Fiduciary Rule 2, Opponents 0

By Nevin Adams • November 29, 2016 • 0 Comments
A second federal court has weighed in on the legal challenges presented to the Department of Labor’s (DOL) Fiduciary Rule.

In a 63-page ruling, Judge Daniel Crabtree of the U.S. District Court for the District of Kansas ruled that Market Synergy Group, Inc. failed to make the case that it was likely to succeed on the merits, and thus denied the plaintiff’s motion for injunctive relief.

In so ruling, Judge Crabtree said the court wasn’t required to decide whether the DOL’s amendment to PTE 84-24 is appropriate given the DOL’s consumer protection concerns, nor was it required to examine whether the DOL’s amendment was improper “because it imposes significant challenges to plaintiff’s business model. Instead, because this lawsuit challenges the DOL’s action under the Administrative Procedure Act and Regulatory Flexibility Act of 1980, the court must (only) determine whether plaintiff is likely to succeed on the merits of its claim that the DOL failed to follow the appropriate procedures in exacting the rule changes.”

It was less than a month ago that Judge Randolph Moss rejected a challenge to the fiduciary rule by the National Association for Fixed Annuities. Last week, Judge Moss refused to put the rule on hold while NAFA appealed to the U.S. Court of Appeals for the D.C. Circuit, though he did grant their request for an expedited ruling.

The Claims

The current suit challenged how the DOL dealt with fixed indexed annuities in the final regulation. Specifically, the plaintiffs claimed they had been led to expect as part of the 2015 proposed regulation, as well as the ensuing discussions and comment period, that the sale of those products to ERISA plans and IRAs would continue to occur under PTE 84-24, and would not be subject to the conditions of the Best Interest Contract Exemption (BICE) — only to discover upon publication of the final regulation that the DOL was “reversing the regulatory position it expressed with respect to treatment of fixed indexed annuities in the proposed rulemaking, and announcing its new regulatory position for the first time in the final rulemaking.”

Market Synergy Group, a for-profit corporation and licensed insurance agency with its principal place of business in Topeka, had claimed that the DOL’s actions “will substantially harm, and already have harmed, the recruiting efforts of IMOs and others like Market Synergy and its members,” noting that “independent insurance agents and IMOs are likely to exit the annuity marketplace, whether voluntarily or not,” citing “anecdotal evidence that agents are exiting the marketplace and industry analysts are forecasting that tens of thousands more may eventually exit.”

Judge Crabtree started by noting that the decision to grant a preliminary injunction rests within the court’s sound discretion, and that it was “an extraordinary remedy … the exception rather than the rule.”
  

Preliminary Injunction Requirements

He then proceeded to step through the four requirements for a preliminary injunction, and “found that plaintiff has established none of the four.”

First, as for the likelihood of success on the merits, Judge Crabtree said that the plaintiff was not likely to prove that the DOL provided insufficient notice that it would remove FIAs from the scope of PTE 84-24 because the language of the proposed rule was sufficient to put the public on notice of the final rulemaking, the plaintiff’s arguments against the court’s reading of the proposed language failed to demonstrate insufficient notice, other commenters anticipated the final rulemaking, the public reaction did not demonstrate an APA violation (he said that the fact that the plaintiff was surprised was as likely to have been due to “a miscalculation about how the DOL would ‘draw the lines’ when it decided which transactions would remain covered by PTE 84-24 and which would fall under the BICE in the final rules”), and even if the DOL provided insufficient notice, it was “harmless error because other commenters made the same comments that plaintiff says it would have asserted with proper notice.”

Secondly, Judge Crabtree said that the plaintiff was not likely to show that the DOL arbitrarily treated FIAs differently from all other fixed annuities – since the DOL announced that it based its decision to exclude FIAs from PTE 84-24 on “the complexity, risk, and conflicts of interest associated with recommendations of variable annuity contracts, indexed annuity contracts and similar contracts,” and the court’s review of the administrative record “shows that the DOL’s determination is supported by substantial evidence.” In sum, the court concluded that the DOL provided a reasoned explanation for its decision to move FIAs from the scope of PTE 84-24, and thus the DOL’s final rule is not arbitrary and capricious.

Thirdly, Crabtree said that the plaintiff was not likely to prove that the DOL failed to consider the detrimental effects of its actions on independent insurance agent distribution channels. He noted that the DOL explained that it lacked sufficient data and the industry had declined to provide that information even though the DOL requested it, and that despite that, the DOL made an effort to weigh these costs and benefits of the rule changes, ultimately deciding that the benefits to investors outweighed the costs to those in the independent distribution channel. He quoted from the recent decision by the D.C. Circuit that while “[t]his is not an easy balance to strike”… “[t]he only question for the [c]ourt … is whether the [DOL’s] decision was a reasonable one,” and the court cannot “substitute its judgment [for] that of the [DOL] regarding matters of policy and not law.”

Finally, Crabtree determined that the plaintiff was not likely to show that the DOL exceeded its statutory authority by seeking to manipulate the financial product market instead of regulating fiduciary conduct. In support of this finding, Crabtree noted that the DOL described its uncertainty about “whether the disclosure requirements proposed herein are readily applicable to insurance and annuity products that are not securities” and “whether the distribution methods and channels of insurance products that are not securities fit within this exemption’s framework,” and therefore specifically sought “public comment [about] the current disclosure requirements applicable to insurance and annuity contracts that are not securities,” as well as questioning whether the BICE “can be revised with respect to such non-securities insurance and annuity contracts to provide meaningful information to investors as to the costs of such investments and the overall compensation.”

He noted that Market Synergy did not submit public comment about the changes, and while the plaintiff said it did not do so because it relied on the DOL’s “determination to continue to include non-security annuity products, including all forms of fixed annuities, within the scope of amended PTE 84-24,” but that the DOL had nonetheless examined the BICE’s compliance costs specific to insurers, predicted that insurers would incur costs similar to broker-dealers since they would have to perform the same tasks to comply with the rule changes, and thus used the same data that it used to determine broker-dealers’ costs to estimate the costs to insurers to comply with the rule changes.

The bottom line? “Plaintiff has not shouldered its burden to establish the four requirements for a preliminary injunction. The court thus denies plaintiff’s Motion for Preliminary Injunction.”