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.