appellate case: 17-3038 document: 01019843912 date filed ... · page(s) of the sequentially...

Docket No. 17-3038 Oral Argument Requested

IN THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

MARKET SYNERGY GROUP, INC.,

Plaintiff-Appellant,

v.

UNITED STATES DEPARTMENT OF LABOR and R. ALEXANDER ACOSTA, in his official capacity as Secretary of the United States Department of Labor,

Defendants-Appellees.

Appeal from a Decision of the United States District Court for the District of Kansas,

Honorable Daniel D. Crabtree, Case No. 5:16-CV-04083

APPELLANT’S OPENING BRIEF

CARLTON FIELDS JORDEN BURT, P.A. Michael A. Valerio One State Street, Suite 1800 Hartford, Connecticut 06103 (860) 392-5000 Telephone WALTERS BENDER STROHBEHN & VAUGHAN, P.C. J. Michael Vaughan 2500 City Center Square, 1100 Main Kansas City, Missouri 64105 (816) 421-6620 Telephone

CARLTON FIELDS JORDEN BURT, P.A. James F. Jorden Brian P. Perryman 1025 Thomas Jefferson Street, NW Suite 400 West Washington, DC 20007 (202) 965-8100 Telephone

Attorneys for Plaintiff-Appellant

Market Synergy Group, Inc.

Appellate Case: 17-3038 Document: 01019843912 Date Filed: 07/20/2017 Page: 1

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CORPORATE DISCLOSURE STATEMENT

Pursuant to Fed. R. App. P. 26.1, plaintiff-appellant Market Synergy, Inc.

discloses that no corporation owns 10% or more of its stock.


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TABLE OF CONTENTS

Page

CORPORATE DISCLOSURE STATEMENT ................................................................. i TABLE OF CONTENTS ..................................................................................................... ii TABLE OF AUTHORITIES .............................................................................................. vi STATEMENT OF RELATED CASES ............................................................................. x GLOSSARY ............................................................................................................................ xi STATEMENT OF JURISDICTION ................................................................................. 1 INTRODUCTION AND STATEMENT OF ISSUES .................................................. 1 STATEMENT OF THE CASE ........................................................................................... 3

I. Fixed And Variable Annuities ........................................................................ 3 II. Independent Insurance Agent Distribution Channels ............................... 6 III. The Department’s Proposed Rulemaking .................................................... 8

A. The “Conflict Of Interest” Rule ........................................................ 8 B. The BICE .............................................................................................. 9 C. PTE 84-24 ........................................................................................... 10

1. Proposed amendment and partial revocation .................... 10 2. The response to proposed PTE 84-24 ................................ 12

IV. The Department’s Final Rulemaking .......................................................... 13

A. The Change In Products Covered By PTE 84-24 ........................ 13 B. The Public’s Surprise ......................................................................... 15


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C. Consequences Of The Department’s About-Face ....................... 16

V. The Proposed “Insurance Intermediary” Exemption .............................. 19 VI. The Proceedings Below ................................................................................ 20 VII. Subsequent Developments ........................................................................... 20

SUMMARY OF ARGUMENT .......................................................................................... 21 ARGUMENT ........................................................................................................................ 23

I. Standard Of Review ....................................................................................... 23 II. The Department Gave No Warning That It Would Remove

FIAs From PTE 84-24 .................................................................................. 24

A. The Department’s “Switcheroo” Was Unanticipated .................. 25 B. The District Court Misread The Notice Of Proposed

Rulemaking .......................................................................................... 27

1. The Department solicited comments on potential changes to the BICE, not on FIAs’ removal from PTE 84-24 ...................................................... 27

2. The Department failed to identify the

assumptions on which it would distinguish FIAs from other fixed annuities ..................................................... 30

C. The Few Comments Submitted Concerning FIAs Are

Irrelevant ............................................................................................. 31

1. The District Court relied on legally irrelevant comments ................................................................................ 31

2. Those comments are also factually irrelevant,

demonstrating confusion at most ........................................ 32


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D. The District Court’s “Harmless Error” Finding Is Doubly Flawed ................................................................................... 33

1. Where, as here, the lack of notice is complete, a

showing of prejudice is not required ................................... 33 2. Market Synergy and others were prejudiced ...................... 34

III. FIAs Are Arbitrarily Treated Differently From Other Fixed

Annuities ......................................................................................................... 37

A. The Department Failed To Explain Why PTE 84-24’s Impartial Conduct Standards Would Not Abate Conflicts Of Interest, Or To Identify Conflicts Unique To FIAs ................................................................................. 37

B. FIAs Are Not Uniquely Risky Or Complex .................................. 40 C. The Department’s Dismissive Treatment Of Existing

State-Based Regulation Was Unreasoned ....................................... 45

IV. The Department Failed To Consider The Crippling Effect Of Its Actions On The Independent Insurance Agent Distribution Channel ..................................................................................... 49

A. The Independent Distribution Channel Is “An

Important Aspect Of The Problem” That Went Ignored ................................................................................................. 49

B. The Department Is Disjointedly Restructuring The

Fixed Annuity Industry ..................................................................... 52 CONCLUSION .................................................................................................................... 54 STATEMENT REGARDING ORAL ARGUMENT .................................................. 56 CERTIFICATE OF TYPE-VOLUME COMPLIANCE ............................................. 57


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RULE 28.2(A) ADDENDUM

Memo. & Order, Market Synergy Group, Inc. v. United States Department of Labor, et al., No. 5:16-cv-04083-DDC-KGS (D. Kan. Nov. 28, 2016) (ECF No. 59)

Memo. & Order, Market Synergy Group, Inc. v. United States Department of Labor, et al., No. 5:16-cv-04083-DDC-KGS (D. Kan. Feb. 17, 2017) (ECF No. 71)

CERTIFICATE OF ECF SUBMISSION COMPLIANCE CERTIFICATE OF SERVICE


vi

TABLE OF AUTHORITIES

Cases Page(s) Allina Health Services v. Sebelius, 746 F.3d 1102 (D.C. Cir. 2014) ......................................................................... 35, 36 American Equity Investment Life Insurance Co. v. SEC, 613 F.3d 166 (D.C. Cir. 2009) .................................................................... 44, 47, 48 American Mining Congress v. Thomas, 772 F.2d 617 (10th Cir. 1985) .................................................................................. 24 Daimler Trucks North America LLC v. EPA, 737 F.3d 95 (D.C. Cir. 2013) .................................................................................... 31 Environmental Integrity Project v. EPA, 425 F.3d 992 (D.C. Cir. 2005) .................................................................... 24, 28, 30 Home Box Office, Inc. v. FCC, 567 F.2d 9 (D.C. Cir. 1977) ...................................................................................... 42 Independent Petroleum Association of America v. Babbitt, 92 F.3d 1248 (D.C. Cir. 1996) ................................................................................. 37 ITT World Communications, Inc. v. FCC, 725 F.2d 732 (D.C. Cir. 1984) ........................................................................... 52, 53 MCI Telecommunications Corp. v. FCC, 57 F.3d 1136 (D.C. Cir. 1995) ................................................................................. 31 Mid Continent Nail Corp. v. United States, 846 F.3d 1364 (Fed. Cir. 2017) ................................................................................ 28 Michigan v. EPA, 135 S. Ct. 2699 (2015) .................................................................................. 48, 49, 54 Motor Vehicle Manufacturers Association of the United States v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29 (1983) ........................................ passim


vii

National Association for Fixed Annuities v. Perez, 217 F. Supp. 3d 1 (D.D.C. 2016) ............................................................................ 29 National Association of Broadcasters v. FCC, 740 F.2d 1190 (D.C. Cir. 1984) ......................................................................... 53, 54 National Federation of Independent Business v. Perez, 2016 WL 3766121 (N.D. Tex. June 27, 2016) ....................................................... 53 Natural Resources Defense Council v. EPA, 279 F.3d 1180 (9th Cir. 2002) ............................................................................ 29, 36 Natural Resources Defense Council v. EPA, 824 F.2d 1258 (1st Cir. 1987) ................................................................................... 36 Olenhouse v. Commodity Credit Corp., 42 F.3d 1560 (10th Cir. 1994) .................................................................................. 23 Olpin v. Ideal National Insurance Co., 419 F.2d 1250 (10th Cir. 1969) ................................................................................ 44 SEC v. National Securities, Inc., 393 U.S. 453 (1969) ................................................................................................... 45 Shands Jacksonville Medical Center v. Burwell, 139 F. Supp. 3d 240 (D.D.C. 2015) ........................................................................ 30 Shell Oil Co. v. EPA, 950 F.2d 741 (D.C. Cir. 1991) ........................................................................... 28, 34 Sprint Corp. v. FCC, 315 F.3d 369 (D.C. Cir. 2003) ................................................................................. 34 United Keetoowah Band of Cherokee Indians of Oklahoma v. HUD, 567 F.3d 1235 (10th Cir. 2009) ................................................................................ 23 United States v. Krueger, 809 F. 3d 1109 (10th Cir. 2015) ............................................................................... 47 Valley Community Preservation Commission v. Mineta, 373 F.3d 1078 (10th Cir. 2004) ................................................................................ 16


viii

Wagner Electric Corp. v. Volpe, 466 F.2d 1013 (3d Cir. 1972) ................................................................................... 31 Zen Magnets, LLC v. Consumer Product Safety Commission, 841 F.3d 1141 (10th Cir. 2016) ................................................................................ 40 Statutes and Rules 5 U.S.C. § 553 ................................................................................................................... 24, 31 5 U.S.C. § 706 ................................................................................................................... 23, 24 15 U.S.C. § 77b ...................................................................................................................... 48 15 U.S.C. § 1011 .................................................................................................................... 45 28 U.S.C. § 1291 ...................................................................................................................... 1 28 U.S.C. § 1331 ...................................................................................................................... 1 29 U.S.C. § 1135 .............................................................................................................. 48, 49 82 Fed. Reg. 9,675 (Feb. 7, 2017) ....................................................................................... 20 82 Fed. Reg. 31,278 (July 6, 2017) ...................................................................................... 21 83 Fed. Reg. 16,902 (Apr. 7, 2017) ............................................................................... 20, 39 Court Filings Pl.’s Memo. in Support of Mot. for Summ. Judg., Chamber of Commerce of the

United States v. Perez, No. 3:16-CV-1476, ECF No. 59 (N.D. Tex. filed July 18, 2016), 2016 WL 4190833 .............................................................................. 18

Defs.’ Reply in Support of Mot. for Summ. Judg., Nat’l Ass’n for Fixed

Annuities v. Perez, No. 1:16-CV-1035, ECF No. 30 (D.D.C. filed Aug. 5, 2016), 2016 WL 4497547 ............................................................................................ 29


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Pl.’s Reply in Support of Mot. for Prelim. Inj., Nat’l Ass’n for Fixed Annuities v. Perez, No. 1:16-CV-1035, ECF No. 27 (D.D.C. filed July 22, 2016), 2016 WL 4497565 ........................................................................................................ 18

