Kansas Judge Upholds DOL Fiduciary Rule

A Kansas federal judge has rejected the insurer Market Synergy's request for a preliminary injunction to block the Department of Labor's fiduciary rule – the second legal victory for Labor's rule aimed at mitigating conflicts of interest in the retirement advice market.

In his 63-page ruling, issued Monday, Judge Daniel Crabtree ruled that Market Synergy did not prove that DOL failed to follow appropriate procedures under the Administrative Procedures Act and Regulatory Flexibility Act of 1980 by putting fixed indexed annuities under the DOL rule's best interest contract exemption, or BICE.

To reach his decision, Crabtree wrote that the court "need not decide whether the DOL's amendment to [Prohibited Transaction Exemption] 84-24 is appropriate given the DOL's consumer protection concerns." The court, he continued, "also need not question whether the DOL's amendment is improper because it imposes significant challenges to plaintiff's business model."

Instead, Crabtree said, because the Market Synergy lawsuit "challenges the DOL's action under the Administrative Procedure Act and Regulatory Flexibility Act 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. The court concludes … that plaintiff is not likely to succeed on the merits of this claim. And, thus, plaintiff is not entitled to the injunctive relief that it seeks by its motion."

Market Synergy argued that Labor violated the APA and Regulatory Flexibility Act by issuing a final rule that amends and partially revokes PTE 84-24's coverage for FIA transactions and, instead, requires them to comply with BICE.

Micah Hauptman, financial services counsel at the Consumer Federation of America, said Monday that Crabtree's ruling "confirms what we've known all along – that the DOL was on solid ground in promulgating this rule."

Specifically, the opinion, Hauptman points out, "discredits each of Market Synergy's claims, explaining why Market Synergy is unlikely to prove its case on the merits, why the DOL's Regulatory Impact Analysis supports the DOL's findings, and how the DOL provided a reasoned basis for its regulatory action."

The opinion "also discredits Market Synergy's claim that it will suffer irreparable harm from the rule. The court found that claim to be speculative and based on an assertion — that the Best Interest Contract Exemption is unworkable for the sale of fixed indexed annuities — that should be rejected."

Erin Sweeney, counsel at Miller & Chevalier, added that Crabtree's ruling "dealt a second jarring blow to industry representatives" by denying the Market Synergy preliminary injunction request "and potentially carving a steeper path toward a circuit court split and a Supreme Court decision on the fiduciary rule."

Crabtree in the District of Kansas heard oral arguments on Sept. 23 in the second case against Labor's rule. Lawyers representing Market Synergy stated in their arguments that DOL failed to prove that the current state-based regulation of fixed indexed annuities is broken, and that the judge should "hit the pause" button on including them in the rule.

Oral arguments in the first case against DOL's rule brought by the National Association for Fixed Annuities were heard by U.S. District Judge Randolph Moss on Aug. 25. In a 92-page ruling, released Nov. 4, Moss denied NAFA's request for a preliminary injunction to stay DOL's rule. He also ruled in favor of Labor on the merits in upholding the rule, formally called the conflict of interest rule.

NAFA said a few days later that it would appeal Moss' decision. Moss on Nov. 23 declined the request.

"The new rules were adopted to protect retirement investors from conflicted advice and potential losses to their retirement savings," Moss wrote. "Enjoining the rule would delay this protection. It would also interfere with the implementation of three regulations that were lawfully adopted after nearly six years of study, public comment, and consideration."

The annuities group, represented by Bryan Cave, could now ask the D.C. Circuit to block enforcement of the rule while the appeal is pending. The group had not asked for such relief by Monday morning.

Sweeney noted that "after concluding that the DOL appropriately weighed the costs and benefits of the movement of fixed income annuities from PTE 84-24 to the BICE, and that the DOL's decision was a reasonable one, Judge Crabtree echoed the words of fellow Obama-appointee, Judge Randolph D. Moss – the first judge to uphold the fiduciary rule – and held that this court 'cannot substitute its judgment [for] that of the DOL.'"

Oral arguments were heard on Nov. 18 in the third case against DOL's rule in the U.S. District Court for the Northern District of Texas. That case was brought by the nine plaintiffs, including the Securities Industry and Financial Markets Association, the Financial Services Institute and the U.S. Chamber of Commerce.

The groups are represented by former DOL solicitor Eugene Scalia, who's now a partner in Gibson, Dunn & Crutcher's Washington office and a son of deceased Supreme Court Justice Antonin Scalia.

Lawyers present at the oral arguments in Texas had differing views about which way Judge Barbara M.G. Lynn was leaning.

But Hauptman noted that Lynn "has indicated that she is well-aware of the other litigation against DOL regarding this rulemaking. Since both the NAFA the MSG cases implicate similar issues that are before Judge Lynn, it is realistic to expect that the NAFA and MSG opinions will help inform, but not necessarily drive, her decision."

Sweeney of Miller & Chevalier, who attended the Texas oral arguments, told ThinkAdvisor on Friday that she believed Lynn "gave DOL a very hard time." Lynn, in her view, gave signs of potentially leaning to vacate DOL's rule. Lynn "was very troubled by the fact that DOL, to reach its conclusion about annuities, relied on studies that only addressed mutual funds."

But William Nelson, public policy counsel for the Certified Financial Planner Board of Standards, who was also in the Texas courtroom, told ThinkAdvisor that he viewed Lynn's questioning as "balanced [with] probing questions on both sides."

— Check out Can Trump, GOP Stop DOL Rule? Not Likely on ThinkAdvisor.

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