indexed annuities. Van Dyke also seeks cross-relief, asserting that the fines and
penalties imposed against him were arbitrary and excessive and that he is entitled to
recover his attorney fees based on the invalidation of the administrative rule
announced in the Secretary’s decision.
¶ 44 A. The Statutory Definition of Securities
¶ 45 We initially address the Secretary’s argument that the appellate court erred in
holding that the indexed annuities at issue are not securities under the Act. On
administrative review, this court reviews the decision of the Secretary. Board of
Education of the City of Chicago v. Illinois Educational Labor Relations Board,
2015 IL 118043, ¶ 14. The determination of whether a financial instrument falls
within the definition of a “security” under the Act is a matter of statutory
construction, which presents a question of law subject to de novo review. People
ex rel. Madigan v. Wildermuth, 2017 IL 120763, ¶ 11.
4
Van Dyke asserts that the Department had “no jurisdiction” over annuities issued by an
authorized insurance company. The term “jurisdiction” is not strictly applicable to an administrative
agency, but it has been used to refer to the authority of the administrative agency to act. Business &
Professional People for the Public Interest v. Illinois Commerce Comm’n, 136 Ill. 2d 192, 243
(1989) (citing Newkirk v. Bigard, 109 Ill. 2d 28, 36 (1985)). Accordingly, we consider Van Dyke’s
contention as challenging the Department’s authority to bring the enforcement action against him.
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¶ 46 When interpreting a statute, the court’s primary objective is to ascertain and
give effect to the intent of the legislature. Id. ¶ 17. The most reliable indicator of
legislative intent is the language of the statute itself, which must be given its plain
and ordinary meaning. Id. We consider the statute in its entirety, keeping in mind
the subject it addresses and the apparent intent of the legislature in enacting it. Id.
Words and phrases should not be construed in isolation but must be interpreted in
light of other relevant provisions of the statute. Id. No part of a statute should be
rendered meaningless or superfluous. Skaperdas v. Country Casualty Insurance
Co., 2015 IL 117021, ¶ 15. Clear and unambiguous language will be applied as
written. In re Estate of Shelton, 2017 IL 121199, ¶ 36. In addition, specific statutory
provisions will control over general provisions on the same subject. People ex rel.
Madigan v. Burge, 2014 IL 115635, ¶ 31. Courts must construe statutes relating to
the same subject matter with reference to one another so as to give effect to the
provisions of each, if reasonable. Harris v. Thompson, 2012 IL 112525, ¶ 25.
Moreover, courts will presume that the legislature did not intend to enact a statute
that leads to absurdity, inconvenience, or injustice. Lutkauskas v. Ricker, 2015 IL
117090, ¶ 36.
¶ 47 The purpose of the Act is to protect innocent persons who may be induced to
invest in speculative enterprises over which they have little control. Carpenter v.
Exelon Enterprises Co., 399 Ill. App. 3d 330, 334 (2010). To effectuate the Act’s
paternalistic goals, it should be given a liberal construction, and courts construe the
term “security” broadly. Id.; Polikoff v. Levy, 55 Ill. App. 2d 229, 234 (1965).
¶ 48 In determining whether the indexed annuities at issue in this case are securities,
we necessarily begin with an examination of the language of the statute itself.
Section 2.1 of the Act sets forth the definition of a “security” and provides in
relevant part as follows:
“ ‘Security’ means any note, stock, treasury stock, *** investment contract, ***
face-amount certificate, *** or, in general, any interest or instrument
commonly known as a ‘security’ ***.” 815 ILCS 5/2.1 (West 2012).
¶ 49 Section 2.14 defines the term “face amount certificate” to include “any form of
annuity contract (other than an annuity contract issued by a life insurance company
authorized to transact business in this State).” Id. § 2.14. According to the clear and
unambiguous language of this provision, the type of financial instrument
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designated as a “face amount certificate” specifically excludes all annuity contracts
issued by an authorized life insurance company. Id. Considered together, sections
2.1 and 2.14 plainly demonstrate that any form of annuity contract issued by an
authorized insurer is not included within the classification of “face-amount
certificate” set forth in section 2.1’s definition of a “security.” The indexed
annuities at issue in this case were issued by authorized life insurance companies
and are similarly excluded from the statutory definition of a “security.”
¶ 50 The Secretary does not dispute this point but argues that the appellate court
erred in failing to consider whether the indexed annuities are securities because
they constitute “investment contracts.” The Secretary points out that, because the
definition of a “security” in section 2.1 lists a wide array of financial instruments
and interests, separated by the disjunctive “or,” each phrase constitutes an
independent ground for determining that a transaction involves a security. See
Integrated Research Services, Inc. v. Secretary of State, 328 Ill. App. 3d 67, 71
(2002). The Secretary contends that the indexed annuities are “investment
contracts” as that term has been interpreted by federal courts construing the federal
Securities Act of 1933 (the federal statute), which exempts from securities
regulation any annuity contract issued by a company that is subject to state
insurance regulation. 15 U.S.C. §§ 77b(1), 77c(a)(8) (2012). According to the
Secretary, our Act must be construed similarly because it was patterned after the
federal statute and because Illinois courts have adopted the United States Supreme
Court’s construction of the term “investment contract” in applying the Act. See
Daleiden v. Wiggins Oil Co., 118 Ill. 2d 528, 537-40 (1987) (citing Samuel H.