Press Articles Anna Prior & Leslie Scism, Rules for Indexed Annuities Face an Unexpected

Tightening, Wall St. J. (Apr. 6, 2016), at http://tinyurl.com/zblhjxt ................... 16

Cyril Tuohy, Annuity Industry Caught Off-Guard by DOL Rule, InsuranceNewsNet (Apr. 6, 2016), at http://tinyurl.com/zy9bkj5 ............. 16, 26

Kerry Pechter, Surprise: DOL Rule Targets Indexed Annuities, Retirement Income J. (Apr. 7, 2016), at http://tinyurl.com/hvb3xqr .............. 16

Greg Iacurci, Variable and fixed-indexed annuities feel sting of DOL fiduciary rule, InvestmentNews (Apr. 6, 2016), at http://tinyurl.com/ja2c3m3 ...................... 26

Miscellaneous H.R. Rep. No. 114-527 (2016) ............................................................................................. 27 National Conference of Insurance Legislators, Resolution in Opposition to the

United States Department of Labor Fiduciary Rule (Nov. 20, 2016), at http://tinyurl.com/hdtxk53 ....................................................................... 45, 46, 47

National Conference of Insurance Legislators, Resolution in Support of State

Insurance Commissioner Authority Over Fixed Indexed Annuity Products (Nov. 23, 2008), at http://tinyurl.com/gt7hgge ...................................... 43, 46, 47

Letter from National Association of Insurance Commissioners to

Congressman Gregory Meeks (May 1, 2009), at http://tinyurl.com/zs8p7mb ................................................................................... 43


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STATEMENT OF RELATED CASES

Pursuant to 10th Cir. R. 28.2(C)(1), an appeal in the United States Court of

Appeals for the District of Columbia Circuit, National Association for Fixed Annuities v.

United States Department of Labor, No. 16-5345, docketed November 28, 2016, may be a

related appeal. In addition, an appeal in the United States Court of Appeals for the

Fifth Circuit, Chamber of Commerce of the United States of America v. United States Department

of Labor, No. 17-10238, docketed March 1, 2017, may be a related appeal. There are no

other known prior or related appeals.


xi

GLOSSARY

APA Administrative Procedures Act, 5 U.S.C. § 500 et seq.

App’x-__ References to “App’x-__” are to the page(s) of the sequentially numbered Appellant’s Appendix, filed herewith

BICE Best Interest Contract Exemption

BICE-II

Proposed Best Interest Contract Exemption for Insurance Intermediaries, 82 Fed. Reg. 7,336 (Jan. 19, 2017)

The Code Internal Revenue Code of 1986, as amended, 26 U.S.C. § 1 et seq.

The Department United States Department of Labor, together with R. Alexander Acosta, in his official capacity as Secretary of the United States Department of Labor

ERISA Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. § 1001 et seq.

FINRA

Financial Industry Regulatory Authority

FIA

Fixed Indexed Annuity

The Harkin Amendment Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 989J, 124 Stat. 1376 (2010)

IMO

Independent Marketing Organization

IRA Individual Retirement Account

Market Synergy Market Synergy Group, Inc.


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NASAA North American Securities Administrators Association

NAIC

National Association of Insurance Commissioners

NCOIL National Conference of Insurance Legislators

PTE 84-24 Prohibited Transaction Exemption 84-24

RFA

Regulatory Flexibility Act of 1980, 5 U.S.C. § 601 et seq.

SEC Securities and Exchange Commission


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STATEMENT OF JURISDICTION

The District Court had original jurisdiction under 28 U.S.C. § 1331 because this

case involves claims arising under the APA and RFA. A final judgment was entered

on February 17, 2017. App’x-490. A timely notice of appeal was filed on February

22, 2017. App’x-491. This Court has appellate jurisdiction under 28 U.S.C. § 1291.

INTRODUCTION AND STATEMENT OF ISSUES

Since their introduction to the marketplace in 1995, FIAs have helped enable

and protect the retirements of millions of Americans. These products, including their

sale, are extensively regulated by state insurance departments and are primarily offered

through independent life insurance agents. Independent agents perform an essential

role in educating clients about their choices in retirement savings vehicles and in

evaluating whether an FIA might be a suitable choice given each client’s financial

circumstances. Under existing state law standards, these independent life insurance

and annuity agents are required to ensure, whatever insurance product they sell, that

the annuity is “suitable” based on the clients’ retirement goals and resources. They do

not exercise discretion in deciding on choices or managing the client’s assets. Under

prevailing state law fiduciary standards, the sale of FIAs and other insurance products

have never been characterized as creating a fiduciary relationship.

Regulatory actions by the Department, however, will fundamentally alter, and

threaten to obliterate, the independent insurance agent business and service model.

Citing concerns over supposed conflicts of interest associated with the sale of retail


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financial products in the individual retirement market, the Department issued a final

rule redefining the activities it deems to be fiduciary “investment advice” under

ERISA and the Code. In most instances, this rule will make independent agents and

other sellers of retail financial products fiduciaries to the products’ purchasers. While

Market Synergy disagrees with the Department, the relief sought in this appeal is

limited to reversing the Department’s decision with respect to PTE 84-24. The

Department amended and partially revoked PTE 84-24, which provides exemptive

relief to insurance agents and others who, under the Department’s new definition,

would become fiduciaries in connection with transactions involving ERISA plans or

IRAs. Absent an exemption like PTE 84-24, ERISA and the Code prohibit fiduciaries

from receiving third-party compensation, e.g., commissions.

Reversing course from what its notice of proposed rulemaking had represented

it would do, the Department revoked PTE 84-24 as it applies to plan and IRA

purchases of annuities that do not satisfy the Department’s new definition of a “Fixed

Rate Annuity Contract,” thereby excluding FIAs from PTE 84-24. That exclusion

leaves independent agents without a workable exemption under which to sell FIAs.

Other fixed annuities will continue to enjoy exemptive relief under PTE 84-24.

This appeal presents three issues for review:

1. Did the Department provide adequate notice of its intention to exclude

transactions involving FIAs from PTE 84-24 when, in its notice of proposed


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rulemaking, the Department stated that such transactions “can continue to occur

under that exemption”? App’x-487-88, 424-43.

2. Did the Department arbitrarily treat FIAs differently from other fixed

annuities by excluding FIAs from PTE 84-24? App’x-488, 438-48.

3. Did the Department adequately consider the detrimental economic

impact its exclusion of FIAs from PTE 84-24 would have on independent insurance

agent distribution channels? App’x-488, 448-54.

STATEMENT OF THE CASE

I. Fixed And Variable Annuities.

Annuities are retirement savings and income vehicles sold by life insurance

companies. App’x-401. All annuities have one feature in common distinguishing

them from other financial products: with an annuity, the insurer promises to pay

income on a regular basis for a chosen period of time. App’x-401-02.

Annuities may provide for immediate or deferred payments. App’x-402, 1562.

In contrast to immediate annuities, deferred annuities characteristically have two

phases of operation: (i) a “deferral” phase in which the contract accumulates value

through payment of premiums and credited interest, and (ii) a “payout” phase in

which the purchaser receives a predetermined stream of payments. App’x-402, 1562.

The most common types of deferred annuities are variable annuities and fixed

annuities, which include “fixed declared-rate annuities” and FIAs. App’x-402, 1642.

Recognition should be given to the differences between state-regulated insurance


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products (e.g., FIAs), on the one hand, and federally-regulated securities products (e.g.,

variable annuities), on the other hand, with respect to three key characteristics: (i)

product guarantees (or lack thereof, in the case of variable annuities); (ii) regulatory

and disclosure regimes; and (iii) the products’ respective distribution channels.

Fixed declared-rate annuity owners are guaranteed a return of principal (subject

to state minimum nonforfeiture laws) and minimum crediting rate during the deferral

phase. App’x-402, 1642. The insurer, normally on an annual basis, declares in

advance a specific crediting rate, which may be above a guaranteed minimum rate.

App’x-402, 1642. The insurer bears the investment risk associated with the declared

rate, which is guaranteed for that upcoming year (or another period). App’x-402,

1642. When the annuity reaches the payout phase, the payments’ amounts are based

on rates guaranteed at the time of issuance (or the insurer’s current rates, if higher)

and are guaranteed for the payout duration. App’x-402, 1563.

The only significant difference between FIAs and fixed declared-rate annuities

is the method for computing interest earnings credited. App’x-1642. An FIA is a

fixed annuity that earns credited interest based on positive changes in a market index,

such as the S&P 500. App’x-402, 1566. Premiums are not invested in index funds.

App’x-402, 1642. The index’s performance is simply used as a reference to determine

the amount of credited interest in accordance with the specified index crediting

method. App’x-402, 1642. The crediting rate is guaranteed to never be less than zero,

even if the market declines and the index is net-negative for the crediting period.


5

App’x-403, 1642. Thus, as with other fixed annuities, principal and prior credited

interest are always protected from market downturns. App’x-403, 1642. Further,

FIAs typically allow the contract owner to elect to switch the chosen reference index

or computation method from year-to-year or, alternatively, to select a fixed rate for

the year. App’x-1642.

Fixed annuities, including FIAs, have always been regulated solely by the states

as fixed insurance products. App’x-403, 1642. The insurance industry is one of the

most heavily regulated industries in the United States, and FIAs are a heavily regulated

product. A comprehensive range of state insurance and consumer protection laws

too numerous to fully catalog here apply to: (i) the insurers that offer FIAs; (ii) the

licensed agents who sell them; (iii) the products themselves; and (iv) sales transactions

involving FIAs. (Summations of these state laws appear in the administrative record.

See, e.g., App’x-1351-1516, 1574-76, 1578, 1580, 1617-26, 194-97.)

Virtually all FIAs are not registered with the SEC as securities. App’x-660.

This treatment was confirmed in the Harkin Amendment to the Dodd-Frank Wall

Street Reform and Consumer Protection Act. Among other things, the Harkin

Amendment requires the SEC to treat as “exempt” under federal securities law

annuity contracts meeting the following requirements: (i) the contract’s value does

not vary according to the performance of a separate account; (ii) the contract satisfies

applicable state standard nonforfeiture laws or, if applicable state law lacks such a

provision, the requirements of the NAIC’s model standard nonforfeiture law; and (iii)


6

the contract is subject to suitability requirements that duplicate or substantially meet

or exceed the requirements of the NAIC model suitability regulation or, alternatively,

the insurer has implemented practices on a nationwide basis that meet or exceed the

NAIC standards and sales are subject to state monitoring for compliance. App’x-740.

In contrast to the principal protection and guarantees associated with fixed

annuities, including FIAs, variable annuities do not have guaranteed returns. Variable

annuities are securities, regulated by federal securities laws, App’x-403, 1644, whose

investment returns vary in accordance with the value of the assets in which funds are

invested. App’x-403, 1644. Unlike fixed annuities, variable annuities are thus exposed

to losses based on the investments’ performance. App’x-403, 1643.

