Tenth Circuit Rules in Favor of DOL Fiduciary Rule on Issue of Fixed Indexed Annuities

On March 13, 2018, the U.S. Court of Appeals for the Tenth Circuit issued a ruling upholding the DOL's fiduciary rule (the Rule). As background, the Rule was adopted by the DOL in April of 2016, and it amended ERISA's definition of "fiduciary" by considering a larger subset of communications to be investment advice that renders the person providing that advice a fiduciary. Additionally, the DOL introduced new prohibited transaction exemptions (PTEs) and amended others in order to permit common compensation structures and to cover certain types of transactions. The PTEs that were central to this case are the new Best Interest Contract Exemption (BICE) and PTE 84-24, which allows an exemption for commissions paid to insurance brokers in connection with a plan's purchase of insurance or annuity contracts.

In this case, Market Synergy Group (MSG) alleged that the DOL didn't follow the Administrative Procedure Act (APA) in promulgating the Rule. Specifically, they claimed that the DOL had arbitrarily excluded fixed indexed annuities (FIAs) from being covered under PTE 84-24 (opting instead to cover them through the BICE). They also claimed that the DOL didn't provide adequate notice of that decision and that the DOL's actions would cost MSG roughly 80 percent of their revenue (as their business revolved around working with independent marketing organizations to distribute FIAs). MSG asked the district court for a preliminary injunction, which the district court denied.

On appeal to the Tenth Circuit, MSG again asserted that the DOL had violated the APA. However, the Tenth Circuit found that the DOL provided adequate notice and didn't arbitrarily treat FIAs differently from fixed annuities or fail to consider the economic impact of the Rule on the FIA industry. As such, the Tenth Circuit affirmed the district court's ruling in favor of the Rule.

Although the Tenth Circuit joined other circuit courts in upholding the Rule, the Rule was vacated by the Fifth Circuit less than a week after this ruling. As such, it's hard to know what impact these circuit decisions have on the Rule. We'll continue to follow the developments and report on them in future editions of Compliance Corner.

Market Synergy Group Inc. vs. DOL »