Young, Exemptions From Registration Under the Illinois Securities Law of 1953,
1961 U. Ill. L.F. 205, 206); see also Ronnett v. American Breeding Herds, Inc., 124
Ill. App. 3d 842, 847 (1984).
¶ 51 As interpreted by the Supreme Court, the term “investment contract” “ ‘means
a contract, transaction or scheme whereby a person invests his money in a common
enterprise and is led to expect profits solely from the efforts of the promoter or a
third party.’ ” Daleiden, 118 Ill. 2d at 538 (quoting Securities & Exchange Comm’n
v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946)). In the Secretary’s view, the
indexed annuities at issue in this case are such contracts. In support, the Secretary
relies primarily on Securities & Exchange Comm’n v. Variable Annuity Life
Insurance Co. of America, 359 U.S. 65 (1959) (VALIC), Securities & Exchange
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Comm’n v. United Benefit Life Insurance Co., 387 U.S. 202 (1967) (United
Benefit), and American Equity Investment Life Insurance Co. v. Securities &
Exchange Comm’n, 613 F.3d 166 (D.C. Cir. 2010) (American Equity).
¶ 52 In VALIC, the Supreme Court considered whether variable annuity contracts
constituted securities under the federal statute. VALIC, 359 U.S. at 69. In doing so,
the Court emphasized the various characteristics that distinguish a variable annuity
from a traditional annuity, noting that a traditional annuity provides the purchaser
with specified amounts that are paid at definite times and that the funds underlying
such annuities are invested in conservative instruments. Id. In contrast, purchasers
of variable annuities pay premiums that are invested in common stocks, and the
benefit payments vary with the success of the investment policy. Id. The Court
explained that, without a guarantee of fixed income, all of the investment risk is
borne by the purchaser. Id. at 71. The Court observed that the issuer of a variable
annuity guarantees the purchaser only an interest in a portfolio of common stocks
or other equities, which is “an interest that has a ceiling but no floor.” Id. at 72. The
Court reasoned that, because the variable annuity did not require the issuer to
assume any “true underwriting of risks,” it did not fall within the exemption in
section 3(a)(8) of the federal statute (15 U.S.C. § 77c(a)(8) (1952)) for traditional
annuities issued by insurers. VALIC, 399 U.S. at 73.
¶ 53 In United Benefit, the Court elaborated on the VALIC decision by addressing
whether the variable component of a deferred, or optional, annuity contract (the
“Flexible Fund”) was a security under the federal statute. United Benefit, 387 U.S.
at 207, 209. The Court observed that the Flexible Fund was similar to a variable
annuity in that the purchaser paid premiums into a separate account that was
primarily invested in common stocks, with the goal of producing capital gains and
an interest return. Id. at 204-05. In determining whether the Flexible Fund
constituted a security, the Court considered whether it “ ‘involve[d] considerations
of investment not present in the conventional contract of insurance.’ ” Id. at 210
(quoting Prudential Insurance Co. of America v. Securities & Exchange Comm’n,
326 F.2d 383, 388 (3d Cir. 1964)). The Court noted that the Flexible Fund’s appeal
to the purchaser was “the prospect of ‘growth’ through sound investment
management.” Id. at 211. Although the purchaser’s investment risk was
substantially reduced by a guarantee that a percentage of the premiums would be
returned, that circumstance was insufficient to create an insurance obligation under
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the federal statute. Id. The Court particularly considered the “ ‘character the
instrument is given [by the promoter], the plan of distribution, and the economic
inducements held out to the prospect.’ ” Id. (quoting Securities & Exchange
Comm’n v. C.M. Joiner Leasing Corp., 320 U.S. 344, 352-53 (1943)). Given that
the Flexible Fund was marketed to consumers interested in “growth through
professionally managed investment,” the Court concluded that it did not fall within
the insurance exemption in section 3(a)(8) of the federal statute. Id. at 211-12.
