Van Dyke v. White

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Supreme Court Date: 2019.10.07
10:20:20 -05'00'
Van Dyke v. White, 2019 IL 121452Caption in Supreme RICHARD LEE VAN DYKE, Appellee, v. JESSE WHITE, Secretary
Court: of State, State of Illinois, Appellant.
Docket No. 121452
Filed March 21, 2019
Decision Under Appeal from the Appellate Court for the Fourth District; heard in that
Review court on appeal from the Circuit Court of Sangamon County, the Hon.
John W. Belz, Judge, presiding.
Judgment Appellate court judgment affirmed.
Circuit court judgment reversed.
Counsel on Lisa Madigan, Attorney General, of Springfield (David L. Franklin,
Appeal Solicitor General, and Christopher M.R. Turner, Assistant Attorney
General, of Chicago, of counsel), for appellant.
William P. Hardy and Michael D. Morehead, of Hinshaw &
Culbertson LLP, of Springfield, for appellee.
Kirk W. Dillard, Julie L. Young, and Hugh S. Balsam, of Locke Lord
LLP, of Chicago, for amicus curiae Fidelity & Guaranty Life
Insurance Company.
E. King Poor, Gary R. Clark, and Charles E. Harper, of Quarles &
Brady LLP, of Chicago, for amicus curiae National Association for
Fixed Annuities.
Roland C. Goss and Jason R. Brost, of Carlton Fields Jorden Burt,
P.A., of Washington, D.C., for amicus curiae American Council of
Life Insurers.
Deanna Besbekos-LaPage, of Stoltmann Law Offices, of Barrington,
Royal B. Lea III, of Bingham & Lea, P.C., of San Antonio, Texas,
Braden W. Sparks, of Braden W. Sparks, P.C., of Dallas, Texas, and
Melinda J. Steuer, of Sacramento, California, for amicus curiae Public
Investors Arbitration Bar Association.
Christopher D. Galanos, of Quinn, Johnston, Henderson, Pretorius &
Cerulo, of Springfield, and Mark Jonathan Stewart, of Washington,
D.C., for amicus curiae North American Securities Administrators
Association, Inc.
Justices 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.
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¶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 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
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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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 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. 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
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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 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
3
These were the same contract forms that were at issue in the Department of Insurance proceedings.
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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 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.
¶ 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 officer’s 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
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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
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
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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:
“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.
¶ 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.
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¶ 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 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
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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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.
¶ 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 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.
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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
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, 359 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
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“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 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.
¶ 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
The federal law applicable to indexed annuities has changed since VALIC, United Benefit, and
5
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
nonforfeiture 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
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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 “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
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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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).
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 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
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“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.
¶ 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
“[w]hen acting as an investment adviser, investment adviser representative, or federal
covered investment adviser, by any means or instrumentality, directly or indirectly:
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(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).
¶ 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
“[i]t 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 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
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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. 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
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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 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 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
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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 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
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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 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).
¶ 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.
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¶ 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.
¶ 97 Appellate court judgment affirmed.
¶ 98 Circuit court judgment reversed.
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