Variable annuities differ from fixed annuities, including FIAs, in other ways.

For example, variable annuities are not subject to state standard nonforfeiture laws

and therefore insurers are not required to guarantee a minimum contract value or rate

of return. App’x-682. Moreover, fixed annuities, including FIAs, are subject to state

guaranty fund laws that provide protections for purchasers if insurers become

insolvent; variable annuities’ separate accounts are not. App’x-1642.

II. Independent Insurance Agent Distribution Channels.

Independent insurance-only agents, also known as “producers,” typically sell a

variety of insurance products, including life insurance and fixed annuities.

Nationwide, about 80,000 independent agents are engaged in FIA sales. App’x-401.


7

Insurers generally do not recruit independent agents to sell their products.

App’x-403. Rather, independent agents are recruited by IMOs to offer, when

appropriate, FIAs and other insurance products to the agents’ clients. App’x-403,

800. In general, an IMO is an intermediary between agents and insurers, providing

economies of scale for producer recruitment, product education, wholesaling,

marketing, processing, and licensing and contract support. App’x-403; 800-01. IMOs

are compensated for their support services through commissions paid by the insurers

with which they have relationships; commissions are generally based upon a

percentage of agent sales volume. App’x-403.

IMOs and their agent networks constitute the largest overall distribution

channel for FIAs. App’x-403, 802. The great majority of FIAs sold in 2014 and 2015

were sold by independent agents not affiliated with a broker-dealer, with the large

majority of that percentage within IRAs. App’x-403, 1172. FIAs represent a

significant portion of a typical IMO’s independent agents’ sales. App’x-403.

Independent agents’ sale of variable annuities, by contrast, is negligible. App’x-800.

Market Synergy is a licensed insurance agency that works with insurers to

develop proprietary FIAs and other insurance products for exclusive distribution.

App’x-401. It partners with select IMOs in distributing those products. Id. Market

Synergy also conducts market research and provides training and product support for

IMO network members and their independent agents. Id. Its business derives from,


8

and is dependent upon, the viability of the IMO/agent distribution channel for sales

of FIAs and other insurance products. Id.

Market Synergy distributes insurance products through eleven IMO network

members located around the country. Id. The network members are independently-

owned insurance wholesalers focused on assisting agents with their life insurance and

annuity business. Id. There are approximately 20,000 agents among the IMOs in the

Market Synergy network. Id.

In 2015, Market Synergy and its network members collectively were responsible

for approximately $15 billion of FIA sales, measured by premium paid. Id. FIAs

represented more than 90% of total sales. App’x-403-04. Virtually all of Market

Synergy’s 2015 revenue was attributable in some way to developing, marketing, or

distributing FIAs. App’x-404.

III. The Department’s Proposed Rulemaking.

A. The “Conflict Of Interest” Rule.

In April 2015, the Department proposed a complex regulatory package that will

severely disrupt the independent distribution channel. The package’s stated purpose

was to minimize purported conflicts of interest associated with the sale of individual

financial products to retirement investors. App’x-1082.

In the first major piece of its regulatory package, the Department published a

notice of proposed rulemaking to redefine who is a “fiduciary” of an employee benefit

plan under ERISA as a result of giving “investment advice” to an ERISA-covered


9

retirement plan or its participants or beneficiaries. App’x-1081-1113. The

Department proposed to treat all persons engaged in the sale of virtually any form of

property to an employee benefit plan, plan fiduciary, plan participant, or beneficiary,

IRA, or IRA owner as fiduciaries under ERISA and the Code, altering current ERISA

regulations and tests for determining fiduciary status. App’x-1081. According to the

proposal, a person would be a fiduciary to a plan or IRA if he or she engaged in

specified sales activities, which were deemed to be the rendering of investment advice,

for a fee or other compensation with respect to any money or property of a plan.

App’x-1109-10. Under the proposal, these newly defined fiduciaries to plans and

IRAs could not receive third-party compensation in “prohibited transactions,” such as

third-party commissions, absent an applicable administrative exemption. App’x-1082.

B. The BICE.

In the package’s second major piece, the Department proposed a new

prohibited transaction class exemption – the BICE – that would provide conditional

relief for common compensation, including third-party commissions and revenue-

sharing, that an Adviser (a defined term in the proposal) and the Adviser’s firm might

receive in connection with investment advice to Retirement Investors (another

defined term). App’x-1114-43. The BICE would require a Financial Institution (also

a defined term) and the Adviser to contractually acknowledge fiduciary status, commit

to Impartial Conduct Standards (including acting in the Retirement Investor’s “best

interest” and receiving no more than “reasonable” compensation), adopt procedures


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designed to minimize the impact of conflicts of interest, and disclose information on

their conflicts and the cost of the advice. App’x-1138-39.

C. PTE 84-24.

1. Proposed amendment and partial revocation.

Third, the Department proposed to amend and partially revoke then-existing

PTE 84-24, a prohibited transaction class exemption for certain transactions involving

insurance agents and brokers, pension consultants, insurers, and investment company

principal underwriters. App’x-1144-60.

Then-existing PTE 84-24, the proposal stated, exempted certain prohibited

transactions that occur when, among other things, ERISA plans or IRAs purchase

insurance and annuity contracts from a “party in interest,” such as a recordkeeper or

investment manager to the plan. App’x-1151-52. The exemption permitted agents,

brokers, and pension consultants that are such parties in interest or fiduciaries with

respect to plans and IRAs to effect the purchase of an “insurance and annuity

contract” and receive commissions on the sale. App’x-1152. The exemption was also

available when the insurer selling the contract is a party in interest or “disqualified

person” with respect to the plan or IRA because the insurer is providing services to

the plan. Id. The proposal noted that, under then-existing PTE 84-24, the term

“insurance and annuity contract” included variable annuities. App’x-1153.

The Department proposed several changes to PTE 84-24. Among these

proposals was the revocation of exemptive relief for insurance agents, insurance


11

brokers, and pension consultants to receive commissions in connection with the

purchase by IRAs “of variable annuity contracts and other annuity contracts that are

securities under federal securities laws.” App’x-1154. Participants in such securities

transactions would be limited to exemptive relief under the new BICE. App’x-1155.

In the proposal’s own words:

As the Best Interest Contract Exemption was designed for IRA owners and other investors that rely on fiduciary investment advisers in the retail marketplace, the Department believes that some of the transactions involving IRAs that are currently permitted under PTE 84-24 should instead occur under the conditions of the Best Interest Contract Exemption, specifically, transactions involving variable annuity contracts and other annuity contracts that are securities under federal securities laws, and mutual fund shares. Therefore, this proposal would revoke relief in PTE 84-24 for such transactions.

App’x-1154 (emphasis added).

“On the other hand,” the proposal continued,

the Department has determined that transactions involving insurance and annuity contracts that are not securities can continue to occur under this exemption, with the added protections of the Impartial Conduct Standards. In this proposal, therefore, the Department has distinguished between transactions that involve securities and those that involve insurance products that are not securities. The Department believes that annuity contracts that are securities and mutual fund shares are distributed through the same channels as many other investments covered by the Best Interest Contract Exemption, and such investment products all have similar disclosure requirements under existing regulations.


12

App’x-1155 (emphasis added). Thus, in contrast to federally-regulated securities

products (e.g., variable annuities), all state-regulated fixed annuities – including FIAs –

would have remained within PTE 84-24’s proposed exemptive scope.

2. The response to proposed PTE 84-24.

Relying on the Department’s assurance that all forms of fixed annuities would

fall within the scope of PTE 84-24, as amended, Market Synergy determined that it

had no need to submit a comment regarding the proposed regulatory package.

App’x-411. Because the Department’s notice drew a line between federally-regulated

securities products and state-regulated insurance products (including FIAs), Market

Synergy and other interested persons had no reason to believe that the Department

would ultimately switch any fixed annuity product into the BICE.

Market Synergy’s understanding of the limited nature of the proposal was

echoed by the industry at large. The Department received over 3,000 comment letters

on the proposed regulatory package. App’x-506. There were also over 300,000

submissions made as part of 30 separate petitions submitted on the proposal. Id.

These comments and petitions came from consumer groups, plan sponsors, financial

services companies, academics, government officials, trade associations, and others,

both in support of, and in opposition to, the proposed rule and related exemptions.

Id. With respect to PTE 84-24, many comments were directed to the issue of whether

securities products like variable annuities and mutual funds should be excluded. See,

e.g., App’x-1517-81, 1582-1614. Market Synergy, however, is unaware of any


13

comment that assumed that the Department intended to exclude non-security

products like FIAs from PTE 84-24. Indeed, it was widely reported in the press that

FIAs would be treated like fixed declared-rate annuities. App’x-116-17. Only two

comment letters specifically suggested that such a change should be considered. Both

of these were submitted by insurance industry competitors on behalf of or related to

investment advisers.

IV. The Department’s Final Rulemaking.

A. The Change In Products Covered By PTE 84-24.

In April 2016, the Department issued its final conflict of interest rule and

BICE, both of which were materially the same (at least for purposes of this appeal) as

their proposed versions. At the same time, the Department issued its amendment to

and partial revocation of PTE 84-24. App’x-651-85. While the amended exemption’s

underlying conditions did not change appreciably from the proposal, the scope of

fixed annuity products covered by the exemption changed dramatically.

In PTE 84-24’s final version, the Department created a new defined term

appearing nowhere in the notice of proposed rulemaking. This new term – “Fixed

Rate Annuity Contract” – excludes FIAs from the exemption: “A Fixed Rate Annuity

Contract does not include a variable annuity or an indexed annuity or similar annuity.”

App’x-681 (emphasis added). The Department acknowledged that the possibility of

this revision was never broached in its notice:


14

The proposed amendment to PTE 84-24 stated that the proposed Best Interest Contract Exemption was designed for IRA owners and other investors that rely on fiduciary investment advisers in the retail marketplace, and expressed the view that some of the transactions involving IRAs that were permitted under PTE 84-24 should instead occur under the conditions of the Best Interest Contract Exemption, specifically, transactions involving variable annuity contracts and other annuity contracts that are non-exempt securities under federal securities laws, and investment company securities.

App’x-660 (emphasis added). The Department also understood “that like Fixed Rate

Annuity Contracts, indexed annuities are generally not regulated as registered

securities under federal securities laws” and that the Harkin Amendment “calls for

certain annuity contracts to be considered exempt securities by the SEC if the

conditions of that section are met.” Id.