¶ 54 The Secretary also relies on American Equity, in which the United States Court
of Appeals for the District of Columbia Circuit addressed the validity of a
Securities and Exchange Commission (SEC) regulation providing that certain
indexed annuities are securities and do not fall within the insurance exemption in
the federal statute. American Equity, 613 F.3d at 167, 170-71. In determining
whether the SEC’s administrative rule was valid, the court of appeals initially
found that the insurance exemption in section 3(a)(8) was ambiguous, or at least
silent, as to whether the term “annuity contract” encompasses all forms of contracts
that may be described as annuities, including the indexed annuity at issue. Id. at
172-73. The court then considered whether the SEC’s interpretation of the federal
statute to include fixed index annuities as securities was reasonable. Id. at 173. The
court characterized the fixed index annuity as “a hybrid financial product that
combines some of the benefits of fixed annuities with the added earning potential of
a security.” Id. at 168. Relying on the reasoning in VALIC and United Benefit, the
court determined that the SEC’s interpretation was reasonable. Id. at 174-75. The
court noted that fixed index annuities “ ‘appeal to the purchaser not on the usual
insurance basis of stability and security but on the prospect of ‘growth’ through
sound investment management.’ ” Id. at 174 (quoting United Benefit, 387 U.S. at
211). The court explained that a fixed index annuity is similar to a security because
variability in the potential return “ ‘involve[s] considerations of investment not
present in the conventional contract of insurance.’ ” Id. (quoting United Benefit,
387 U.S. at 210). The court observed that the wide range of potential return based
on the performance of a securities index makes fixed index annuities “more like
securities from a risk perspective than other annuity contracts.” Id. at 176. In light
of these considerations, the court concluded that the SEC had reasonably
interpreted the federal statute to include fixed index annuities as instruments that
are subject to federal securities regulation. Id.
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¶ 55 We find, however, that VALIC, United Benefit, and American Equity do not
control here because our statutory regime, though similar to the federal regime, is
fundamentally different in several key respects. 5 First and foremost, section 2.1 of
the Act includes “face-amount certificate” in the definition of a “security” (815
ILCS 5/2.1 (West 2012)), whereas no such reference is included in the definition
contained in the federal securities statute (15 U.S.C. § 77b(1) (2012)). 6 This
difference is significant because our legislature has clearly and deliberately
excluded from the definition of “face amount certificate” any annuity contract
issued by an authorized life insurance company. Thus, while the federal statute
includes an insurance exemption in section 3(a)(8) (15 U.S.C. § 77c(a)(8) (2012)),
our Act declares that annuities issued by insurance companies are entirely
excluded—not merely exempt—from the definition of a “security” (815 ILCS
5/2.14 (West 2012)). Also, because the term “face amount certificate” references a
distinct and recognized type of financial instrument, it must be distinguished from
the term “investment contract,” which is a general descriptive designation that
serves to encompass all types of “[n]ovel, uncommon, or irregular devices.” C.M.
Joiner Leasing Corp., 320 U.S. at 351; see also Peoria Union Stock Yards Co.
Retirement Plan v. Penn Mutual Life Insurance Co., 698 F.2d 320, 324 (7th Cir.
1983) (describing the term “investment contract” as “a catch-all” phrase to include
“interests that have the functional attributes of stock and other formal securities but
are not so denominated”). Reliance on the “catch-all” phrase “investment contract”
is unnecessary and inappropriate here, given that our statutory definition of
5
The federal law applicable to indexed annuities has changed since VALIC, United Benefit, and
American Equity were decided. Pursuant to an amendment to the Dodd-Frank Wall Street Reform
and Consumer Protection Act, a fixed index annuity falls within the insurance exemption in section
3(a)(8) where (1) the value does not vary according to the performance of a separate account; (2) it
satisfies non-forfeiture laws; and (3) it is issued on or after June 16, 2013, in a state, or issued by an
insurance company that is domiciled in a state, that adopts suitability requirements that meet the
Suitability in Annuity Transactions Model Regulation. Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. No. 111-203, § 989 J, 124 Stat. 1376, 1949-50 (2010); see Nat’l
Ass’n of Ins. Commissioners, Suitability in Annuity Transactions Model Regulation (2015), https://
www.naic.org/store/free/MDL-275.pdf [https://perma.cc/V7LZ-F2W4]. Therefore, an indexed
annuity that satisfies the conditions set forth above qualifies for exemption under the federal statute.
This amendment has no bearing here because the indexed annuities at issue were purchased in 2009
and 2010, long before the date specified in the amendment.
6
Although section 80a-2(a)(15) of the federal Investment Company Act of 1940 provides a
definition of the term “face-amount certificate,” that definition does not specifically exclude annuity
contracts issued by an insurance company. 15 U.S.C. § 80a-2(a)(15) (2012).
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“security” includes a reference to a particular type of financial instrument that
encompasses annuities issued by insurance companies. As a consequence, the
specific statutory provision excluding insurance annuities from the definition of
“face amount certificate” in section 2.14 takes precedence over the generally
descriptive term “investment contract” in section 2.1. See Burge, 2014 IL 115635,
¶ 31 (observing that specific statutory provisions will control over general
provisions on the same subject). Although the term “security” is generally given a
broad interpretation, that guideline does not allow us to ignore the clear and
unambiguous language in section 2.14. Reading section 2.1 as the Secretary
suggests effectively would nullify the insurance exclusion in section 2.14 and
render that language superfluous. This we will not do. See Skaperdas, 2015 IL
117021, ¶ 15 (holding that no part of a statute should be rendered meaningless or
superfluous).
