A federal appeals court has denied an emergency motion to delay implementation of the Department of Labor’s fiduciary rule.
The National Association of Fixed Annuities filed the motion, requesting the implementation date for the rule be delayed at least 10 months, and up to two years.
NAFA is appealing a November decision in the U.S. District Court for the District of Columbia that upheld the rule, which requires advisors of retirement investment accounts to act solely in the interest of investors.
The one-paragraph ruling issued by a Special Panel for Review in the D.C. Appellate Court said NAFA’s emergency motion “has not satisfied the stringent requirements for an injunction pending appeal.”
Before today’s decision, legal sources told BenefitsPro that NAFA’s emergency motion was unlikely to be granted.
“This ruling was expected,” said Erin Sweeney, of counsel with Miller & Chevalier. “It is extremely rare for an emergency injunction to be granted.”
NAFA’s appeal of the lower court decision is still pending. In its emergency motion, attorneys for the trade organization said it would not seek an expedited appeal. But in light of the denial to delay the rule, they may now have to, said Sweeney. “NAFA is running out of options.”
The Labor Department’s fiduciary rule has also been upheld in a Kansas federal court, and is being challenged in two other courts in Texas and Minnesota.
In its denied emergency motion, NAFA argued its members—insurance carriers, insurance agents, and independent marketing organizations—have been forced to reorganize the massive distribution system for fixed indexed annuities that has been in place for decades.
“NAFA members face extraordinary challenges to comply with this flawed rule, which was adopted improperly by DOL and foisted on the fixed annuity industry with a short time to comply,” wrote NAFA attorneys in its request to delay the rule.
In the decisions upholding the rule in the District of Columbia and Kansas, where Market Synergies, an independent marketing organization (IMO), sued the Labor Department under the Administrative Procedure Act, both judges acknowledged that the fiduciary rule will disrupt the market for fixed indexed annuities.
About 60 percent of the roughly $50 billion annual FIA market is sold through independent insurance agents who contract with IMOs and field marketing organizations, which in turn contract with insurance carriers.
Under the fiduciary rule, fixed indexed annuities and all other retirement investments sold on commission to IRAs will have to comply with the Best Interest Contract Exemption, which regulators crafted to protect investors from receiving conflicted investment advice.
The DOL created four classifications of financial institutions that can sell FIAs under the BIC Exemption: broker-dealers, banks, insurance companies, and registered investment advisories. A provision in the rule allows for independent marketing organizations to apply for a financial institution exemption, which would allow them to market FIAs under the BIC Exemption.
The Labor Department has said it is crafting a class-wide financial institution exemption for IMOs.
But industry analysts have said that will be of little use for most marketing organizations, as the exemption will require IMOs to hold cash reserves to guarantee they can make investors whole if they sue for breach of contract under the rule.
“Ultimately, I think the fiduciary rule has the power to whittle down the number of IMOs from 350 to 12,” said Sheryl Moore, president and CEO of Wink, Inc., a Des Moines-based provider of analytics tools to the insurance industry, in a previous interview with BenefitsPro. Compliance costs will be too much for smaller IMOs to absorb, she explained.
NAFA’s emergency motion said the Labor Department has “dragged its feet” crafting the exemption for IMOs, making it impossible for them to comply with rule’s April 10, 2017 implementation date.
Opponents of the fiduciary rule are hoping that a split will emerge from the appellate courts, forcing the Supreme Court to consider whether the Labor Department crafted the rule within its statutory authority.
Arguments in U.S. Chamber of Commerce v. DOL have been heard in the District Court for the Northern District of Texas. A ruling could be issued before the end of the year.
In the Kansas District, Market Synergies has not announced whether it will appeal the lower court decision. The parties are scheduled for a status conference with the presiding judge next week.