The Department did not support its final action with any new or differing

analysis of the three characteristics that prompted the proposal to include all fixed

annuities under PTE 84-24, viz., insurance guarantees, regulatory regimes, and

distribution channels. It acknowledged, but then ignored, commenters who pointed

out that, for purposes of the proposed conflict of interest rule, there is no meaningful

distinction between FIAs and other fixed annuities:

In this regard, some industry commenters focused on indexed annuities, in particular. These commenters asserted that fixed indexed annuities and fixed annuities are identical insurance products except for the method of calculating interest credited to the contract. They said that indexed annuities are treated the same as other fixed annuities under state insurance law and federal securities


15

law, and stated that indexed annuities can offer the same income, insurance and contractual guarantees as fixed annuities. Moreover, some commenters noted that significant investment risk is borne by the insurer and there is no risk of principal loss, assuming that the investor does not incur surrender charges. According to some commenters, indexed annuities are no more complex than other fixed annuities, and there are no different conflicts of interest created with their sales, as compared to fixed annuities.

App’x-661.

The Department neither disputed nor critiqued these comments. It simply

stated: “Based upon its significant concerns about the complexity, risk, and conflicts

of interest associated with recommendations of variable annuity contracts, indexed

annuity contracts and similar contracts, the final exemption treats these transactions

the same way whether the investor is a plan or IRA.” App’x-661-62.

The Department included an appendix to amended PTE 84-24 entitled

“Comparing Different Types of Deferred Annuities.” App’x-682-84. Rather than

identifying any greater or different conflicts of interest between “fixed indexed”

annuities and “fixed-rate” annuities, the appendix highlights the similarities between

the two product-types, with the exception that FIAs use a different method for

computing interest earnings credited to the contract. App’x-682.

B. The Public’s Surprise.

Market Synergy and the insurance industry were astonished by the

Department’s volte-face. See, e.g., App’x-117, 133. The national and trade press


16

reported extensively on the surprise caused by the Department’s adverse treatment of

FIAs. The headlines alone tell the story. See, e.g., Anna Prior & Leslie Scism, Rules for

Indexed Annuities Face an Unexpected Tightening, Wall St. J. (Apr. 6, 2016), at

http://tinyurl.com/zblhjxt; Cyril Tuohy, Annuity Industry Caught Off-Guard by DOL

Rule, InsuranceNewsNet (Apr. 6, 2016), at http://tinyurl.com/zy9bkj5; Kerry Pechter,

Surprise: DOL Rule Targets Indexed Annuities, Ret. Income J. (Apr. 7, 2016), at

http://tinyurl.com/hvb3xqr.1

State insurance regulators also were blindsided by the Department’s action.

For example, as Kansas Insurance Commissioner Ken Selzer attested, had he known

that the Department was contemplating reversing its proposal on PTE 84-24, he

would have considered providing input during the comment period. App’x-198.

Kansas and other states’ insurance regulators, however, were denied that opportunity

because the Department put neither them nor the public on notice that it might treat

FIAs other than as proposed. Id.

C. Consequences Of The Department’s About-Face.

Because PTE 84-24 will be unavailable to FIA sellers, to continue receiving

third-party compensation, they must operate under the BICE. To do that, on the

1 Although not in the administrative record, the Court may consider evidence showing the surprise at the Department’s action experienced by the press, industry, and others. Courts may consider “evidence coming into existence after the agency acted that demonstrates that the actions were right or wrong.” Valley Cmty. Preservation Comm’n v. Mineta, 373 F.3d 1078, 1089 n.2 (10th Cir. 2004).


17

approaching January 1, 2018 applicability date, FIA sellers will need a qualifying

sponsoring Financial Institution.

Neither Market Synergy nor IMOs themselves qualify as Financial Institutions.

In promulgating the BICE, the Department specifically declined to expand the

categories of Financial Institutions to “marketing or distribution affiliates or

intermediaries.” App’x-616. The Department limited the definition of Financial

Institution to certain entities “subject to well-established regulatory conditions and

oversight,” viz., registered securities broker-dealers, registered investment advisers,

banks, and, if certain conditions are met, insurers. Id.

Although the Department allowed that it might grant individual exemptions to

IMOs, it indicated that any such exemption would depend upon the IMO’s “ability to

effectively supervise individual Advisers’ compliance” with the BICE. Id. Because

they serve independent agents, however, Market Synergy and IMOs are not configured

to “effectively supervise” BICE compliance without fundamentally restructuring their

operations at an impractical cost. App’x-122-23. IMOs are not structured to, and do

not: (i) control the type or degree of interaction independent agents have with their

clients; or (ii) direct agents’ day-to-day activities. App’x-123. Moreover, independent

insurance-only agents do not and cannot legally work with securities broker-dealers

and registered investment advisers. Many do not want to become securities-licensed.

The customary relationships with securities brokerage and advisory firms are


18

incompatible with the independent nature of these insurance professionals’

businesses. See, e.g., App’x-166, 183-84, 192.

It is also doubtful whether any insurers will agree to serve as Financial

Institutions for purposes of supervising independent agents under the BICE. To

Market Synergy’s knowledge, no FIA carrier has publicly affirmed that it is willing to

do so. In other litigation with the Department, FIA carriers – through their trade

associations – have confirmed that they will not sponsor independent agents.2 The

reason is apparent: independent sales forces exist to avoid having insurers assume

responsibility for, or control of, independent agents. Insurers must consider the risk of

being held legally liable under a “Best Interest Contract” for the agents’ acts and

omissions, as well as establishing the new procedures, disclosures, and supervisory

apparatus required under the BICE. And insurers cannot reasonably know what

recommendations agents make using other insurers’ products, yet the BICE presumes

that they must. Rather than distributing FIAs through independent channels, insurers

will likely attempt to shift their distribution to career agents, banks, registered

investment advisers, and broker-dealers, or simply exit the space completely.

2 See Pl.’s Memo. in Support of Mot. for Summ. Judg., Chamber of Commerce of the United States v. Perez, No. 3:16-CV-1476, ECF No. 59 at 25 (N.D. Tex. filed July 18, 2016), 2016 WL 4190833; Pl.’s Reply in Support of Mot. for Prelim. Inj., Nat’l Ass’n for Fixed Annuities v. Perez, No. 1:16-CV-1035, ECF No. 27 at 44 (D.D.C. filed July 22, 2016), 2016 WL 4497565.


19

V. The Proposed “Insurance Intermediary” Exemption.

Tacitly admitting that its regulatory package maroons the independent

insurance agent distribution channel, nine months after unveiling that package, the

Department proposed a new class exemption similar to the BICE but limited to

certain “Insurance Intermediaries” like IMOs: BICE-II. The Department proposed

to allow some IMOs to act as Financial Institutions if they qualify under and comply

with an extraordinary set of conditions, including a $1.5 billion premium fixed annuity

sales threshold, maintaining capital reserves and/or fiduciary liability insurance,

annually undergoing and making public independent financial audits, and reviewing

and approving marketing materials, along with most conditions of the original BICE.

The Department’s proposal is just that – a proposal – and is subject to material

modifications or, more likely, will never be granted at all. Most (if not all) IMOs and

Market Synergy could not qualify as Financial Institutions under BICE-II’s onerous

conditions anyway. Among other things, most IMOs: (i) have not transacted sales of

fixed annuities averaging at least $1.5 billion in premiums per fiscal year over their

prior three fiscal years; and/or (ii) will be unable or unwilling to maintain fiduciary

liability insurance, unencumbered capital reserves, or some combination thereof, in an

aggregate amount equal to at least 1% of the average annual amount of premium sales

of fixed annuities sold over their prior three fiscal years.


20

VI. The Proceedings Below.

In May 2016, Market Synergy filed suit to require the Department to give

transactions involving FIAs the same exemptive relief that transactions involving

other fixed annuities receive under PTE 84-24. It moved for a preliminary injunction,

which the Department opposed. The District Court denied that motion in a

November 2016 order. App’x-398. In February 2017, the District Court entered

summary judgment in the Department’s favor, incorporating the findings of fact and

legal conclusions made in its order denying the motion for preliminary injunction.

App’x-483. The District Court ruled that the Department: (i) gave sufficient notice

that it would remove FIAs from PTE 82-24’s scope; (ii) did not arbitrarily treat FIAs

differently from other fixed annuities; and (iii) adequately considered the effects of its

actions on independent distribution channels. App’x-487-88. This appeal followed.

VII. Subsequent Developments.

In February 2017, the President directed the Department to examine whether

its rulemaking may adversely affect the ability of Americans to gain access to

retirement information and financial advice, and to prepare an updated economic and

legal analysis concerning the likely impact of the rulemaking. See 82 Fed. Reg. 9,675

(Feb. 7, 2017). In response to the President’s directive, in April 2017 the Department

required that fiduciaries relying on the BICE and PTE 84-24 adhere only to the

Impartial Conduct Standards as conditions of those exemptions during a transition

period from June 9, 2017 through January 1, 2018. See 83 Fed. Reg. 16,902 (Apr. 7,


21

2017). In other words, the fiduciary definition and the exemptions’ Impartial

Conduct Standards became applicable on June 9, 2017, while compliance with the

exemptions’ remaining conditions, such as the BICE’s requirement to enter into “Best

Interest Contracts,” is not required until January 1, 2018. See id.

Most recently, the Department issued a request for information seeking public

input that could form the basis of new exemptions or changes to the fiduciary

definition and PTEs, and input regarding the advisability of extending the January 1,

2018 applicability date. See 82 Fed. Reg. 31,278 (July 6, 2017). Except for one

question, comments in response to the request for information must be submitted to

the Department on or before August 7, 2017. Id.

SUMMARY OF ARGUMENT

1. The Department’s surprise “switcheroo” is unlawful. After announcing

in 2015 that it “determined that transactions involving insurance and annuity

contracts that are not securities can continue to occur under this exemption [i.e., PTE

84-24],” App’x-1155, in 2016 the Department reversed course, announcing that “the

exemption does not cover variable annuities, indexed annuities or similar annuities,”

App’x-656, while acknowledging that, unlike variable annuities, “indexed annuities are

generally not regulated as registered securities under federal securities laws.” App’x-

660. The District Court held that this turnabout – which stunned the industry, press,

and state insurance regulators – was a “logical outgrowth” of the proposal. But a final

agency action cannot be a logical outgrowth of a proposed action that disclaimed the


22

final action. Nothing in the administrative record hinted at how the Department

would ultimately treat FIAs under PTE 84-24.

2. The Department irrationally treats FIAs differently from other fixed

annuities. The Department emphasized without factual basis that FIAs are “riskier”

and more “complex” than other fixed annuities. These are non sequiturs. The

Department’s stated aim was to remediate conflicted advice and self-dealing in the

sale of financial products. The Department, however, remains unable to identify a

single conflict of interest associated with FIAs that does not also exist for fixed

annuities. Nor does the Department explain why any conflicts associated with FIAs

could not be mitigated under amended PTE 84-24’s Impartial Conduct Standards.

FIAs are not uniquely riskier or more complex anyway – the features the Department

claimed evince FIAs’ risk and complexity are equally features of other fixed annuities.