¶ 56 Second, section 3(M) of the Act provides that the registration requirements in
the Act do not apply to “[a]ny security issued by and representing an interest in or a
debt of, or guaranteed by, an insurance company organized under the laws of any
state.” 815 ILCS 5/3(M) (West 2012). The Secretary asserts that this provision
means that indexed annuities are securities under section 2.1 but are merely exempt
from the registration requirements. We agree that indexed annuities need not be
registered under the Act. But that does not mean that they fall within the definition
of a “security” under section 2.1. If the legislature only intended to excuse the
registration obligation, it conclusively achieved that end with the exemption in
section 3(M), and the specific exclusion in section 2.14 would be wholly
unnecessary.
¶ 57 In addition, we cannot ignore section 245.24 of the Illinois Insurance Code,
which provides:
“Notwithstanding any other provision of law, the Director [of Insurance] has
sole authority to regulate the issuance and sale of variable contracts, and to
promulgate such reasonable rules and regulations as may be appropriate to
carry out the purposes and provisions of this Article.” (Emphases added.) 215
ILCS 5/245.24 (West 2012).
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There is no corollary provision in the federal statutes because regulation of the
insurance industry generally falls under the control of the states. See VALIC, 359
U.S. at 68-69.
¶ 58 The Secretary argues that section 245.24 has no relevance here because it
applies only to variable annuities and because it merely grants the Director of
Insurance exclusive authority to regulate the companies that issue variable
contracts as well as the registration and form of such contracts and the maintenance
of their separate accounts. According to the Secretary, this provision does not apply
to the sale of variable annuities to individual buyers.
¶ 59 We agree that the terms of section 245.24 apply only to variable annuities, but
we disagree that application of that section should be restricted in the way the
Secretary suggests. Under the plain language of that provision, regulation of “the
issuance and sale of variable contracts” is vested in the Director of Insurance.
(Emphasis added.) 215 ILCS 5/245.24 (West 2012). Section 245.24 contains no
language that excludes sales to individual buyers, and we will not read into that
provision an exception or limitation not expressed by the legislature. See In re
Estate of Shelton, 2017 IL 121199, ¶ 36. The fact that its neighboring provisions
pertain to the issuing companies and requirements of the contracts and separate
accounts does not mandate that we do so.
¶ 60 Contrary to the Secretary’s argument, section 245.24 cannot be dismissed as
wholly irrelevant to the question of whether an indexed annuity is a security under
the Act. In addition to defeating the purpose of the insurance exclusion in section
2.14 of the Act, acceptance of the Secretary’s argument would be inconsistent with
section 245.24 of the Insurance Code. See Harris, 2012 IL 112525, ¶ 25
(recognizing that courts must construe statutes relating to the same subject with
reference to one another so as to give effect to the provisions of each, if reasonable).
¶ 61 By enacting section 245.24, the legislature deliberately assigned regulatory
control over the sale of variable annuities, which place all of the investment risk on
the purchaser, to the Department of Insurance. This critical difference further
distinguishes our overall statutory regime from the federal regime.
¶ 62 Moreover, we observe that the underlying premise of the Secretary’s argument
is that the variable rate of return—not the guaranteed minimum rate—qualifies the
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indexed annuities as securities. Given that the Department of Insurance regulates
both traditional and variable annuities as insurance products, it would be
incongruous for indexed annuities—a hybrid of the two—to be subject to
regulation as a security under the Act. See Lutkauskas, 2015 IL 117090, ¶ 36
(recognizing that courts will presume that the legislature did not intend to enact a
statute that leads to absurdity, inconvenience, or injustice).
¶ 63 Lastly, the Secretary concedes that the Department of Insurance regulates both
variable and indexed annuities. He claims, however, that insurance producers may
be subject to “overlapping” regulation because the Department of Insurance
regulation that governs licensure of variable contract producers requires them to
report any discipline imposed by state securities agencies or judgments under
securities law. See 50 Ill. Adm. Code § 1551.90(d) (2001). But the imposition of
this reporting requirement makes sense, given that an insurance producer may also
be licensed as an investment adviser and, thereby, subject to regulation under the
Act. The fact that investment advisers are required to inform the Department of
Insurance about prior securities violations does not mean that an indexed annuity
falls within the definition of a “security” under section 2.1 of the Act.
¶ 64 Considered in its entirety, our statutory regime demonstrates the legislature’s
intent that annuity contracts issued by authorized insurers are insurance products
and are not securities because they fall within the exclusion from face amount
certificates and are not investment contracts under section 2.1. As a consequence,
Van Dyke’s recommendation that his clients purchase the indexed annuities at
issue in this case cannot form the basis of a violation of sections 12(A), (F), (G), or
(I) of the Act.
