The Honorable Daniel D. Crabtree should "hit the pause button" and enjoin enforcement of a revised exemption (Revised PTE 84-24) to the final conflict of interest regulation, Market Synergy Group, Inc. (Market Synergy) argued at the September 21, 2016, preliminary injunction hearing in the United States District Court for the District of Kansas. In the hearing, Market Synergy characterized its request for an injunction as a "rifle shot" and repeatedly emphasized that the relief Market Synergy is seeking is limited in scope and is not "intended to undo the DOL's entire fiduciary rule."

Judge Crabtree, a 2014 Obama appointee, appeared sympathetic to Market Synergy's arguments that independent marketing organizations (IMOs) and independent agents will suffer irreparable harm unless the United States Department of Labor (DOL) is enjoined from enforcing Revised PTE 84-24 with respect to fixed indexed annuities (FIAs). 

Market Synergy noted that they represent 20,000 independent agents through 11 IMOs selling FIAs and that a total of 80,000 independent agents operate in the United States, with 64 percent of those independent agents operating through 200 IMOs. Market Synergy argued that the DOL wholly failed to consider how Revised PTE 84-24 would impact IMOs and independent agents. According to Market Synergy, "the DOL did not understand fixed indexed annuities and to the extent the DOL understood the product, they definitely did not address the impact of PTE 84-24 on fixed indexed annuities in the rulemaking." Only if the court grants an injunction of Revised PTE 84-24 will "IMOs be able to continue to survive and independent agents will be able to continue to sell," Market Synergy noted. 

Market Synergy pointed out that under the proposed regulation, FIAs were not subject to the Best Interest Contract (BIC) Exemption, but the final regulation nevertheless required that persons receiving commissions in connection with FIAs must comply with the more onerous BIC Exemption, instead of PTE 84-24. It is this change from the BIC Exemption to Revised PTE 84-24 that Market Synergy characterized as a "switcheroo" in the hearing. 

Significantly, the BIC Exemption depends on the existence of a "financial institution" to sign the required best interest contract with individual investors. According to Market Synergy, because FIAs are typically distributed through IMOs and IMOs are not considered to be "financial institutions" under the BIC Exemption, IMOs and independent agents cannot comply with the BIC Exemption.

Market Synergy argued that the DOL "did not demonstrate a need for regulating fixed indexed annuities under the BIC Exemption in the proposal and the DOL did not tell us that the BIC Exemption might apply to us." Changes in the regulatory regime must be "foreshadowed" by a regulatory proposal in order to provide adequate notice to stakeholders, according to Market Synergy.

When attorneys for the DOL contended that notice was adequate, Judge Crabtree expressed skepticism. If the only notice an agency gives the public is that it seeks comments on whether the agency has "drawn the line in the right place," Judge Crabtree asked, "isn't that notice of everything and notice of nothing at the same time?" Apparently acknowledging the notice issue, the DOL contended that the court should invoke the doctrine of "harmless error," which forgives an agency's notice failure as long as public comments on a rulemaking were actually considered by the agency and the public was not prejudiced by the notice failure. 

On the authority front, Judge Crabtree pressed Market Synergy on its view that the DOL lacked authority to regulate FIAs, asking, "Couldn't the federal government step in to regulate fixed indexed annuities if the states were doing a bad job regulating fixed indexed annuities?" Market Synergy agreed that the DOL would have authority to regulate FIAs if the DOL had demonstrated that the state regulatory regime was "woefully inadequate." 

Judge Crabtree then restated his understanding, "So, you are not saying that the DOL has wandered into an area that the DOL is prohibited from regulating, instead you are saying that they didn't do the necessary work -- you are saying that although there is a narrow path to get there, they could have done it." Market Synergy agreed. 

Market Synergy contended that the DOL inexplicably failed to examine state regulation of FIAs in the rulemaking before subjecting FIAs to the BIC Exemption, which was arbitrary because of the "complete absence of data in the record of what the states have done." FIAs are subject to a "longstanding, robust, dynamic, comprehensive, soup-to-nuts" regulatory regime at the state level that the DOL inappropriately failed to consider when deciding to move FIAs from PTE 84-24 to the BIC Exemption, according to Market Synergy. 

Judge Crabtree was very focused on the timing of relief. When the DOL suggested that IMOs could submit individual exemption applications to the DOL to serve as financial institutions, Judge Crabtree asked, "And how long is that process going to take?" Similarly, when the DOL suggested that an injunction may be premature because Revised PTE 84-24 is not yet effective, Judge Crabtree rejected that argument out of hand, stating, "If they had to wait until the regulation was effective, then I would have someone like you coming to the podium and saying that it is too late to obtain an injunction." 

In concluding the hearing, Judge Crabtree emphasized his view that the issues and rights implicated in the case are "substantial" and "important," suggesting that he may be inclined to grant the limited injunction requested by Market Synergy. As for timing, Judge Crabtree ordered the parties to file supplemental briefs due in one week, and further ordered the parties to meet and confer over the next two weeks in order to determine if any additional materials or briefing would be required in order for him to rule on both the preliminary injunction motion and the underlying lawsuit at the same time.

Judge Crabtree made clear his understanding that he expected the losing party to file an immediate appeal of his decision whether the preliminary injunction is granted or denied. Accordingly, Judge Crabtree's focus on resolving the entire action is an apparent effort to streamline the litigation in anticipation of appeal. Given that the parties are not required to complete coordination on the underlying lawsuit for two weeks, it appears unlikely that Judge Crabtree will render a decision prior to the next fiduciary regulation battleground -- oral argument on motions for summary judgment filed in the consolidated action in the United States District Court for the Northern District of Texas on November 17, 2016, before Judge Barbara M.G. Lynn.

For more information, please contact:

Theresa S. Gee, tgee@milchev.com, 202-626-5928

Erin M. Sweeney*

Yongo Ding*

Nicholas P. Wamsley*

*Former Miller & Chevalier attorney

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