3. The Department never evaluated whether, without PTE 84-24,

independent distribution channels could sell FIAs under the BICE. No Financial

Institution will sponsor them. The Department did not meaningfully consider the

consequent harm its final action would inflict upon those in that channel. While the

Department cursorily assessed the anticipated economic impact upon insurance

companies, it overlooked the existential threat its actions pose to independent agents,

IMOs, Market Synergy, and others. The belated proposal of BICE-II underscores

how poorly conceived the Department’s original regulatory package was.


23

ARGUMENT

I. Standard Of Review.

When reviewing a final agency action under the APA, the Court independently

reviews the action and is not bound by a district court’s factual findings or legal

conclusions. United Keetoowah Band of Cherokee Indians of Okla. v. HUD, 567 F.3d 1235,

1239 (10th Cir. 2009). Review is thus de novo. Olenhouse v. Commodity Credit Corp., 42

F.3d 1560, 1564 (10th Cir. 1994). An action must be set aside if, among other things,

it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with

law,” 5 U.S.C. § 706(2)(A), “without observance of procedure required by law,” id. §

706(2)(D), or “unsupported by substantial evidence,” id. § 706(2)(E).

Generally, a final agency action is arbitrary and capricious if the agency

“entirely failed to consider an important aspect of the problem, offered an explanation

for its decision that runs counter to the evidence before the agency, or is so

implausible that it could not be ascribed to a difference in view or the product of

agency expertise.” Motor Vehicle Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins. Co., 463

U.S. 29, 43 (1983). While that standard of review is “narrow,” it “does not mean that

the review is insubstantial”; “to the contrary,” the Court must engage in a “substantial

inquiry” and conduct a “thorough, probing, in-depth review.” United Keetoowah Band,

567 F.3d at 1239. “Determination of whether the agency complied with prescribed

procedures requires a plenary review of the record and consideration of applicable

law.” Olenhouse, 42 F.3d at 1574.


24

II. The Department Gave No Warning That It Would Remove FIAs From PTE 84-24.

Agencies like the Department must publish notices of proposed rulemakings

articulating, among other things, “either the terms or substance of the proposed rule

or a description of the subjects and issues involved.” 5 U.S.C. § 553(b)(3).

Meaningful notice is essential to “give interested persons an opportunity to participate

in the rule making through submission of written data, views, or arguments.” Id. §

553(c). Rules made in contravention of this requirement are “without observance of

procedure required by law” and must be set aside. Id. § 706(2)(D).

While agencies may change proposed rules after a comment period without

triggering new rounds of notice, any final rule must be a “logical outgrowth” of the

proposed rule. A final rule can only be a logical outgrowth of an actual proposed rule,

which must warn that the agency is considering an about-face. See Am. Mining Cong. v.

Thomas, 772 F.2d 617, 639 (10th Cir. 1985). After all, agencies cannot “use the

rulemaking process to pull a surprise switcheroo on regulated entities.” Envt’l Integrity

Project v. EPA, 425 F.3d 992, 996 (D.C. Cir. 2005).

Here, interested persons could not have anticipated the Department’s

treatment of FIAs in PTE 84-24. Neither the term “fixed indexed annuity” nor its

alternative appellation, “equity indexed annuity,” or their cognates appear anywhere in

the Department’s notices of proposed rulemaking. The Department determined that

only “some of the transactions involving IRAs that are currently permitted under PTE


25

84-24 should instead occur under the conditions of the [BICE], specifically, transactions

involving variable annuity contracts and other annuity contracts that are securities under federal

securities laws, and mutual fund shares.” App’x-1154 (emphasis added). Therefore, the

Department advised, “the amendment would revoke relief for insurance agents,

insurance brokers and pension consultants to receive a commission in connection

with the purchase by IRAs of variable annuity contracts and other annuity contracts that are

securities under federal securities laws[.]” App’x-1152 (emphasis added).

Having “distinguished between transactions that involve securities and those

that involve insurance products that are not securities,” the Department “determined

that transactions involving insurance and annuity contracts that are not securities can continue to

occur under this exemption [i.e., PTE 84-24], with the added protections of the Impartial

Conduct Standards.” App’x-1155 (emphasis added). FIAs are not securities, a point

the Department never disputed. App’x-660. Accordingly, because PTE 84-24, as

amended, excluded FIAs, that exclusion was not a logical outgrowth of the proposal.

A. The Department’s “Switcheroo” Was Unanticipated.

The District Court’s ruling to the contrary blinks reality. When the

Department announced its decision to exclude FIAs from amended PTE 84-24, the

industry, state insurance regulators, and press all expressed their astonishment. The

District Court discounted this widespread public reaction “as resulting not from a lack

of notice, but from a miscalculation about how the DOL would ‘draw the lines’ when


26

it decided which transactions would remain covered by PTE 84-24 and which would

fall under the BICE in the final rules.” App’x-435.

That paints a misleading picture. The public was surprised, not disappointed by

some “miscalculation.” An article from InvestmentNews, a trade publication,

captured the sentiment the day amended PTE 84-24 was unveiled: “The Department

of Labor dealt a bit of a surprise blow to fixed indexed annuities in the final iteration

of its rule, issued Wednesday, by lumping the annuities into a more complex and

costly regulatory regime than they have presently, representing an about-face from the

department’s original proposal.” Greg Iacurci, Variable and fixed-indexed annuities feel

sting of DOL fiduciary rule, InvestmentNews (Apr. 6, 2016), at

http://tinyurl.com/ja2c3m3. Another publication echoed: “They didn’t make it, and

the annuity industry was caught off-guard. Fixed indexed annuities (FIAs), which had

originally been left out of a draft proposal of the Department of Labor’s new fiduciary

rule, were added to variable annuities as the two classes of annuity products requiring

an exemption.” Cyril Tuohy, Annuity Industry Caught Off-Guard by DOL Rule,

InsuranceNewsNet (Apr. 6, 2016), at http://tinyurl.com/zy9bkj5.

In the same vein, state insurance officials complained that the Department did

not put “the public on notice of such a contemplated reversal from the proposed

rulemaking package, nor has the Department allowed for additional comment now

that its significant reversal of position has appeared for the first time in the final

published rule.” App’x-198. Congress, too, was surprised by the Department’s


27

about-face. See H.R. Rep. No. 114-527, at 17 (2016) (“[U]nlike the 2015 [notice of

proposed rulemaking], under the final rule, all variable and fixed-index annuities will

need to comply with the new requirements.”).

The District Court shrugged off these reactions. Widespread public and

regulatory surprise at FIAs’ treatment in amended PTE 84-24 concretely

demonstrates, however, that the Department’s notice was in fact deficient.

B. The District Court Misread The Notice Of Proposed Rulemaking.

1. The Department solicited comments on potential changes to the BICE, not on FIAs’ removal from PTE 84-24.

The District Court premised its ruling on the following notice language:

The Department is not certain that the conditions of the Best Interest Contract Exemption, including some of the disclosure requirements, would be readily applicable to insurance and annuity contracts that are not securities, or that the distribution methods and channels of insurance products that are not securities would fit within the exemption’s framework. While the Best Interest Contract Exemption will be available for such products, the Department is seeking comment in that proposal on a number of issues related to use of that exemption for such insurance and annuity products. The Department requests comment on this approach. In particular, the Department requests comment on whether the proposal to revoke relief for securities transactions involving IRAs (i.e., annuities that are securities and mutual funds) but leave in place relief for IRA transactions involving insurance and annuity contracts that are not securities strikes the appropriate balance and is protective of the interests of the IRAs.

App’x-428 (quoting App’x-1155).


28

With this language, the District Court reasoned, “DOL specifically requested

public comments about whether its approach – leaving within the scope of PTE 84-

24 ‘insurance and annuity contracts that are not securities’ – is appropriate when the

proposal revokes the relief afforded under PTE 84-24 for annuities that are securities

and mutual funds.” App’x-428. This open-ended language supposedly “put the

public on notice that the DOL was considering whether to remove from PTE 84-24

other types of insurance and annuity products that are not securities.” App’x-428-29.

As even the District Court acknowledged at oral argument, however, this

language is “notice of everything and notice of nothing in some respects.” App’x-

1795-1796. “Posing such a general ‘scope’ question does not suffice to provide the

requisite ‘fair notice’ for an agency rule to be upheld as a logical outgrowth.” Mid

Continent Nail Corp. v. United States, 846 F.3d 1364, 1377 (Fed. Cir. 2017). Such “weak

signals” are inadequate. Shell Oil Co. v. EPA, 950 F.2d 741, 751 (D.C. Cir. 1991). “If

the APA’s notice requirements mean anything, they require that a reasonable

commenter must be able to trust an agency’s representations about which particular

aspects of its proposal are open for consideration. A contrary rule would allow an

agency to reject innumerable alternatives in its Notice of Proposed Rulemaking only

to justify any final rule it might be able to devise by whimsically picking and choosing

within the four corners of a lengthy ‘notice.’” Envt’l Integrity, 425 F.3d at 998.

The Department’s notice did not even whisper what was coming. The most

logical reading of that notice is that the “approach” on which comment was requested


29

were potential modifications to the BICE, not to PTE 84-24. The Department’s

notice sought comment on whether it should follow through on moving variable

annuities and mutual funds into the BICE, not out of PTE 84-24. The notice never

receded from the Department’s unqualified determination that “transactions involving

insurance and annuity contracts that are not securities can continue to occur under”

PTE 84-24. App’x-1155.

The District Court waved aside this reading as “too narrow.” App’x-430.3

“However, nuance and subtlety are not virtues in agency notice practice.” Natural

Resources Def. Council v. EPA, 279 F.3d 1180, 1189 (9th Cir. 2002). Asking for

comment on “issues related to use of” the BICE “for [non-security] insurance and

annuity products,” App’x-1155, is not the same as asking for comment on whether

the Department should revoke PTE 84-24 for such products. Soliciting comment on

the BICE’s applicability to non-security annuities does not preclude PTE 84-24’s dual

applicability to the same – non-security annuities could be sold under either

exemption. In amended PTE 84-24, the Department confirmed that the BICE 3 The District Court relied on National Association for Fixed Annuities v. Perez, 217 F. Supp. 3d 1 (D.D.C. 2016), but the “notice” question was neglected by the plaintiff in that case. As the Department observed in its briefing there, “NAFA appears to have abandoned its argument that DOL provided inadequate notice for the final PTE 84-24’s exclusion of FIAs,” referencing the argument “only once, and only to justify the industry’s refusal to provide data to DOL.” Defs.’ Reply in Support of Mot. for Summ. Judg., Nat’l Ass’n for Fixed Annuities v. Perez, No. 1:16-CV-1035, ECF No. 30 at 27 n.33 (D.D.C. filed Aug. 5, 2016), 2016 WL 4497547. The NAFA decision does not even mention the crucial sentence in the notice of proposed rulemaking affirming that the Department “has determined that transactions involving insurance and annuity contracts that are not securities can continue to occur under” PTE 84-24.


