Judge Could Issue Partial Block of DOL Rule, Lawyer Says

A Kansas judge could throw out the tougher regulation of fixed indexed annuities, while allowing the rest of the controversial fiduciary rule to stand.

Judge Daniel Crabtree heard three-and-a-half hours of testimony Wednesday in the Market Synergy Group vs. Department of Labor lawsuit. MSG is taking a nuanced stand with its request for a preliminary injunction, citing irreparable harm if FIA sales require a Best Interest Contract Exemption.

Under the DOL’s preliminary rule, FIAs remained under the Prohibited Transaction Exemption 84-24. When its final rule was published in April, FIAs surprisingly turned up under the BICE.

The BIC is seen as more costly and restrictive, requiring extensive disclosures and a signed contract between advisor and client.

Erin M. Sweeney, a lawyer with Miller & Chevalier in Washington, D.C., attended the Kansas City hearing and said Crabtree “appeared sympathetic” to Market Synergy’s arguments.

If Crabtree sides with the plaintiffs, it will go down as a partial win for the industry. Similar lawsuits in Washington, D.C. and Dallas courts seek judicial rejection of the entire rule.

If he grants an injunction, Crabtree’s ruling “would apply only to enjoin the DOL from enforcing Revised PTE 84-24 as it relates to fixed indexed annuities,” Sweeney explained. “The fiduciary rule and the BIC Exemption would proceed on schedule.”

If it survived a likely appeal by the DOL, such a ruling would mean FIAs would be sold under PTE 84-24, as in the tentative rule.

Proving irreparable harm is the key to winning an injunction. Market Synergy distributes FIAs and other insurance products through 11 IMO network members. Collectively, Market Synergy and these network members were responsible for approximately $15 billion of FIA sales in 2015.

Those circumstances have industry supporters hopeful that the MSG claim has a decent chance of success.

The DOL proposed new fiduciary rules in April 2015, which cover advice provided regarding qualified retirement employer-sponsored plans and individual retirement accounts.

DOL officials and public interest groups say the rules, which impose a fiduciary standard of care on financial advisors dealing with retirement accounts, are necessary to protect retirement investors from high commissions.

Critics say the DOL is trying to force the industry to move from a commission- to a fee-based model. The rules are scheduled to begin taking effect April 10, 2017.

The first lawsuit – National Association for Fixed Annuities vs. Department of Labor — was heard Aug. 25 in Washington, D.C. No ruling has been issued in that case yet.

NAFA asked Judge Randolph D. Moss to vacate the fiduciary rule, the BIC Exemption and Revised PTE 84-24, Sweeney noted.

“Judge Moss could decide to grant more limited relief and carve back the relief to Revised PTE 84-24 and/or to the application of Revised PTE 84-24 to fixed income annuities,” she added.

A consolidated case headed by the U.S. Chamber of Commerce as the lead plaintiff is slated to be heard by Judge Barbara M.G. Lynn Nov. 17 in Dallas.

“The parties in front of Judge Lynn have not filed for a preliminary injunction,” Sweeney said. “Instead, they have asked Judge Lynn to invalidate the rule based on summary judgment briefing.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com.

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