The U.S. District Court for the District of Columbia will hear arguments at 2 p.m. Eastern time Aug. 25 in The National Association of Fixed Annuities v. Thomas E. Perez.

Erin Sweeney, a Washington, D.C.-based attorney with Miller and Chevalier Chartered and a former benefit law specialist with the U.S. Department of Labor under the George W. Bush administration, will be there, monitoring the proceeding on behalf of her clients, along with what she expects will be a “who’s who” among the country’s small, and these days, influential band of Employee Retirement Income Security Act legal specialists.

Among the five lawsuits looking to stay the Labor Department's fiduciary rule, Sweeney says the claims brought on behalf of fixed indexed annuity providers are uniquely compelling.

“How indexed annuities were treated under the proposed rule was so different from the final rule,” said Sweeney, referring to fact that the Labor Department moved fixed indexed annuities from Prohibited Transaction Exemption 84-24 to the rule’s Best Interest Contract Exemption.

Under the proposed version of the rule, insurance agents and securities brokers could continue to sell fixed indexed annuities without having to comply with the Best Interest Contract Exemption.

In shifting the sale and distribution of fixed indexed annuities to the purview of the Best Interest Contract Exemption, the Labor Department took the annuity industry by complete surprise, said Sweeney, echoing what annuity stakeholders have argued since the rule was finalized last April.

“If they had any idea DOL was thinking of moving FIAs to the BIC bucket, industry would have filed comment letters, and made their position known,” said Sweeney. “But they didn’t have the chance to.”

Since the rule has been finalized, Labor Secretary Thomas Perez has publicly noted on several occasions the exhaustive outreach regulators made to industry throughout the long rulemaking process.

In Sweeney’s opinion, that argument fails with respect to how the rule regulates fixed indexed annuities. Under the Administrative Procedure Act, regulators are required to give affected stakeholders and industries adequate notice when issuing new rules. In its suit against the Labor Department, the National Association of Fixed Annuities alleges “the Department failed to analyze, discuss, or even acknowledge how moving FIAs into the BICE will affect the FIA industry,” according to court documents. Four of the six claims in the NAFA suit are brought under the Administrative Procedure Act.

Sweeney says that argument is persuasive. “No one saw this coming,” she added.

Strongest argument

Of those six claims, Sweeney says the claim that the Labor Department rule does the annuity industry irreparable harm is the strongest argument in the NAFA case, and perhaps the strongest argument of all the claims in the suits against the Labor Department.

For fixed indexed annuity providers, and the independent insurance agents that account for approximately 60 percent of all fixed indexed annuity sales, the rule will “squash” the existing market, says Sweeney.

NAFA will argue that the rule’s impact on independent marketing organizations, which distribute fixed indexed annuities through channels of independent insurance agents, will be devastating.

Under the Best Interest Contract Exemption, independent marketing organizations are not listed among the financial institutions eligible to receive commissions on sales of fixed indexed annuities — insurance carriers, broker-dealers, and registered advisory firms are named as institutions that will qualify for the Best Interest Contract Exemption.

Last year, independent marketing organizations accounted for more than $35 billion in fixed indexed annuity sales. In its suit, NAFA claims the rule dramatically changes the existing distribution model for fixed indexed annuities, as insurance carriers will turn to broker-dealers to sell the annuities.

NAFA projects the rule will result in independent marketing organizations losing 70 percent of their compensation, and estimates that 20,000 independent insurance agents will be forced to exit the business. “The IMOs that are able to remain in the business will likely face massive spikes in their compliance costs,” argued NAFA in its court filing.

A faulty premise, says Labor Department

In its filed response to NAFA’s suit, attorneys from the U.S. Department of Justice and the Labor Department argue that NAFA’s claim of irreparable harm is based on “a faulty premise and is likewise purely speculative.”

The Best Interest Contract Exemption allows independent marketing organizations to receive compensation “so long as the requirements of the exemption are fulfilled by the financial institution and advisor,” according to court documents filed on behalf of the Labor Department.

Attorneys for the Labor Department say independent marketing organizations can continue to market fixed indexed annuities, and receive compensation, by contracting with an insurance carrier.

But opponents of the Labor Department rule say that carriers will be reluctant to enter into such an agreement because they would be unable to monitor the activities of thousands of independent insurance agents, and whether or not their recommendations on fixed indexed annuities comply with the Best Interest Contract Exemption.

The Labor Department says any decision by carriers to no longer work with independent marketing organizations would be an “independent” decision of those carriers, “and not directly attributable to the rule and is thus insufficient to establish irreparable harm.”

Moreover, the Labor Department argues that independent marketing organizations can seek exemptions to become financial institutions under the Best Interest Contract Exemption, as four independent marketing organizations already have.

Judge Randolph Moss

Sweeney, like other Employee Retirement Income Security Act experts, is not expecting the D.C. District Court to drag its feet in deciding the case.

A decision will certainly come before the end of the year, if not before, she said.

Presiding over the case is U.S. Judge Randolph Moss. A 2014 Obama administration appointee, Moss is no stranger to administrative law matters. Before being confirmed to the bench, the one-time assistant attorney general chaired the regulatory and government affairs department at Wilmer Cutler Pickering Hale and Dorr LLP.

“The Administrative Procedures Act is right up his alley,” said Sweeney.

Instant Insights /

NAFA DOL fiduciary rule case likely to be ruled on quickly

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