We are issuing the latest update to our series of Alerts regarding the final rules issued by the Department of Labor (“DOL”) with respect to fiduciaries under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the DOL’s Best Interest Contract Exemption (“BIC Exemption”) from ERISA’s prohibited transactions provisions.

On February 17, 2017, the Honorable Daniel D. Crabtree, U.S.D.J. rejected a challenge to the DOL’s amendments to Prohibited Transactions Exemption 84-24 (“PTE 84-24”) insofar as those amendments apply to fixed indexed annuities. These amendments were issued on April 8, 2016 in conjunction with the DOL’s issuance of the Fiduciary Rule and BIC Exemption. PTE 84-24 had originally provided a broad exemption for the receipt of sales commissions by insurance agents and brokers “in connection with the purchase, with plan assets, of an insurance or annuity contract.” As amended, PTE 84-24 now applies only to “fixed rate annuity contracts,” which encompasses annuities whose “benefits do not vary, in part on in whole, based on the investment experience of a separate account or accounts maintained by the insurer or the investment experience of an index or investment model.” Amended PTE 84-24 thus specifically excludes from its coverage variable annuities, “indexed annuities and other similar annuities.” Variable annuities and fixed indexed annuities are now subject to the BIC Exemption. In Market Synergy Group, Inc. v. United States Department of Labor, et al., 16-cv-4083-DDC-KGS, 2017 U.S. Dist. LEXIS  23155 (D. Kan. Feb. 17, 2017), Judge Crabtree granted summary judgment in favor of the DOL on the challenge to the amendments to PTE 84-24 brought by Market Synergy Group, Inc. (“Market Synergy”) and denied the plaintiff’s motion for summary judgment. The district court’s decision can be found at the following link, click here.

In its Complaint, Market Synergy alleged that the DOL’s removal of fixed indexed annuities from the scope of the PTE 84-24 exemption violated the Administrative Procedures Act (“APA”), 5 U.S.C. § 706(2)(A) (2017) and Regulatory Flexibility Act (“RFA”), 5 U.S.C. § 601 (2017). On November 28, 2016, Judge Crabtree denied Market Synergy’s motion to preliminarily enjoin the DOL from taking any action to adopt or enforce PTE 84-24 as it applies to sales of fixed indexed annuities. Both parties thereafter moved for summary judgment. In denying summary judgment to Market Synergy and granting summary judgment to the DOL, Judge Crabtree concluded in his February 17, 2017 decision that Market Synergy had failed to show that the removal of fixed indexed annuities from PTE 84-24 and placement of such products under the ambit of the BIC Exemption violated the APA or RPA. Judge Crabtree reached the following conclusions: 

  • First, the DOL gave proper notice that it intended to remove fixed indexed annuities from the final version of PTE 84-24;
  • Second, the DOL’s decision to treat fixed indexed annuities differently than all other fixed annuities in PTE 84-24 was not arbitrary or capricious;
  • Third, the DOL properly considered the economic impact that the final rule would impose on independent insurance agent distribution channels; and
  • Fourth, the issuance of Amended PTE 84-24 does not exceed the DOL’s statutory authority.   

Market Synergy has not yet publicly announced whether it will appeal Judge Crabtree’s decision to the United States Court of Appeals for the Tenth Circuit. Judge Crabtree’s decision granting summary judgment to the DOL represents the fourth decision by a federal court in favor of the DOL on the Fiduciary Rule, BIC Exemption and amendments to PTE 84-24. In addition to Judge Crabtree’s two decisions, the other decisions are (i) The National Association for Fixed Annuities v. Thomas E. Perez, Secretary of the United States Department of Labor, et al., Civil Action No. 16-1035 (RDM), 2016 U.S. Dist. LEXIS 153214 (D.D.C. Nov. 4, 2016) (Honorable Randolph D. Moss, U.S.D.J.); and (ii) Chamber of Commerce of the United States of America v. Edward Hugler, Acting Secretary of the United States Department of Labor, et al., Civil Action No. 16-cv-01476-M, 2017 U.S. Dist. LEXIS  17619 (N.D. Tex. Feb. 8, 2017) (Honorable Barbara M. G. Lynn, U.S.D.J.).

Based on what we have seen so far from the courts which have spoken on this issue, it does not appear likely that relief from the Fiduciary Rule, BIC Exemption or amendments to PTE 84-24 is going to be obtained from the courts. However, in a footnote, Judge Crabtree “recognized that recent developments may lead to future changes in this rule-making,” citing President Donald J. Trump’s February 3, 2017 Memorandum directing the Secretary of the DOL to (i) undertake a review of the Fiduciary Rule; and (ii) if appropriate, publish for notice and comment a proposed new rule rescinding or revising the Fiduciary Rule. The DOL has recently filed a notice with the Office of Management and Budget (“OMB”) requesting a delay of the Fiduciary Rule’s April 10, 2017 applicability date. It is thus becoming clear that the financial services industry’s best chances at obtaining relief from the Fiduciary Rule, BIC Exemption and amendments to PTE 84-24 will come from any subsequent rule-making that results from the DOL’s review of the Fiduciary Rule or alternatively the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act legislation that is pending in Congress, which would among other things void the Fiduciary Rule and BIC Exemption and restrict the DOL from promulgating any replacement fiduciary rule until after the Securities and Exchange Commission issues its final rule on this subject.


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