¶ 65 B. The Secretary’s Decision Under Section 12(J)
¶ 66 The Secretary contends that, even if the indexed annuities do not qualify as
securities, he had authority to bring the administrative action against Van Dyke
under section 12(J) of the Act. The Secretary also asserts that the appellate court
erroneously concluded that the evidence presented at the administrative hearing
was insufficient to establish that Van Dyke violated section 12 of the Act by
engaging in fraudulent, deceptive, or manipulative conduct in recommending the
purchase of the indexed annuities at issue.
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¶ 67 Van Dyke responds that the appellate court properly reversed the Secretary’s
administrative decision because the Department acted arbitrarily in bringing the
enforcement action against him and failed to prove fraud with respect to the subject
transactions. Van Dyke argues that section 12(J) of the Act does not apply because
he was not acting as an investment adviser when he recommended that his clients
purchase the subject indexed annuities.
¶ 68 An administrative agency’s findings and conclusions on questions of fact are
deemed prima facie true and correct. In examining an administrative agency’s
factual findings, a reviewing court does not weigh the evidence or substitute its
judgment for that of the agency. Instead, a reviewing court is limited to ascertaining
whether such findings of fact are against the manifest weight of the evidence. An
administrative agency’s factual determinations are against the manifest weight of
the evidence if the opposite conclusion is clearly evident. In contrast, an agency’s
decision on a question of law is not binding on a reviewing court. An agency’s
interpretation of statutory language presents a pure question of law, which this
court reviews de novo. Cinkus v. Village of Stickney Municipal Officers Electoral
Board, 228 Ill. 2d 200, 210 (2008). Also, whether an investment adviser owes a
fiduciary duty to his clients under the Act presents a question of law that is
reviewed de novo. See Gouge v. Central Illinois Public Service Co., 144 Ill. 2d 535,
542 (1991) (recognizing that ascertaining the existence of a duty is question of
law).
¶ 69 Section 12(J) of the Act provides that it is a violation for a person:
“When acting as an investment adviser, investment adviser representative, or
federal covered investment adviser, by any means or instrumentality, directly or
indirectly:
(1) To employ any device, scheme or artifice to defraud any client or
prospective client;
(2) To engage in any transaction, practice, or course of business which
operates as a fraud or deceit upon any client or prospective client; or
(3) To engage in any act, practice, or course of business which is
fraudulent deceptive or manipulative.” 815 ILCS 5/12(J) (West 2012).
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¶ 70 Section 12(J) contains no reference to or requirement for a sale of a security in
connection with the proscribed conduct. The plain language broadly prohibits any
scheme to defraud by any means or instrumentality, directly or indirectly. As
opposed to the statutory definitions discussed above in section II.A. of this opinion,
the substantive terms of section 12(J) are virtually identical to the antifraud
provisions in section 206 of the federal Investment Advisers Act of 1940 (Advisers
Act) (15 U.S.C. § 80b-6 (2012)). Given that similarity, it is appropriate to consider
the language of section 206 and federal cases interpreting it. Section 206 provides
in relevant part that:
“It shall be unlawful for any investment adviser ***
(1) to employ any device, scheme, or artifice to defraud any client or
prospective client;
(2) to engage in any transaction, practice, or course of business which
operates as a fraud or deceit upon any client or prospective client;
***
(4) to engage in any act, practice, or course of business which is
fraudulent, deceptive, or manipulative.” Id.
Federal courts have clarified that section 206 does not require that the challenged
transaction involve a security to prove a violation. See Securities & Exchange
Comm’n v. K.W. Brown & Co., 555 F. Supp. 2d 1275, 1308 (S.D. Fla. 2007);
Abrahamson v. Fleschner, 568 F.2d 862, 877 (2d Cir. 1977).
¶ 71 The plain language of section 12(J) requires proof that Van Dyke was “acting
as an investment adviser,” an inquiry that can only be considered in the context of
the definition of an “investment adviser” set forth in section 2.11 of the Act. See
815 ILCS 5/2.11 (West 2012). Section 2.11 provides in pertinent part as follows:
“ ‘Investment adviser’ means any person who, for compensation, engages ***
in the business of advising others, either directly or through publications or
writings, as to the value of securities or as to the advisability of investing in,
purchasing, or selling securities or who, *** for direct or indirect compensation
and as part of a regular advisory business, issues or promulgates analyses or
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reports concerning securities or any financial planner or other person who, as an
integral component of other financially related services, provides the foregoing
investment advisory services to others for compensation and as part of a
business or who holds himself or herself out as providing the foregoing
investment advisory services to others for compensation ***.” (Emphasis
added.) Id.