30

“applies to all annuities, including Fixed Rate Annuity Contracts as well as variable annuity

contracts and indexed annuity contracts.” App’x-657 (emphases added).

2. The Department failed to identify the assumptions on which it would distinguish FIAs from other fixed annuities.

The notice’s deficiency is amplified by its failure to identify the standards by

which the Department would distinguish FIAs from other fixed annuities, viz.,

supposedly greater or different conflicts of interest, investment risk, and product

complexity. The District Court conceded that “these standards do not appear in the

proposed rule,” but countered that “governing legal principles do not require that

level of detail to satisfy the APA’s notice requirement.” App’x-432. That is wrong.

To permit meaningful comment, “the APA does require the disclosure of

assumptions critical to the agency’s decision.” Shands Jacksonville Med. Ctr. v. Burwell,

139 F. Supp. 3d 240, 263, 265 (D.D.C. 2015). Interested persons should not have “to

divine the agency’s unspoken thoughts.” Envt’l Integrity, 425 F.3d at 996.

Here, the public was never informed that it should comment on whether FIAs

differ from other fixed annuities based upon conflicts, risk, or complexity. Nor was

the public informed that the Department viewed (or might view) FIAs as more similar

to variable annuities and other securities products in those regards. Because the

Department’s notice did not identify the assumptions by which it ultimately purported

to distinguish FIAs from other fixed annuities, it did not meaningfully disclose the

reasoning that ultimately animated PTE 84-24’s amendments.


31

C. The Few Comments Submitted Concerning FIAs Are Irrelevant.

1. The District Court relied on legally irrelevant comments.

The District Court drew support for its ruling from the fact that the

Department “received comments from other interested parties” supposedly

“discussing whether FIAs should remain covered under PTE 84-24 or move into the

BICE.” App’x-432. Even if this characterization of the record were accurate – it is

not – the comments of select “interested parties” are legally irrelevant. “Others

possibly not so knowledgeable also were interested persons within the meaning of 5

U.S.C. § 553.” Wagner Elec. Corp. v. Volpe, 466 F.2d 1013, 1019 (3d Cir. 1972).

Courts consistently refuse to conclude, based upon actual knowledge by some

interested persons, that all interested persons had adequate notice. See, e.g., Daimler

Trucks N. Am. LLC v. EPA, 737 F.3d 95, 102 (D.C. Cir. 2013) (“petitioners’ notice of

EPA’s interpretation does not imply that the public had notice of, or an opportunity to

comment on, EPA’s changes to the regulation”) (emphasis in original); MCI

Telecommnc’ns Corp. v. FCC, 57 F.3d 1136, 1143 (D.C. Cir. 1995) (“[E]ven if we credit

the Commission with having demonstrated that Sprint had actual notice of the

Commission’s intentions, this is insufficient because the Commission has failed to

demonstrate that the other three IXC parties before the court had actual notice.”);

Wagner Elec., 466 F.2d at 1019 (“The fact that some knowledgeable manufacturers

appreciated the intimate relationship between the permissible failure rate provisions


32

and the performance criteria, and so responded, is not relevant.”). In reaching the

opposite conclusion, the District Court misapplied the relevant legal standard.

2. Those comments are also factually irrelevant, demonstrating confusion at most.

The handful of cited comments prove nothing anyway. The District Court

stated that “one commenter interpreted the proposed rule as ‘specifically requesting

comment on which exemption, the BICE or a revised PTE 84-24, should apply to

different types of annuity products.’” App’x-432. But this commenter addressed only

whether variable and other securities-type annuities should remain in PTE 84-24.

App’x-1598-1599. As the commenter wrote, the “draft of the Proposal would

bifurcate the regulation of different types of insurance products, so that variable

annuities and other registered annuities would be subject to a new [BICE], but fixed

annuities and fixed index annuities would be subject to a revised PTE 84-24.” App’x-

1598. The District Court read this comment out of context.

“Other commenters,” the District Court continued, “praised the DOL for

keeping FIAs within the PTE 84-24 exemption and urged the DOL to let them

remain there instead of moving them into the BICE.” App’x-432. These comments

only underscore the public’s belief that FIAs would remain under PTE 84-24, not that

the Department would make BICE the sole available exemption. In any event,

adequate notice cannot be conjured from certain commenters’ confusion.


33

The District Court also made much of a comment submitted by an IMO within

Market Synergy’s network, Advisors Excel. App’x-1710-13. That comment, however,

did not address the BICE, FIAs’ potential exclusion from PTE 84-24, or similarities

between FIAs and other fixed annuities. Advisors Excel’s stated purpose was simply

to “urge the Department to: (1) adopt a workable definition of ‘commission’; (2)

develop a viable method in how compensation is disclosed; and (3) offer clearer

guidance on what is meant by ‘reasonable compensation’; and (4) provide a realistic

timeframe for implementation.” App’x-1711. Its comment briefly mentioned that

fixed annuities (not just FIAs) have no downside investment risk and that consumer

complaint rates for fixed annuities (again, not just FIAs) are minimal, App’x-1711-12,

but did not offer any focused discussion of these or the other points that Market

Synergy has since raised in litigation against the Department. The District Court’s

reliance on this comment, too, was factually (and legally) misplaced.

D. The District Court’s “Harmless Error” Finding Is Doubly Flawed.

1. Where, as here, the lack of notice is complete, a showing of prejudice is not required.

The District Court separately found that any notice deficiency “was harmless

error because other commenters made the same comments” Market Synergy would

have made “and thus plaintiff can show no prejudice.” App’x-435. But where, as

here, there is an utter failure to provide notice of a proposed rulemaking, actual


34

prejudice caused by the lack of notice need not be shown. See Sprint Corp. v. FCC, 315

F.3d 369, 376 (D.C. Cir. 2003); Shell Oil, 950 F.2d at 752.

Broadening the “harmless error” rule to require prejudice would virtually repeal

the APA’s notice requirements:

[I]f the government could skip those procedures, engage in informal consultation, and then be protected from judicial review unless a petitioner could show a new argument – not presented informally – section 553 obviously would be eviscerated. The government could avoid the necessity of publishing a notice of a proposed rule and perhaps, most important, would not be obliged to set forth a statement of the basis and purpose of the rule, which needs to take account of the major comments – and often is a major focus of judicial review.

Sprint, 315 F.3d at 376-77 (internal quotation marks omitted). The District Court

erred by applying the “harmless error” rule at all.

2. Market Synergy and others were prejudiced.

Regardless, Market Synergy was harmed because it would have more

thoroughly presented its arguments had it known that its core business model was in

jeopardy. Commenters like Market Synergy never really knew what points, if any, to

focus on, nor could interested persons have anticipated either the Department’s

ultimate conclusion or that conclusion’s undisclosed assumptions.

For example, Market Synergy and others could not comment on the harm to

the independent distribution channel resulting from FIAs’ exclusion from PTE 84-24.

Although it found that “the DOL understood that annuities are sold through this


35

channel, how this channel functioned under the existing regulations, and how it would

operate under the new rules,” App’x-437, the District Court elsewhere found that the

Department “explained that it lacked sufficient data” to “account for costs for

independent insurance agents.” App’x-449. Market Synergy and others would have

supplied that missing data, but could not anticipate the need to do so. Understanding

the independent distribution channel’s basic operation is not the same as considering

(or quantifying) the detriment the channel will suffer by the Department’s choices.

Likewise, no comment addressed the post hoc “solutions” the Department

suggested in the litigation below, e.g., individual or class exemptions treating IMOs as

Financial Institutions. Those purported “solutions” did not even exist before

amended PTE 84-24 was unveiled.

Nor do the handful of comments to which the District Court pointed address a

central premise of this suit: that FIAs are functionally indistinguishable from other

fixed annuities with regard to their purported “conflicts of interest,” “risk,” and

“complexity.” Because the Department never indicated that it might view FIAs as

dissimilar from other fixed annuities or discussed FIAs in its notice, nobody submitted

a comment focusing on that issue.

To support its harmless-error analysis, the District Court relied on Allina Health

Services v. Sebelius, 746 F.3d 1102 (D.C. Cir. 2014). App’x-436. That case, however,

supports Market Synergy, not the Department. Similar to what happened here, in

Allina, “there were a few commenters who initially commented in support of the final


36

rule, apparently not understanding its implications, and another commenter who read

the proposed rule as if it were the final rule. But the tiny handful of comments mostly

revealed hopeless confusion, rather than focused opposition to the final rule,” so the

court could not conclude “that the agency’s error was harmless.” 746 F.3d at 1110.

This Court should reach the same conclusion. The scant few confused

comments on which the District Court relied hardly suggest common knowledge of a

potential agency turnabout, particularly where billions of dollars are at stake. Dozens

of comments spanning hundreds of pages explained why variable annuities should

remain in PTE 84-24 alongside fixed annuities, see, e.g., App’x-1517-81, 1582-1614, but

virtually no comment addressed FIAs’ exclusion from PTE 84-24. Quantitatively,

one would have expected an avalanche of comments on such a transformative issue.

Qualitatively, Market Synergy’s, state insurance regulators’, and the industry’s

comments would have looked much different than the few sparsely sketched

comments on which the District Court relied – each of which assumed that the

Department would not exclude FIAs from PTE 84-24. Interested persons, however,

were denied the opportunity to do so, in violation of the APA. See Natural Resources

Def. Council, 279 F.3d at 1188 (“[T]hat interested parties did not anticipate the

paradigm shift from the draft to the final permit is underscored by the contents of the

instant petition for review, which raises for the first time numerous issues about the

proposed change.”); Natural Resources Def. Council v. EPA, 824 F.2d 1258, 1285 (1st

Cir. 1987) (“Because the public never saw this provision until the final rule was


37

promulgated, it is not surprising that the petitioners are now raising so many

challenges to this provision since this court provides the first and only forum that they

have had in which to express their concerns.”).

III. FIAs Are Arbitrarily Treated Differently From Other Fixed Annuities.

The Department violated the APA in yet another way – arbitrarily treating

FIAs adversely relative to other fixed annuities. “The treatment of cases A and B,

where the two cases are functionally indistinguishable, must be consistent. That is the

very meaning of the arbitrary and capricious standard.” Indep. Petroleum Ass’n of Am. v.

Babbitt, 92 F.3d 1248, 1260 (D.C. Cir. 1996). Rather than identifying any conflict of

interest associated with FIAs that differs from or is greater than conflicts associated

with other fixed annuities, the Department maligned FIAs as “risky” and “complex.”

The District Court acquiesced in those characterizations, also without itself identifying

any FIA-specific conflict. The Department, however, is not tasked with regulating

financial products for risk or complexity, but with regulating against fiduciary self-

dealing. Regardless, FIAs are no more risky or complex than other fixed annuities

and, further, they are adequately regulated by existing state law.

A. The Department Failed To Explain Why PTE 84-24’s Impartial Conduct Standards Would Not Abate Conflicts Of Interest, Or To Identify Conflicts Unique To FIAs.

