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Another Win for the DOL

The Labor Department kept its undefeated string going with another win in court, and one that had an element of déjà vu.

The suit, filed by Market Synergy Group in the U.S. District Court for the District of Kansas, challenged how the Labor Department dealt with fixed indexed annuities in the final regulation. Specifically, the plaintiffs claimed they had been led to expect as part of the 2015 proposed regulation, as well as the ensuing discussions and comment period, that the sale of those products to ERISA plans and IRAs would continue to occur under PTE 84-24, and would not be subject to the conditions of the Best Interest Contract Exemption (BICE) – only to discover upon publication of the final regulation that the Labor Department was “reversing the regulatory position it expressed with respect to treatment of fixed indexed annuities in the proposed rulemaking, and announcing its new regulatory position for the first time in the final rulemaking.”

The suit had alleged that the Labor Department’s actions “will substantially harm, and already have harmed, the recruiting efforts of IMOs and others like Market Synergy and its members,” noting that “independent insurance agents and IMOs are likely to exit the annuity marketplace, whether voluntarily or not,” citing “anecdotal evidence that agents are exiting the marketplace and industry analysts are forecasting that tens of thousands more may eventually exit.”

Previous Decision

This same judge – and these same parties – had considered these issues before. In fact, on Nov. 28, 2016, the court issued a Memorandum and Order denying plaintiff’s Motion for Preliminary Injunction, concluding that the plaintiff “had failed to establish the requirements necessary for preliminary relief.” In that case, the court had determined that plaintiff is not likely to prevail on the merits of its claims that the DOL violated the Administrative Procedure Act (APA) and the Regulatory Flexibility Act (RFA) by issuing PTE 84-24. Additionally, the court at that time found that plaintiff “could not establish irreparable harm, that the balance of equities tips in its favor, or that an injunction is in the public interest.” And so, the court denied plaintiff’s Motion for Preliminary Injunction.

In reconsidering the case, Judge Crabtree noted that the plaintiff in the suit asserted that the DOL violated the APA and RFA in four ways:

  • the DOL failed to provide notice that it would remove FIAs from the scope of the exemption in PTE 84-24;

  • the DOL arbitrarily treated FIAs differently from all other fixed annuities;

  • the DOL failed to consider the detrimental effects of its actions on independent insurance agent distribution channels; and

  • the DOL exceeded its statutory authority by seeking to manipulate the financial product market instead of regulating fiduciary conduct.

And then proceeded to note that it had considered each one of those claims in its Nov. 28, 2016 Order  – and reiterated its determination that the plaintiff was not likely to prevail on the merits on any claim.

‘Repeat’ Performance?

And then, since “the parties submitted no additional evidence with their cross motions for summary judgment,” and the court “…has conducted no other hearings on the merits since the September 21, 2016 preliminary injunction hearing,” the court noted that “…the arguments and evidence before the court on plaintiff’s Motion for Preliminary Injunction essentially are the same ones advanced in the parties’ cross motions for summary judgment at issue here.”

So, guess what? The judge (writing in the third person, as they often do), commented, “The court believes it reached the correct decision in its Nov. 28, 2016 Order, and it finds no reason to depart from the legal conclusions and reasoning set forth in that Order.”

Nonetheless, Judge Crabtree took the time to restate “the same reasons discussed in its November 28, 2016 Order.” First, the court determined that, as a matter of law that plaintiff fails to establish a violation of the APA or RFA – first because it found that the administrative record establishes that the DOL satisfied the APA’s requirement of providing fair notice of the proposed rule change in giving, in the court’s assessment that the DOL gave proper notice that it intended to remove FIAs from the final version of PTE 84-24 – “because this result logically grew out of the proposed rule.” Moreover, “…even if notice was insufficient, any violation of the APA was harmless because other commenters expressed the same concerns that plaintiff says it would have submitted if the DOL had given proper notice that it intended to remove FIAs from the final rule.”

Judge Crabtree also noted that the DOL’s decision to treat FIAs differently than all other fixed annuities in PTE 84-24 was not arbitrary and capricious, that “the administrative record shows that the DOL provided a reasoned explanation for its decision to move FIAs out of the scope of PTE 84-24.”

He also determined that the administrative record “…shows that the DOL properly considered the economic impact that the final rule would impose on independent insurance agent distribution channels,” and that the DOL’s rulemaking thus “comports with the requirements of the APA and RFA.” Finally, he concluded that the DOL’s issuance of PTE 84-24 does not exceed the agency’s statutory authority because “…as explained in the November 28, 2016 Order, Congress has granted the DOL the authority to issue the exemptions found in the final rule, and the court must defer to those determinations.”

And, for all these reasons (again), he concluded (again) that “plaintiff fails to establish a violation of the APA or RFA as a matter of law.”

Other Actions

The Labor Department had already prevailed in rulings in the U.S. District Court for the Northern District of Texas and the U.S. District Court for the District of Columbia, in addition to the previous ruling here. The Labor Department had asked for a stay from the Texas court following President Trump’s Executive Memorandum directing the Labor Department to reconsider/reevaluate the impact of the fiduciary regulation, but the judge issued her decision that same day. The Labor Department subsequently filed for another stay in a suit pending federal court in a case involving the fiduciary regulation pending in the U.S. District Court for the District of Minnesota.