¶ 72 Under the clear and unambiguous language of section 2.11, the definition of an
“investment adviser” expressly includes any person who holds himself or herself
out as providing investment advisory services regarding securities. Thus, even if a
particular transaction does not involve a security, a person can fall within the
purview of section 12(J) by holding himself or herself out as providing such
investment advice. Id.
¶ 73 Here, the Secretary’s determination that Van Dyke acted as an investment
adviser in the replacement transactions is not against the manifest weight of the
evidence. The record demonstrates that, as part of his business, Van Dyke provided
investment advice as a component of his financial, retirement, and estate planning
services. Those services involved recommendations regarding the purchase of
various financial products, including securities and indexed annuities, and
Van Dyke admitted that he acted as an investment adviser for his clients with
regard to the original contracts. In addition, the documents in the record indicate
that Van Dyke identified himself as an investment adviser when communicating
with his clients about the replacement contracts and in corresponding on their
behalf with the companies issuing the replacement contracts. Also, there is no
indication in the record that he severed his relationship as an investment adviser
with any of those clients or otherwise informed them that he was only acting as an
insurance producer with regard to the replacement contracts. Therefore, Van Dyke
acted both as a registered investment adviser under the Act and as a licensed
insurance producer under the Insurance Code and was subject to the legal duties
under each regulatory regime, including the Act’s antifraud provisions.
Accordingly, Van Dyke was acting as an investment adviser, and his conduct
brings him within the purview of section 12(J).
¶ 74 In the Advisers Act, Congress recognized that investment advisers have a
fiduciary relationship with their clients. See Securities & Exchange Comm’n v.
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Capital Gains Research Bureau, Inc., 375 U.S. 180, 191, 194 (1963).
Consequently, investment advisers owe their clients a fiduciary duty that is a more
exacting and higher standard than the suitability standard relied upon by the
appellate court. Because the fiduciary duty standard is also a creature of common
law, it is not determinative or significant that the Department did not have
regulations or rules that specifically defined the nature of that duty or the particular
obligations owed by an investment adviser. See Danigeles v. Illinois Department of
Financial & Professional Regulation, 2015 IL App (1st) 142622, ¶ 78 (recognizing
that administrative agencies may establish standards of conduct for applying
statutes through individualized administrative adjudications).
¶ 75 A fiduciary relationship may arise as a matter of fact where one party reposes
trust and confidence in another, who thereby gains a resulting influence and
superiority over the subservient party. Khan v. Deutsche Bank AG, 2012 IL
112219, ¶ 58, (citing Ray v. Winter, 67 Ill. 2d 296, 304, (1977)). A fiduciary
relationship may also arise as a matter of law, such as between a securities broker
and his customer. Khan v. BDO Seidman, LLP, 408 Ill. App. 3d 564, 592 (2011).
¶ 76 The investment adviser’s fiduciary duty includes the obligation to act in his
client’s best interests and to disclose all material facts concerning a recommended
investment. See Connick v. Suzuki Motor Co., 174 Ill. 2d 482, 500 (1997).
Coextensive with this duty is section 12(J)’s broad proscription against any act,
practice, or course of conduct of business that is deceptive or manipulative, which
reflects the legislature’s recognition of the trust and confidence underlying the
investment adviser’s relationship with his client. 815 ILCS 5/12(J) (West 2012); 14
Ill. Adm. Code 130.852 (2012) (requiring investment advisers charge fair
compensation and provide adequate disclosures); Ill. Adm. Code 130.853 (1997)
(requiring investment advisers to not engage in transactions unsuitable for their
clients). Here, Van Dyke’s clients testified that they had put their trust in him and
relied on him for his investment advice. Accordingly, we find that Van Dyke owed
a fiduciary duty under section 12(J) to act in the best interests of his clients when
recommending the replacement contracts.
¶ 77 Next, we must determine whether the Secretary’s finding that Van Dyke
breached his fiduciary duty and committed fraud upon his clients is against the
manifest weight of the evidence. The Secretary argues his findings, that Van Dyke
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violated section 12(J) by recommending replacement contracts that were not in his
clients’ best interests and engaged in fraudulent and manipulative conduct, are
supported by the record. Van Dyke responds that the appellate court’s conclusion
that those findings were arbitrary, capricious, and against the manifest weight of
the evidence is supported by the record. Van Dyke also contends that there is no
competent evidence in the record that he defrauded any of his clients.
¶ 78 In examining an administrative agency’s factual findings, a reviewing court is
limited to ascertaining whether such findings of fact are against the manifest weight
of the evidence. Cinkus, 228 Ill. 2d at 210.
¶ 79 The Secretary argues that the record shows that, as a result of the replacement
transactions, each client incurred surrender charges and losses totaling almost
$300,000, while Van Dyke was paid over $175,000 in commissions. In addition,
DeWitt testified that the replacement contracts imposed higher annual fees than the
original contracts, which would result in greater long-term costs. He also testified
that the majority of the replacement contracts provided lower guaranteed rates and
values than the original contracts.
