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Fiduciary Rule Notches Another Win in Court

The fiduciary rule kept its winning streak intact in the first ruling by a federal appellate court.

This time it was the U.S. Court of Appeals for the 10th Circuit weighing in (Mkt. Synergy Grp., Inc. v. U.S. Dep't of Labor, 10th Cir., No. 17-3038, decision affirming ruling for defendants 3/13/18) on an appeal by Market Synergy Group, a for-profit corporation and licensed insurance agency, of an affirmation of the legitimacy of the fiduciary regulation by the district court.

The ruling, written by Judge Paul J. Kelly Jr., joined by Judges Carlos F. Lucero and Scott M. Matheson Jr., started by outlining the history of the regulation, ultimately noting that the final rule contained “two changes important to this case”: the Best Interest Contract Exemption (BICE), and the removal of fixed indexed annuities (FIAs), as well as variable annuities from the PTE 84-24 exemption and placing them in the newly created BICE. The Labor Department’s stated reason for the change, Judge Kelly explained, “was because FIAs: (1) require the customer to shoulder significant investment risk, (2) “do not offer the same predictability of payments as Fixed Rate Annuity Contracts,” (3) are “often quite complex,” and (4) are “subject to significant conflicts of interest at the point of sale.”

APA Issues

Kelly noted that Market Synergy Group, Inc. had charged that in so doing the Labor Department violated the Administrative Procedure Act (APA) in three ways:

  • failing to provide adequate notice of its intention to exclude transactions involving FIAs from PTE 84-24;

  • arbitrarily treating FIAs differently from other fixed annuities by excluding FIAs from PTE 84-24; and

  • failing to adequately consider the detrimental economic impact of its exclusion of FIAs from PTE 84-24.

Market Synergy Group, Inc. argued that as a consequence, it would lose 80% of its revenue, and sought a preliminary injunction to prevent the Labor Department from implementing the new regulation, though that was denied by the district court. Then, on cross-motions for summary judgment, the district court ruled in favor of the Labor Department, finding (as the appellate court viewed it) that there was adequate notice, no arbitrary treatment of FIAs compared to other fixed annuities, and an adequate economic impact analysis, to which Market Synergy Group, Inc. filed an appeal.

Adequate Considerations?

As to the arguments presented by the plaintiffs, the appellate court dispensed with them, noting that:

  • the NPRM gave sufficient notice and that the final rule was a logical outgrowth of the proposed rule;

  • the Labor Department, after due consideration “ultimately decided to treat FIAs differently than fixed rate annuities because of their risk, complexity, and conflicts of interests,” and did so “with evidentiary support in the record”;

  • since the Labor Department “adequately considered the issue, its decision was not arbitrary or capricious”; and

  • “relying on the record before it, the DOL could reasonably conclude that the benefits to investors outweighed the costs of compliance.”

The fiduciary regulation remains undefeated in litigation thus far, but fiduciary regulation opponents are still waiting – and hoping – that the pending decision from the 5th Circuit Court of Appeals might break that streak. That’s the case brought by an assortment of plaintiffs, including the U.S. Chamber of Commerce, the Financial Services Institute and the Securities Industry and Financial Markets Association (SIFMA).