Erin Sweeney, of counsel to Miller & Chevalier, is an ERISA expert who spent four years as a lawyer at the Department of Labor.

Lawyers representing insurer Market Synergy in its case against the Department of Labor’s fiduciary rule told a Kansas judge Wednesday that Labor 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.

In arguing their case in Topeka before Judge Daniel Crabtree in the District of Kansas, attorneys for Market Synergy characterized the insurer’s request for an injunction as a “rifle shot” and repeatedly emphasized that the relief the insurer is seeking is limited in scope and is not “intended to undo the DOL’s entire fiduciary rule,” Erin Sweeney, counsel at Miller & Chevalier, told ThinkAdvisor Wednesday after attending the hearing.

Crabtree presided over the second hearing against DOL’s rule. Judge Randolph Moss, U.S. District judge for the District of Columbia, heard oral arguments on Aug. 25 in the first hearing in the case brought by the National Association for Fixed Annuities. 

Both hearings ran for three hours. Moss did not immediately render a decision but is expected to do so by the end of September.

Both NAFA and Market Synergy argue that fixed indexed annuities were thrown into the DOL rule’s Best Interest Contract Exemption at the last minute. Market Synergy attorneys called it the big “switcher-oo,” Sweeney said.

Fixed indexed annuities have historically been regulated by the states under prohibited transaction exemption (PTE) 8424, but the DOL’s final rule, issued in April, included them under the BICE—which “shocked” both NAFA and Market Synergy, according to Sweeney.

Sweeney noted that the Market Synergy attorneys argued that FIAs have a “longstanding, robust, dynamic, comprehensive, soup to nuts” regulatory regime at the state level that the DOL inappropriately failed to consider when deciding to move FIAs from PTE 84-24 to the BICE.

DOL’s final rule requires that “persons receiving commissions in connection with FIAs must comply with the more onerous BIC Exemption, instead of PTE 84-24,” the attorneys said.

Crabtree “appeared sympathetic to Market Synergy’s arguments that independent marketing organizations (IMOs) and independent agents will suffer irreparable harm” unless DOL “is enjoined from enforcing Revised PTE 84-24 with respect to fixed indexed annuities,” said Sweeney, a former DOL attorney.

Market Synergy noted that it represents 20,000 independent agents through 11 IMOs (insurance marketing organizations) selling FIAs, and that a total of 80,000 independent agents operate in the United States with 64% of those independent agents operating through 200 IMOs, Sweeney explained.

The BICE depends on the existence of a “financial institution” to sign the required best interest contract with individual investors, she continued. 

Market Synergy argued that because FIAs are “typically distributed through IMOs and IMOs are not considered to be ‘financial institutions’ under the BIC Exemption, IMOs and independent agents cannot comply with the BIC exemption,” Sweeney said.

While it’s a “tough to call” on which way Crabtree will go, Sweeney believes it’s “60-40 in favor of granting an injunction” against DOL’s rule.

D.C. District Court Judge Moss, however, is likely to render a decision by the end of September denying NAFA’s request for an injunction, Sweeney predicts.

Changes in the regulatory regime must be “foreshadowed” by a regulatory proposal in order to provide adequate notice to stakeholders, according to Market Synergy, Sweeney reported.

When attorneys for the DOL contended that notice was adequate, Crabtree “expressed skepticism,” she said.

If the only notice an agency gives the public is that it seeks comments on whether the agency has “drawn the line in the right place,” Crabtree asked, “isn’t that notice of everything and notice of nothing at the same time?” Sweeney quoted the judge as saying.

“Apparently acknowledging the notice issue, the DOL contended that the court should invoke the doctrine of ‘harmless error,’ which forgives an agency’s notice failure as long as public comments on a rulemaking were actually considered by the agency and the public was not prejudiced by the notice failure,” she said.

Sweeney doesn’t see a decision in the Market Synergy case by the time oral arguments are heard by Judge Barbara M.G. Lynn on Nov. 17 in the Texas case brought by nine plaintiffs.

“Crabtree made clear his understanding that he expected the losing party to file an immediate appeal of his decision whether the preliminary injunction is granted or denied,” Sweeney said.

Accordingly, Crabtree’s focus on resolution of the entire action is an apparent effort to streamline the litigation in anticipation of appeal. 

The parties, she continued, “are not required to complete coordination on the underlying lawsuit for two weeks, [so] it appears unlikely that Judge Crabtree will render a decision prior to the next fiduciary regulation battleground” in Texas.

See ThinkAdvisor’s comprehensive coverage of the DOL Fiduciary Rule, including these recent news and commentary articles:

DOL Fiduciary Rule Causes Pullback on Sale of Annuities, Funds by Insurers

DOL Fiduciary Rule’s Cost for 9 Investment Advice Players: From IBDs to RIAs

History Provides Hope for Institute for the Fiduciary Standard’s New Best Practices