¶ 80 In support of his finding that the transactions were not in the best interest of
Van Dyke’s clients, the Secretary primarily relies on DeWitt’s exhibit 145. That
document compared the aggregate dollar amounts of the original contracts to the
replacement contracts, including columns for both the replacement contracts with
bonuses for a total loss of $99,480.95, and the replacement contracts without
bonuses, for a total loss of $297,457.06. We note, however, that when asked why he
made the distinction between the bonuses or lack thereof, DeWitt stated he was told
how to prepare the summaries by Finnigan, the Department’s attorney. Also, in
explaining how he calculated the losses, DeWitt admitted that he did not take the
surrender charges into account. When Van Dyke’s counsel observed that exhibit
145 was inaccurate by including the MVA but not the surrender charges, DeWitt
admitted that his loss calculations did not take into consideration all of the
applicable factors.
¶ 81 We observe that the final order listed the aggregate numbers from DeWitt’s
exhibit 147, which showed the total contract value before surrender of the original
contracts to be $2,327,904.95 versus the amounts credited to the replacement
contracts as $2,246,897.59, for a loss of $81,007.36. However, the bonus total on
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the replacement contracts was $199,565.17, which indicates an aggregate gain of
$118,557.81 credited to Van Dyke’s clients. We note that the Aviva replacement
contracts specifically state that “the term Premium as used in this endorsement
shall include the Premium Bonus.” In explaining that his exhibits contained three
different loss calculations of $81,007.36, $99,480.95, and $297,457.06, DeWitt
stated that “the numbers varied because it depends on what assumptions you want
to make and what factors you want to include in calculating a loss.”
¶ 82 We find the variance in loss calculations to be nothing less than arbitrary and
capricious. Here, the Department relied on an admittedly inaccurate analysis in its
exhibit 145. The surrendered contracts were never considered with both the
positive MVA and the negative surrender charges as required by the issuing
company’s stated formula.
¶ 83 The Secretary next contends that O’Neal’s PowerPoint presentation showed
that the replacement contracts were not in the best interests of Van Dyke’s clients.
However, we observe that O’Neal made projections for the cash surrender values of
the original contracts and the replacement contracts for four of Van Dyke’s clients.
In every case, the projections for those clients either equaled or fell far short of the
actual replacement contract statements from 2012 and 2013. We further observe
that, in preparing his analysis, O’Neal made several assumptions that were not
supported by the actual evidence and relied on exhibits that he had never verified
for accuracy. Moreover, O’Neal acknowledged that he reviewed approximately 12
pages of documents given to him by Finnigan, and he never read an original or
replacement contract in full. As a consequence, he did not consider the value of
benefits available in the replacement contracts that were not included in the original
contracts. Based on these circumstances, we find that O’Neal’s determination that
the replacement contract transactions were not in the clients’ best interests is
arbitrary and capricious.
¶ 84 The Secretary next contends that the record supports his findings that
Van Dyke violated section 12(J) through material misrepresentations and
omissions. The Secretary maintains that Van Dyke engaged in fraudulent and
manipulative conduct by advising his clients that they would recover any surrender
penalties or other costs resulting from these transactions. The Secretary argues that
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Van Dyke signed suitability confirmation forms for his clients misrepresenting that
there would be no surrender penalties of any kind and the rate of the charges.
¶ 85 Yet the forms that the Secretary is referring to are the same forms at issue in the
separate action brought against Van Dyke by the Department of Insurance.
Van Dyke explained that, in the contracts where the MVA exceeded the surrender
charges, he did not list a surrender charge because the MVA offset it. The
Department of Insurance reached a settlement with Van Dyke under which he paid
$6000 without admitting guilt. In addition, Lamb testified that “every individual’s
financial situation is unique, they have different needs, they have different
expectations.” Accordingly, insurance producers must “very clearly consider the
features in the current annuity contract versus the features in the potential replaced
contract.” However, the Department admittedly never conducted any such
individualized analysis, nor did it consider the individual needs, financial status, or
wishes of Van Dyke’s insurance clients. See 14 Ill. Adm. Code 130.853 (1997); 50
Ill. Adm. Code 3120.10 (2011).
¶ 86 Consequently, we find that the evidence presented failed to establish that
Van Dyke violated the Act or perpetrated a fraud on his clients with regard to the
replacement transactions at issue in this case. As such, the Secretary’s final order
revoking Van Dyke’s investment adviser registration, prohibiting him from
offering or selling securities in Illinois, fining him $330,000, and requiring him to
pay witness fees of $23,500 was properly reversed by the appellate court.
¶ 87 C. Van Dyke’s Claim for Attorney Fees
¶ 88 In seeking cross-relief, Van Dyke contends that he is entitled to recover his
attorney fees based upon the invalidation of the Secretary’s rule that indexed
annuities are securities under the Act. The Secretary opposes Van Dyke’s claim,
arguing that it was merely interpreting the language in the statute as it applied in
this enforcement action, rather than engaging in improper rulemaking.
