Kansas Judge ‘Sympathetic’ to Market Synergy DOL Case

Market Synergy attorneys presented an effective case Wednesday in its bid for a preliminary injunction stopping the Department of Labor fiduciary rule, according to an analyst who attended the hearing.

Erin M. Sweeney, a lawyer with Miller & Chevalier in Washington, D.C., said Judge Daniel Crabtree “appeared sympathetic” to Market Synergy’s arguments that independent marketing organizations and independent agents will suffer irreparable harm from the rule.

Proving irreparable harm is the key to winning an injunction. Market Synergy differs from two other lawsuits against the DOL by employing a “rifle shot” approach, Sweeney explained.

In other words, Market Synergy is not challenging the entire rule, but just one aspect. Plaintiffs argue that the late addition of fixed indexed annuities to the Best Interest Contract Exemption will devastate its business.

Under the DOL's preliminary rule, FIAs remained under the Prohibited Transaction Exemption 84-24. The BIC is seen as more costly and restrictive, requiring extensive disclosures and a signed contract between advisor and client.

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.

Changes in the regulatory regime must be “foreshadowed” by a regulatory proposal in order to provide adequate notice to stakeholders, according to Market Synergy’s attorneys. The company is represented by the Washington, D.C.-based firm of Carlton Fields Jorden Burt.

Judge Skeptical of DOL Claim

When government attorneys contended that notice was adequate, Crabtree expressed skepticism, Sweeney said.

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,” Crabtree asked, “isn’t that notice of everything and notice of nothing at the same time?”

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, 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.”

“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?” the judge asked. “You are saying that although there is a narrow path to get there, they could have done it?”

Plaintiffs agreed with how Crabtree framed the question, Sweeney said. 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,” the plaintiff’s attorney told the judge.

Crabtree was very focused on the timing of relief, Sweeney said. When the DOL suggested that IMOs could submit individual exemption applications to the DOL to serve as financial institutions, the judge asked “and how long is that process going to take?”

Likewise, when the DOL attorney said that an injunction may be premature because the revised PTE 84-24 is not yet effective, Crabtree rejected that argument out of hand, Sweeney said.

“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,” the judge responded.

Crabtree concluded the 3.5-hour hearing by ordering additional briefs and meetings, Sweeney said, adding to the likelihood that he will not rule on the case until after the third hearing is heard in a Dallas courtroom Nov. 17. That is a consolidated case headed by the U.S. Chamber of Commerce.

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.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

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