The Department’s disparate treatment of FIAs and other fixed annuities –

functionally indistinguishable products – was arbitrary for two reasons.


38

First, the Department failed to explain why the Impartial Conduct Standards

that apply to fixed annuities exempted under PTE 84-24 would not equally assuage

any purported conflicts of interest associated with FIAs.

“Generally stated, the Impartial Conduct Standards require that when insurance

agents, insurance brokers, pension consultants, insurance companies or investment

company principal underwriters provide fiduciary investment advice, they act in the

plan’s or IRA’s Best Interest, and not make misleading statements to the plan or IRA

about recommended transactions.” App’x-663. According to the Department, PTE

84-24’s Impartial Conduct Standards “ensure that advisers’ recommendations reflect

the best interest of their retirement investor customers, rather than the conflicting

financial interests of the advisers and their financial institutions.” App’x-664.

Although, unlike the BICE, PTE 84-24 does not require “that parties

contractually commit to the Impartial Conduct Standards,” App’x-663 (emphasis

added), the Department never explained why PTE 84-24’s Impartial Conduct

Standards, together with existing state-based regulation, would adequately protect

against conflicts of interest in fixed annuity transactions, but not against conflicts in

FIA transactions. Indeed, in later delaying the exemptions’ applicability date to

January 2018 while leaving PTE 84-24’s Impartial Conduct Standards in place before

that time, the Department concluded that, during this transitional period, “much of

[the predicted] harm could be avoided through the imposition of fiduciary status and


39

adherence to basic fiduciary norms, particularly including the Impartial Conduct

Standards.” 83 Fed. Reg. 16,902, 16,905 (Apr. 7, 2017).

Second, and relatedly, there are no conflicts of interest that exist for FIAs that

do not otherwise exist for other fixed annuities. Neither the Department nor the

District Court identified a single conflict-based distinction between FIAs and other

fixed annuities related to the manner in which the products are sold. There are none.

The closest the Department came was its post hoc rationalization “that

commissions for FIAs typically exceed those for other products, including declared-

rate annuities.” App’x-443. For this, the Department (and the District Court) cited

its Regulatory Impact Analysis and a single comment. App’x-443-44. The Regulatory

Impact Analysis, however, did not compare rates for FIAs with those for fixed

annuities. App’x-829. Nor did the comment, which is itself devoid of reference to

any data. App’x-1676. These citations instead compare FIA commission rates to

rates for insurance products generally. That is not substantial evidence of anything.

And the record contradicts the Department on this score. According to the

Department’s own data, FIA commission rates are lower than for other life insurance

products. “Commissions on indexed annuities average 6.3 percent of the principal

payment,” the Department stated, while for life insurance products generally

“aggregate commission payments accounted for 7 percent of aggregate total expenses

and amounted to 9 percent of total premiums in 2013.” App’x-829. The Department


40

“offered evidence for its decision that runs counter to the evidence before the

agency.” Motor Vehicle Mfrs., 463 U.S. at 43.

Although the District Court rejoined that “DOL cited evidence showing that

‘U.S. sales commissions on annuities were about 4% of premiums,’” not only did this

statistic not distinguish between annuity variants, it came from a paper published 15

years earlier. App’x-444. The Department ignored its own evidence that FIA

commission rates declined markedly during the intervening period. See App’x-1174.

The downward trend is obvious, and speaks directly to whether the disparate

treatment of FIAs is justified. As this Court recently emphasized in vacating another

agency’s rule, “where there is a known and significant change or trend in the data

underlying an agency decision, the agency must either take that change or trend into

account, or explain why it relied solely on data pre-dating that change or trend.” Zen

Magnets, LLC v. Consumer Prod. Safety Comm’n, 841 F.3d 1141, 1149 (10th Cir. 2016).

“An agency may not simply ignore without analysis important data trends reflected in

the record.” Id. at 1151. That is precisely what the Department did here.

B. FIAs Are Not Uniquely Risky Or Complex.

Unable to show a conflict of interest different from or greater than a conflict

associated with fixed annuities, the Department mischaracterized FIAs as risky and

complex. But a financial product’s risk or complexity, in and of themselves, do not

engender conflicted sales advice, nor did the Department (or the District Court)


41

explain how they could. Even if FIAs are risky and complex, in a rule intended to

abate conflicted sales advice, that does not justify their disparate treatment.

Neither characterization holds water anyway. Except for the method of

calculating interest credited to the annuity contract – a distinction having no bearing

on the Department’s articulated concerns regarding conflicted sales advice – FIAs are

functionally indistinguishable from other fixed annuities. The typical FIA is

essentially convertible into a fixed declared-rate annuity because it allows the contract

owner to elect to switch the chosen reference index or computation method from

year to year or, alternatively, to select a fixed rate for the year. App’x-1642.

The arbitrary nature of the Department’s action is illustrated by the fact that

FIAs satisfy PTE 84-24’s new definition of “Fixed Rate Annuity Contract.” Only the

concluding sentence in that definition removes by ipse dixit FIAs from PTE 84-24’s

scope. According to the Department, a “Fixed Rate Annuity Contract” is

a fixed annuity contract issued by an insurance company that is either an immediate annuity contract or a deferred annuity contract that: (i) satisfies applicable state standard nonforfeiture laws at the time of issue, or (ii) in the case of a group fixed annuity, guarantees return of principal net of reasonable compensation and provides a guaranteed declared minimum interest rate in accordance with the rates specified in the standard nonforfeiture laws in that state that are applicable to individual annuities; in either case, the benefits of which do not vary, in part or in whole, based on the investment experience of a separate account or accounts maintained by the insurer or the investment experience of an index or investment model. A Fixed Rate Annuity Contract does not include a variable annuity or an indexed annuity or similar annuity.


42

App’x-680-681. In other words, an FIA is a Fixed Rate Annuity Contract, except that

the Department says it is not.

Commenters explained to the Department “that fixed indexed annuities and

fixed annuities are identical insurance products except for the method of calculating

interest credited to the contract”; “indexed annuities are treated the same as other

fixed annuities under state insurance law and federal securities law”; “indexed

annuities can offer the same income, insurance and contractual guarantees as fixed

annuities”; “significant investment risk is borne by the insurer and there is no risk of

principal loss”; and “indexed annuities are no more complex than other fixed

annuities.” App’x-661. All of this fell on deaf ears, however. During its rulemaking,

the Department did not respond to these points or engage the commenters – it

acknowledged but then ignored them. App’x-661-62. Of course “the opportunity to

comment is meaningless unless the agency responds to significant points raised by the

public.” Home Box Office, Inc. v. FCC, 567 F.2d 9, 35-36 (D.C. Cir. 1977).

In the context of a rule addressing conflicted sales advice, the only salient

distinction between FIAs and other fixed annuities – the different method for

computing interest credited to policies accounts – is wholly immaterial. That

difference does not affect the manner in which FIAs are sold, or the incentives to sell

them. Nor does it make FIAs any riskier. To the contrary, as state insurance officials

have long emphasized, “the investment risks associated with fixed indexed annuities


43

are borne by the insurance company, not the consumer” and “the primary feature of

fixed indexed annuities is the safety of principal, not the allure of investments

inherent with variable products, mutual funds, and other securities products.”

NCOIL, Resolution in Support of State Insurance Commissioner Authority Over Fixed Indexed

Annuity Products (Nov. 23, 2008) (“2008 NCOIL Resolution”), at

http://tinyurl.com/gt7hgge; see also Letter from NAIC to Congressman Gregory

Meeks (May 1, 2009), at http://tinyurl.com/zs8p7mb (“Though poor index

performance may reduce payments beyond the minimum rate of return, the

fundamental risk lies with the company, not the consumer.”).

In removing FIAs from PTE 84-24’s scope, the Department relied largely on

three bulletins from FINRA, App’x-1145-48, the SEC, App’x-1149-50, and NASAA,

App’x-1714. App’x-658. Unlike NCOIL and the NAIC, none of those organizations

have experience regulating FIAs. None pointed to any studies or findings of abuse in

the sale of FIAs. And none suggested that federal regulation was warranted.

Nor were their opinions relevant. The SEC and FINRA described FIAs as

“complex” and “risky” if surrendered prematurely, not that their sale involves

purported conflicts of interest. The Department has no business regulating financial

products for their perceived complexity or riskiness. In any event, as discussed below,

any complexity or risk can and has been mitigated through disclosure and suitability

requirements that exist at the state level. State-mandated disclosure requirements, for

example, respond to the SEC’s concern that retirement investors may have to pay


44

surrender charges or tax penalties if they prematurely cancel the annuity contract. For

its part, NASAA’s tendentious, one-sentence statement that FIAs are “instruments of

fraud and abuse” was unaccompanied by any data, reasoning, or factual basis

supporting that charge. Moreover, the NAIC and NCOIL – those organizations

actually responsible for regulating FIAs – have jointly denied the charge of “abuse.”

The Department also relied on American Equity Investment Life Insurance Co. v.

SEC, and various bulletins from the SEC and FINRA, for the proposition that “[i]n

FIAs, as in securities, there is a variability in the potential return that results in a risk

to the purchaser.” 613 F.3d 166, 174 (D.C. Cir. 2009). Even if true, this “variability”

has nothing to do with conflicted sales advice. Moreover, any “variability in the

potential return” is purely “upside risk” – the potential to earn more than a zero return.

As with fixed annuities, there is no “downside risk” – the potential to lose principal.

As with fixed annuities, principal is protected from loss.

Unlike the American Equity court, this Court has held that purely “upside risk”

in life insurance products does not constitute investment risk such that the products

should be treated as securities. See Olpin v. Ideal Nat’l Ins. Co., 419 F.2d 1250, 1261-63

(10th Cir. 1969) (where life insurer would annually place amount, within stated limits

and in proportion to outstanding unendorsed insurance, in a “Bonus Fund,”

committing to repay the insured’s proportionate share plus interest, neither

endorsement, fund, nor release was an “investment security” within federal securities

law, since the insurer was obliged to repay a minimum sum, mathematically calculable,


45

although it might invest fund proceeds). The Court should again adopt that reasoning

and hold that FIAs are no more risky than other fixed annuities.

C. The Department’s Dismissive Treatment Of Existing State-Based Regulation Was Unreasoned.

Compounding its errors, the Department has unnecessarily intruded into an

already heavily regulated field. The states, not the federal government, have always

regulated fixed annuities, including FIAs. In the McCarran-Ferguson Act, Congress

“declare[d] that the continued regulation and taxation by the several States of the

business of insurance is in the public interest.” 15 U.S.C. § 1011. “Certainly,” the

Supreme Court has stated, the “selling and advertising of policies” is “part of this

business.” SEC v. Nat’l Secs., Inc., 393 U.S. 453, 460 (1969). The Harkin Amendment

confirms this “hands-off” approach to federal regulation of FIAs specifically.

