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One DOL Lawsuit May Have a Shot

A lawsuit filed against the Department of Labor by nine plaintiffs in the U.S. District Court for the Northern District of Texas has received a lot of public attention; these groups aim to challenge the entire rule—a feat many see as a long shot. But a lesser-known lawsuit by Market Synergy, an insurance agency, may have a shot at getting the DOL to review the rule, a court hearing Wednesday suggests.

Unlike other lawsuits related to the DOL’s conflict of interest rule, Market Synergy is asking the Department to review just one aspect of the rule—the fact that fixed annuities were included in the Best Interest Contract Exemption.

“The one thing that Market Synergy’s attorney said over and over and over again to the judge is, ‘Your honor, this is a rifle shot,’” said Erin Sweeney, counsel at Miller & Chevalier, who attended the court hearing on Wednesday in Kansas City. “‘We’re not intending to undo the Department of Labor’s rule. All we’re asking you to do is re-open this one little piece and remand the Department of Labor to reopen this one little piece.’”

Under the proposed rule, the department had included fixed annuities in its prohibited transaction exemption (84-24), which would have cleared the way for the sale of fixed annuities under an exemption to the fiduciary rule. But fixed annuities were not part of the prohibited transaction exemption in the final rule, released April 6. Instead, they were included in the best interest contract exemption, which allows for the sale of the product but only if the selling firm demonstrates it's in the client's best interest and the pricing is reasonable and level with similar products. 

Market Synergy filed the suit in the U.S. District Court for the District of Kansas in early June. District Judge Daniel Crabtree heard the case.

From her impression of the hearing, which lasted three and a half hours, Sweeney believes Crabtree is more likely than not to grant the injunction.

“The reason why I say the judge is more likely than not to grant the injunction is that he kept probing in on issues that made it clear that Market Synergy can’t get relief except if it happens right now,” Sweeney said.

The issue is with independent insurance agents, who sell fixed indexed annuities through independent market organizations, or IMOs, including the ones in Market Synergy’s network. These agents—being independent—aren’t affiliated with any financial institution. Yet, under the BIC exemption, an agent’s financial institution—an insurance or annuity company—has to sign the contract. That could leave thousands of these agents out of jobs because there’s no one to sign the contract allowing them to continue selling fixed annuities, Sweeney said.

Some IMOs have applied for an exemption with the DOL to become financial institutions, and this possibility was discussed during the hearing. Yet, these applications take years to get approved.

“Without an injunction everyone’s going to have to make a new plan,” Sweeney said. 

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