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.