Kansas Court Again Upholds Fiduciary Rule as Department of Labor Seeks to Delay Implementation

Employee Benefits Alert

On February 17, 2017, Judge Daniel D. Crabtree upheld the new prohibited transaction exemption 84-24 (PTE 84-24) as applied to fixed indexed annuities (FIAs), giving the Department of Labor (DOL) its fourth victory over challenges to the final conflict of interest regulation and related exemptions (Fiduciary Rule). The decision is a narrow one, rejecting Market Synergy Group, Inc.’s (Market Synergy’s) contention that the DOL illegally moved FIAs from PTE 84-24 to the more onerous Best Interest Contract Exemption (BIC Exemption). Despite their losses in court, however, opponents of the Fiduciary Rule may yet be successful in dismantling the Fiduciary Rule with the assistance of the Trump administration (see prior coverage).

The Decision 

Judge Crabtree’s decision came as no surprise. Last November, he denied Market Synergy’s motion for a preliminary injunction of the new PTE 84-24. Deciding the issue on the merits, the judge twice noted that the parties submitted no new evidence in the most recent briefing and therefore, found “no reason to depart from the legal conclusions and reasoning” set forth in his earlier order. Without citation to either Chief Judge Barbara Lynn’s recent decision in the Texas litigation upholding the Fiduciary Rule or District of Columbia District Court Judge Randall Moss’s judgment in favor of the DOL on similar issues, Judge Crabtree sided with the DOL again. Incorporating the legal conclusions from the November opinion, Judge Crabtree held that the DOL did not violate the Administrative Procedure Act (APA) and the Regulatory Flexibility Act (RFA) for four reasons.

First, the DOL satisfied the APA’s requirement to provide fair notice of the proposed rule changes because the removal of FIAs from the final version of PTE 84-24 logically grew out of the proposed rule. As the prior opinion explained, for example, the DOL specifically requested comments on whether it was appropriate for PTE 84-24 to cover “insurance and annuity contracts that are not securities,” which would include FIAs. And, even if notice were insufficient, any APA violation was harmless because other commenters expressed the same concerns that Market Synergy argued it would have submitted had the DOL given the desired notice.

Second, the DOL’s decision to treat FIAs differently than all other fixed annuities in PTE 84-24 was not arbitrary and capricious, but was supported by a reasoned explanation. In particular, the DOL’s regulatory impact analysis substantiated the heightened complexity, risk, and conflicts of interests associated with recommendations of variable annuities and FIAs, compared to those of fixed annuities, which are covered by the final PTE 84-24.

Third, as required by the APA and RFA, the DOL properly considered the economic impact on independent insurance agent distribution channels. As explained in the November opinion, the DOL considered the costs that insurers will incur for complying with the Fiduciary Rule and its exemptions, and left independent marketing organizations (IMOs) several options to continue to operate under the BIC Exemption: (a) IMOs can continue supporting independent insurance agents while insurers serve as the financial institution under the BIC Exemption; (b) insurers and individual agents could affiliate with a broker-dealer; and (c) IMOs may seek individual exemptions to qualify as financial institutions. Judge Crabtree did not address the DOL’s proposed class exemption for IMOs, released on January 19, 2017, allowing IMOs to act as financial institutions and receive compensation in connection with transactions involving FIAs.

Fourth, the DOL did not exceed its statutory authority in issuing the new PTE 84-24. According to the judge, Congress granted the DOL the authority to issue the exemptions found in the final Fiduciary Rule, and courts must defer to the DOL’s determinations.

What to Expect Next

The DOL’s successes in court may not determine the fate of the Fiduciary Rule. The DOL has filed a proposal with the Office of Management and Budget that is expected to delay the Fiduciary Rule’s April 10 implementation date – a delay prompted by the Presidential Memorandum released on February 3, 2017. The Presidential Memorandum ordered the DOL to reassess the Fiduciary Rule’s impact on investors and to revise or even rescind the Fiduciary Rule in light of the results of its reassessment. On the same day, the DOL promptly responded that it “will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.” Thus, the fate of the Fiduciary Rule may not be decided by the courts, but by the Trump administration or Congress, where legislation to delay the Fiduciary Rule’s applicability date for two years was recently introduced.

In the meantime, the appeal filed by the National Association for Fixed Annuities is pending in the District of Columbia Court of Appeals. Market Synergy, along with the U.S. Chamber of Commerce and other industry plaintiffs in the Texas litigation, are considering their next steps.

At the same time, although the DOL moved to stay the litigation in the Minnesota District Court, Judge Susan Nelson denied the DOL’s motion to stay, concluding that a request for a stay based on “[m]ere speculation about the possibility of administrative action – especially when compounded by uncertainty regarding what form that action might take” did not satisfy the presumption against granting a stay.

As these most recent developments illustrate, the future of the Fiduciary Rule is far from certain as we continue to monitor developments.

For more information, please contact: 

Erin M. Sweeneyesweeney@milchev.com, 202-626-6053 

Theresa S. Geetgee@milchev.com, 202-626-5928 

Yongo Ding*

Nicholas P. Wamsley*

*Former Miller & Chevalier attorney

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