¶ 89 The Secretary also asserts that Van Dyke has forfeited his claim for attorney
fees by failing to assert that claim in his action for administrative review in the
circuit court. We do not agree. This court has held that a request for attorney fees
under section 10-55(c) of the Illinois Administrative Procedure Act (Procedure
- 27 -
Act) (5 ILCS 100/10-55(c) (West 2012)) is preserved if it is made while the court
invalidating the rule maintains jurisdiction. Illinois Department of Financial &
Professional Regulation v. Rodriquez, 2012 IL 113706, ¶ 15. Here, the circuit court
affirmed the Secretary’s decision. Because Van Dyke requested attorney fees in the
appellate court—the court that he claims invalidated a Department rule—we will
address the issue.
¶ 90 Section 10-55(c) of the Procedure Act provides as follows:
“In any case in which a party has any administrative rule invalidated by a court
for any reason, including but not limited to the agency’s exceeding its statutory
authority or the agency’s failure to follow statutory procedures in the adoption
of the rule, the court shall award the party bringing the action the reasonable
expenses of the litigation, including reasonable attorney’s fees.” 5 ILCS
100/10-55(c) (West 2012).
Under the Procedure Act, an administrative “rule” is defined as an
“agency statement of general applicability that implements, applies, interprets,
or prescribes law or policy, but does not include (i) statements concerning only
the internal management of an agency and not affecting private rights or
procedures available to persons or entities outside the agency, (ii) informal
advisory rulings issued under Section 5-150, (iii) intra-agency memoranda,
(iv) the prescription of standardized forms, [or] (v) documents prepared or filed
or actions taken by the Legislative Reference Bureau under Section 5.04 of the
Legislative Reference Bureau Act.” Id. § 1-70.
¶ 91 The purpose of section 10-55(c) “is to discourage enforcement of invalid rules
and give those subject to regulation an incentive to oppose doubtful rules where
compliance would otherwise be less costly than litigation.” Citizens Organizing
Project v. Department of Natural Resources, 189 Ill. 2d 593, 598-99 (2000).
Because it provides for an award of attorney fees, section 10-55(c) is to be strictly
construed. Rodriquez, 2012 IL 113706, ¶ 13 (citing Carson Pirie Scott & Co. v.
Department of Employment Security, 131 Ill. 2d 23, 49 (1989)). An agency’s
erroneous interpretation of statutory language as it applies in a particular case does
not constitute improper rulemaking. Alternate Fuels, Inc. v. Director of the Illinois
Environmental Protection Agency, 215 Ill. 2d 219, 247-48 (2004).
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¶ 92 In support of his claim for attorney fees under section 10-55(c), Van Dyke
points out that he argued in the administrative proceeding and on judicial review
that the Department had exceeded its statutory authority because indexed annuities
are not securities under the Act. While we agree that indexed annuities are not
securities, we do not agree that the Department lacked authority to bring the
enforcement action against Van Dyke. As explained above, the Department was
authorized to bring charges against Van Dyke in his capacity as an investment
adviser under section 12(J). The fact that the Secretary’s decision based on those
charges has been held to be unfounded does not affect the Department’s authority
to proceed under the Act. Consequently, an award of attorney fees cannot be
justified on this ground.
¶ 93 Van Dyke also asserts that the Department created ad hoc rules and
unpublished procedures by employing the Department’s rule that it does not
“recognize a bonus as a reason for switching an annuity” and O’Neal’s “age factor”
as well as his “time value of money” principle. In response, the Secretary argues
that its litigation of an individual enforcement action based on its analysis of the
evidence, even if erroneous, does not constitute improper rulemaking under the
Procedure Act. We agree with the Secretary.
¶ 94 The Secretary’s interpretation of the term “security” to include indexed
annuities as a form of investment contract does not constitute improper rulemaking.
See id. In addition, DeWitt’s description of a bonus as not being a recognized
reason for swapping one annuity for another, O’Neal’s “age factor,” and his “time
value of money” principle merely reflected the Department’s positions with regard
to the evidence presented in this case. Those positions regarding the litigation
evidence similarly cannot be characterized as improper rulemaking. See id.; see
also Sparks & Wiewel Construction Co. v. Martin, 250 Ill. App. 3d 955, 967-68
(1993). Accordingly, Van Dyke is not entitled to recover his attorney fees under
section 10-55(c) of the Procedure Act.
¶ 95 III. CONCLUSION
¶ 96 For the foregoing reasons, the judgment of the appellate court is affirmed, and
the judgment of the circuit court of Sangamon County is reversed.
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¶ 97 Appellate court judgment affirmed.
¶ 98 Circuit court judgment reversed.
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