Annuities Industry Fiduciary Challenge Dwelt Blow In Federal Court

A U.S. District Court judge has denied a motion for preliminary injunction filed by annuity firm Market Synergy in a case focused on whether fixed-index annuity providers will be able to use the so-called “84-24 prohibited transaction exemption [PTE],” rather than the “best-interest contract exemption [BIC],” when bringing sales and compliance procedures into alignment with the new Department of Labor (DOL) fiduciary rule.

Several attorneys had suggested to PLANADVISER that the litigation filed by Market Synergy would likely be among the first of a sizable handful of anti-fiduciary rule lawsuits to receive a ruling—given its narrow focus on fixed-index annuity sales conditions and the request for preliminary injunction made by the plaintiff. Turns out they were correct.

In short, plaintiffs in the case feel they will never be able to make the BIC workable given the commission-heavy distribution arrangements traditionally used for fixed-index annuities, and so they want the DOL to be forced to allow annuity providers to work under the 84-24 exemption, as had been initially proposed by DOL but subsequently dialed back in the final version of the rulemaking. While their case can still proceed without receiving an order for preliminary injunction, it is clear that the court believes the plaintiff is not likely to succeed on the merits of their claim. Thus the “extraordinary relief of preliminary injunction” was not granted, and the future of the case remains uncertain. 

Specifically, the plaintiffs had sought a court-ordered injunction on the implementation of the portions of the DOL rulemaking that may directly impact the sale and service of fixed-annuities—especially PTE 84-24 and the BIC. Plaintiffs suggest business revenues could fall by almost 80% under the amended version of PTE 84-24 because the rule change prohibits plaintiff and others affiliated with it from receiving third-party compensation for fixed-index annuity (FIA) sales. The plaintiff also anticipates that the independent market organizations (IMOs) and insurance agents that it works with to distribute FIAs will experience significant revenue losses. And, the plaintiff forecasts that more than 20,000 independent insurance agents could exit the marketplace if the rule change takes effect.

NEXT: On the court’s decisionmaking 

According to the text of the ruling, PTE 84-24 simply provides regulatory relief to insurance agents and others who, according to the DOL’s new regulatory definition, are “fiduciaries” and who receive compensation from third parties in connection with transactions involving an Employee Retirement Income Security Act (ERISA) plan or individual retirement account (IRA).

“Unless an exemption like PTE 84-24 applies, ERISA and the IRS Code prohibit fiduciaries from receiving third-party compensation,” the ruling states. “With the new rule, the DOL revoked PTE 84-24’s exemption of annuity contracts that do not satisfy the DOL’s newly created definition of a ‘Fixed Rate Annuity Contract.’ In doing so, the DOL specifically excluded fixed-index annuities from the PTE 84-24 exemption.”

Plaintiffs suggest these actions stand in violation of the Administrative Procedure Act and Regulatory Flexibility Act, among other issues, but the DOL argues that the rule changes are natural to its function and necessary to protect consumers. The DOL asserts that FIAs are “complex transactions that involve significant conflicts of interest at the point of sale.” Because of these characteristics, the DOL contends that FIA sales require more stringent rules governing the payment of third-party compensation, and thus should not enjoy exemption under PTE 84-24.

To reach the decision announced this week, the court suggests it “needed not decide whether the DOL’s amendment to PTE 84-24 is appropriate given the DOL’s consumer protection concerns. It also need not question whether the DOL’s amendment is improper because it imposes significant challenges to plaintiff’s business model … Instead, because the lawsuit challenges the DOL’s action under the Administrative Procedure Act and (APA) Regulatory Flexibility Act (RFA) of 1980, the court must determine whether plaintiff is likely to succeed on the merits of its claim that the DOL failed to follow the appropriate procedures in exacting the rule changes.”

To make the case, Market Synergy asserts that the DOL violated the APA and RFA in four ways: (1) the DOL failed to provide notice that it would remove FIAs from the scope of the exemption in PTE 84-24; (2) the DOL arbitrarily treated FIAs differently from all other fixed annuities; (3) the DOL failed to consider the detrimental effects of its actions on independent insurance agent distribution channels; and (4) the DOL exceeded its statutory authority by seeking to manipulate the financial product market instead of regulating fiduciary conduct.

The text of the decision shows none of these arguments was particularly persuasive to the court—at least not persuasive enough to warrant preliminary injunction. Additional details on the decision are presented in the text of the decision.