Market Synergy Group reminded a judge this week that the Department of Labor denied it the opportunity to comment on key changes to its fiduciary rule.
Market Synergy Group filed the brief in response to the 3 1/2-hour hearing Sept. 21 before Judge Daniel Crabtree in Kansas City. Some analysts say the proceeding went very well for the plaintiffs.
MSG is taking a nuanced stand with its request for a preliminary injunction, citing irreparable harm if fixed indexed annuity sales require a Best Interest Contract Exemption.
Under the DOL's preliminary rule, FIAs were placed under the Prohibited Transaction Exemption 84-24. When its final rule was published in April, FIAs surprisingly turned up under the more stringent BICE.
With its brief filed Wednesday, MSG sought to reinforce skepticism expressed by Crabtree on the late change in the treatment of FIAs.
‘Nobody Submitted a Comment’
MSG contends the industry was denied a chance to provide input on the change during the public comment period.
“Because the Department never indicated that it might view [FIAs] as dissimilar from other fixed annuities or discussed [FIAs] in its notice, nobody submitted a comment on that issue,” wrote J. Michael Vaughan of Walters Bender Strohbehn & Vaughan, an attorney for MSG.
The DOL contends 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 actually were considered by the agency and the public was not prejudiced by the notice failure.
The DOL tried to shore up that position with its own brief filed Wednesday.
“The notices as to both PTE 84-24 and the (BIC) Exemption proposed to ‘revoke relief’ under PTE 84-24 for variable annuities and to ‘leave in place relief’ for (FIAs) and declared rate annuities — and made clear that both aspects of the proposal were subject to comment and possible change,” wrote Galen N. Thorp, attorney for the DOL.
The dueling briefs lend credence to the issue of notification being the key in the judge’s mind. Crabtree offered a hint of his take during the hearing.
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 reiterated that its treatment of FIAs followed a rational model after reviewing plenty of evidence. The agency rejected MSG’s suggestion that it relied on “the oblique suggestions of a solitary law professor.”
“Because FIAs’ complexity amplifies the inherent conflicts of interest in the annuity market by making the investor ‘acutely dependent’ on the adviser, DOL had reasonable grounds to distinguish FIAs from declared rate annuities,” Thorp wrote in the brief.
Market Synergy distributes FIAs and other insurance products through 11 independent marketing organization network members. Collectively, Market Synergy and these network members were responsible for approximately $15 billion of FIA sales in 2015.
The BIC is seen as more costly and restrictive, requiring extensive disclosures and a signed contract between advisor and client.
In its brief, the DOL said MSG has failed and/or inaccurately portrayed claims of irreparable harm, a standard required for an injunction.
“Plaintiff’s unsupported assertions at argument that 80,000 agents will be out of work or all IMOs out of business goes far beyond its declarations,” the brief reads. “Plaintiff also offers no response to DOL’s showing that the harms alleged in Plaintiff’s declarations are based on speculation about the choices insurers may make regardless of the outcome of this motion.”
Many insurers balked at serving as the "financial institution" called for by the DOL rule. As a condition of receiving compensation that would otherwise be prohibited, the rule requires financial institutions to accept fiduciary status for those transactions.
MSG pointed this out as part of its argument for irreparable harm. In its response, the DOL said that claim is “based on misunderstandings of the exemption’s requirements and is not proven by some insurers merely exploring other distribution channels.”
In its brief, MSG countered by saying a DOL claim that it considered the rule’s impact on the independent agent channel contradicts the agency’s own analysis. The claim was made during the hearing by DOL counsel.
In an earlier brief, the DOL stated that it “could not quantify the precise cost as to independent agents and IMOs because it did not have sufficient data.”
Instead, the DOL analyzed the impact of the rule on insurance companies because it claimed those in the independent channel “are closely aligned with insurance companies,” MSG said in its brief.
The plaintiff followed by drawing a comparison to a hypothetical rule restricting the sale of cars in which the DOL studies the impact on automobile manufacturers and ignores the impact on car dealers.
Different From Other Lawsuits
Two other lawsuits were filed in District of Columbia District Court and Northern District of Texas District Court. The former hearing was held Aug. 25 and Judge Randolph D. Moss has not rendered a decision.
Judge Barbara M.G. Lynn will hear the latter case Nov. 17 in a Dallas court.
Those two lawsuits ask the court to overturn the entire DOL rule. If Crabtree sides with MSG, it will go down as a partial win for the industry.
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,” explained Erin M. Sweeney, a lawyer with Miller & Chevalier in Washington. “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.
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].