Opponents of the controversial Department of Labor fiduciary rule will have another go in court today in Kansas City.
Judge Daniel Crabtree of the U.S. District Court for the District of Kansas will hear Market Synergy’s request for a preliminary injunction at 9 a.m.
As in two other lawsuits, Market Synergy claims the DOL has no authority to enact the rule. But the company, based in Topeka, is taking a more nuanced stand than the other plaintiffs.
The Kansas claim focuses solely on the late change moving fixed indexed annuities out of Prohibited Transaction Exemption 84-24 to the new Best Interest Contract Exemption. The BIC is seen as more costly and restrictive.
Market Synergy distributes FIAs and other insurance products through eleven IMO network members. Collectively, Market Synergy and these network members were responsible for approximately $15 billion of FIA sales in 2015.
“The fixed indexed annuity industry and the public at large were blindsided by the Department’s reversal of its original position,” the complaint reads. “It is one of the few components of the regulatory package that became more restrictive, prejudicial, and onerous in the final rulemaking than in the proposal.”
Plaintiffs’ attorneys have a tough task ahead of them, said Thomas Rohback, a lawyer with Axinn, Veltrop & Harkrider. Rohback is not involved in the case, but reviewed the Market Synergy complaint for InsuranceNewsNet.
'These are Tough Things'
Preliminary injunctions “are not handed out lightly,” Rohback said. “You’ve got to show irreparable harm and you’ve got to show a likelihood of success on the merits. These are tough things.”
The lawsuit hinges on the jarring move of FIAs into the BIC after public comment was completed. Market Synergy attorneys are expected to argue that no true economic analysis was done by the DOL. Furthermore, that the new rules represent a dire economic hardship for the entire FIA industry.
“IMOs not affiliated with a Financial Institution or insurance company will be disenfranchised by the new regime, which will prompt a shift in distribution to registered investment advisers, banks, and broker-dealers,” the complaint reads.
For those in Market Synergy’s network of IMOs, fixed indexed annuities represent more than 90 percent of total sales, the complaint explains. Similarly, 100 percent of Market Synergy’s 2015 revenue was attributable in some way to the development, marketing or distribution of fixed indexed annuities.
But Rohback, who has argued and won several high-profile cases, said Market Synergy’s burden of proof will be high since the DOL has been working on a fiduciary rule for many years.
“If this was that crucial, which obviously it was, a part of Market Synergy’s business, they had to be all over this,” he said. “They have a hard time, I think, claiming that this caught them unawares.”
That’s exactly the case attorneys from Carlton Fields Jorden Burt, a Washington, D.C. law firm, will be making before Judge Crabtree. Attorneys are expected to argue that FIAs are nothing like variable annuities, which are regulated as a security.
And there was no hint that FIAs would end up in the BIC, said Kim O’Brien, vice chairman and CEO of Americans for Annuity Protection.
“While there was discussion generally in the form of questions from regulators, legislators and the DOL itself, about where indexed annuities would be treated under the rule, there was never any serious indication from the DOL that they would change from the proposed language,” she said.
AAP worked with many of the IMOs represented by Market Synergy Group and “they were actively and forcefully engaged throughout this rule’s progress,” O’Brien said.
The Market Synergy complaint includes eight affidavits filed in support.
About 80,000 independent insurance agents sell FIAs, most of which are small businesses, wrote Sheryl Moore, president and CEO of Moore Market Intelligence and Wink Inc., publisher of Wink’s Sales & Market Report.
Independent agents not affiliated with broker/dealers combined for 64.5 percent of FIA sales last year. The average commission percentage for those sales was 5.68 percent.
“I can attest that the rule change was totally unexpected by the fixed indexed annuity industry,” Moore wrote in the affidavit. “The rule change directly threatens the viability of the predominant distribution channel for fixed indexed annuities through independent agents who are not affiliated with a broker-dealer.”
Meanwhile, lawsuits are ongoing in Washington, D.C. and Dallas, Texas federal courts. An Aug. 25 hearing was held in front of Judge Randolph D. Moss. The judge pointedly questioned attorneys for the National Association for Fixed Annuities and disagreed with some of their interpretations.
Moss has not ruled on that complaint, but his tough questioning led many to believe he is unlikely to grant an injunction. It can be a mistake to try and read judges this way, Rohback said.
“More than a few times in oral arguments, a judge just beat the heck out of me,” he recalled, “and then you find out a few weeks later, the judge comes down with a decision in your favor.”
Three lawsuits filed by several plaintiffs in U.S. District Court Northern District of Texas were consolidated by the court. Judge Barbara M.G. Lynn will hear that case on Nov. 17.
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@example.com.
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