The “state-based regulatory structure governing the manufacture, distribution,

and sale of retirement related financial products is effective and proven” and “has in

place on-going substantive procedures, processes and protocols to license, regulate

and supervise insurance agents of retirement related financial products.” NCOIL,

Resolution in Opposition to the United States Department of Labor Fiduciary Rule (Nov. 20,

2016) (“2016 NCOIL Resolution”), at http://tinyurl.com/hdtxk53. Like all other

fixed annuity transactions, FIA transactions are subject to state laws designed to

ensure that insurance agents are adequately trained and licensed; that the agents

recommend only annuities that are suitable given a purchaser’s individual


46

circumstances; that insurers establish a system to supervise annuity recommendations;

that the annuities are readable and disclose material features; and that they offer a

“free-look” provision allowing the purchaser to return the annuity within a period of

time for a full refund. See, e.g., App’x-1351-1516, 1574-76, 1578-80, 1617-26, 194-97;

2016 NCOIL Resolution; 2008 NCOIL Resolution.

State-based regulation works. Compared to other insurance products, hardly

anybody complains to state insurance regulators about FIAs. In 2015, just 52 of all

3,994 life insurance and annuity complaints concerned FIAs. App’x-133.

Understandably, then, state insurance regulators like Kansas Insurance

Commissioner Selzer are “having some difficulty understanding the rationale” behind

the Department’s actions. App’x-197. Commissioner Selzer, like other state officials,

finds it “difficult to justify the Department of Labor’s differing regulatory treatment

of substantially similar (and, for these purposes, materially indistinguishable) fixed

insurance products, largely sold through the same distribution channels, that are

already regulated from a consumer protection standpoint at the state level.” App’x-

198. State officials oppose the Department’s actions precisely because it “would

threaten the proven State-based legislative and regulatory structure by imposing a

vague and burdensome fiduciary standard on non-fiduciary sales relationships, thereby

upending the retirement savings marketplace.” 2016 NCOIL Resolution.

The Department never denied that state-based regulation of FIA transactions is

comprehensive. Instead, the Department’s post hoc rationalization for imposing


47

additional federal regulation is that suitability rules vary by state. To qualify for

exemptive relief under the Harkin Amendment, however, insurers must (and do)

apply suitability standards that meet or exceed all state standards. Moreover, the

Department never explained why uniformity for uniformity’s sake is necessary. Its

rationale – which could justify federal regulation of anything – does not show why

state-based regulation is otherwise inadequate or why federal regulation is needed.

The Department and District Court asserted that “IRA owners need greater

protections when investing in indexed annuities precisely because such products are

not regulated as securities,” App’x-447, but this, too, is just question-begging, not an

explanation for why uniform federal regulation is in the public interest if state-based

protection is adequate. “Ours is not supposed to be the government of the Hunger

Games with power centralized in one district, but a government of diffused and

divided power, the better to prevent its abuse.” United States v. Krueger, 809 F. 3d 1109,

1125 (10th Cir. 2015) (Gorsuch, J., concurring). If anything, the Department is

causing disuniformity by layering superfluous requirements atop the existing regulatory

burden. Dual federal-state regulation of FIAs is inefficient, as state insurance officials

have long maintained. See 2016 NCOIL Resolution; 2008 NCOIL Resolution.

The Department is repeating the same error the SEC made in its own unlawful

attempt to regulate FIAs as federal securities. In American Equity, the court invalidated

the SEC’s regulation, holding that “the SEC’s analysis is incomplete because it fails to

determine whether, under the existing regime, sufficient protections existed to enable


48

investors to make informed investment decisions and sellers to make suitable

recommendations to investors.” 613 F.3d at 179. Because the Department likewise

provided no support for its conclusion that state regulation of FIAs is inadequate, its

decision to impose additional federal regulation is no less arbitrary than the SEC’s

similar decision in American Equity. The Department’s error in imposing the BICE is

even worse because, as discussed above, it discounts the newly-enhanced protections

of PTE 84-24, under which annuity transactions will be subject to Impartial Conduct

Standards, as well as existing state suitability and disclosure standards.

The District Court found American Equity inapplicable because there the SEC

was subject to a statutory directive to consider whether regulation was “‘necessary or

appropriate’” for “‘the protection of investors’” and “‘whether the action will

promote efficiency, competition, and capital formation.’” App’x-446 (indirectly

quoting 15 U.S.C. § 77b(b)). But no similarly-specific statutory directive is necessary

here. An agency violates the APA by having “entirely failed to consider an important

aspect of the problem.” Motor Vehicle Mfrs., 463 U.S. at 43. Plainly, the existence of

adequate state regulation is an “important aspect” of the need for federal regulation.

In any event, there is a similarly-specific statutory directive. Congress directed

the Department to prescribe only regulations “necessary or appropriate” to carry out

ERISA’s relevant provisions. 29 U.S.C. § 1135. “One does not need to open up a

dictionary in order to realize the capaciousness of this phrase.” Michigan v. EPA, 135

S. Ct. 2699, 2707 (2015). A common-sense reading of § 1135 is that a federal


49

regulation is neither “necessary” nor “appropriate” if it duplicates or intrudes upon

adequate state regulation. The District Court erred in concluding otherwise.

IV. The Department Failed To Consider The Crippling Effect Of Its Actions On The Independent Insurance Agent Distribution Channel.

A. The Independent Distribution Channel Is “An Important Aspect

Of The Problem” That Went Ignored. The Department violated the APA by having “entirely failed to consider an

important aspect of the problem,” Motor Vehicle Mfrs., 463 U.S. at 43, in another

critical respect. The Department did not consider the toxic effect its amendment and

partial revocation of PTE 84-24 would have on the independent distribution channel.

The District Court and the Department conceded this failure, satisfying themselves

that the Department “considered the costs that insurers will incur for complying with

the rule and exemptions.” App’x-448 (emphasis added). This was insufficient.

The directive that the Department prescribe only those regulations “necessary

or appropriate” to carry out ERISA’s relevant provisions, 29 U.S.C. § 1135,

necessitates attention to the costs that the regulations impose. See Michigan, 135 S. Ct.

at 2707 (“Read naturally in the present context, the phrase ‘appropriate and necessary’

requires at least some attention to cost.”). “Agencies have long treated cost as a

centrally relevant factor when deciding whether to regulate. Consideration of cost

reflects the understanding that reasonable regulation ordinarily requires paying

attention to the advantages and the disadvantages of agency decisions.” Id.; see also id.

at 2716-17 (Kagan, J., dissenting) (“Cost is almost always a relevant – and usually, a


50

highly important – factor in regulation.”). “Against the backdrop of this established

administrative practice, it is unreasonable to read an instruction to an administrative

agency to determine whether ‘regulation is appropriate and necessary’ as an invitation

to ignore cost.” Id. at 2708.

It is undisputed that FIAs are an important aspect of the retirement product

marketplace – in 2015 more than $303 billion was invested in FIAs. App’x-1643. It is

also undisputed that independent agents and the IMOs that support them are vital to

FIA sales. As the Department found, “in the indexed annuity market insurers heavily

rely on independent insurance agents” and “80 percent of fixed-indexed annuity sales

were attributed to independent insurance agents, whereas only 10 percent of fixed-

indexed annuity sales were completed through banks.” App’x-802-03.

The independent distribution channel’s importance notwithstanding, the

Department admitted that while it “described and acknowledged independent agents,

IMOs, and the independent distribution channel throughout its analysis,” it “could

not quantify the precise cost as to independent agents and IMOs because it did not

have sufficient data.” App’x-248-49. The District Court reiterated: “DOL was

mindful that its analysis may not account for costs for independent insurance agents.”

App’x-448-49. The Department justified its admitted shortcoming because “entities”

in the channel “are closely aligned with insurance companies.” App’x-249. In its

view, “DOL did not need to further single out the independent distribution channel

or weigh additional evidence for its conclusion to be justified.” Id.


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“Conflicts of interest” and “fiduciary investment advice” come, if at all, from

the entities that sell annuities, not the entities that manufacture annuities. By its own

admission, the Department omitted any analysis of the impact on the entities that will

be most affected by amended PTE 84-24. By way of analogy, it is as if the

Department issued a rule restricting how cars may be sold to the public but only

addressed the economic costs to automobile manufacturers, not car dealerships. An

agency’s duty to consider costs cannot be satisfied by its decision to consider some

costs, or the subset of costs it prefers to consider. Otherwise, nothing stops the agency

from gaming the process by cherry-picking which costs to include or exclude.

To be sure, the Department “described” and “acknowledged” the importance

of the independent distribution channel to FIA sales. The District Court cited

portions of the record in which the Department “described” and “acknowledged” the

channel. See App’x-448-51. But look closer: the record cited explains only what the

channel is, not what the channel could become, i.e., how the channel would be

affected by the Department’s rulemaking. The District Court also cited portions of

the record describing the entire regulatory package’s economic impact on the

American economy. See App’x-448-51. Nothing in the record offers a view of the

economic impact on the independent distribution channel specifically. The

Department gave only a vague nod to the obvious point “‘that the final rule will

impose costs on small service providers rendering investment advice to plan or IRA


52

investors including insurance companies and agents and others providing investment

advice to plan and IRA investors.” App’x-449 (quoting App’x-952).

It is one thing to “describe” or “acknowledge” an important aspect of the

problem; it is another thing to actually “consider an important aspect of the problem,”

as the APA requires. Motor Vehicle Mfrs., 463 U.S. at 43 (emphasis added). The

Department never did that. The Department cursorily considered its action’s impact

on those that manufacture such annuities (e.g., insurers), but gave no consideration to

the impact on those who actually offer the supposedly conflicted advice (e.g., agents).

Acknowledging a problem but not analyzing it is caprice epitomized.

B. The Department Is Disjointedly Restructuring The Fixed Annuity Industry.

In excluding FIAs from PTE 84-24, the Department deferred considering

possible solutions to the conundrum in which it put those in the independent

distribution channel: Financial Institutions like insurers will not sponsor independent

agents, and neither the agents nor IMOs themselves qualify as Financial Institutions.

The Department expressly declined to expand the categories of Financial Institutions to

“marketing or distribution affiliates and intermediaries,” leaving for another day the

question of whether such “intermediaries” might receive exemptive relief. App’x-616.

This incremental approach to rulemaking is unreasoned. “[A]n agency does

not act rationally when it chooses and implements one policy and decides to consider

the merits of a potentially inconsistent policy in the very near future.” ITT World


53

Commc’ns, Inc. v. FCC, 725 F.2d 732, 754 (D.C. Cir. 1984). Agencies, therefore, may

not enact “a rule that utterly fails to consider how the likely future resolution of

crucial issues will affect the rule’s rationale.” Nat’l Ass’n of Broadcasters v. FCC, 740

F.2d 1190, 1210 (D.C. Cir. 1984). Of course, agencies may “resolve some issues and

to defer resolution of other issues when the issues decided were not inextricably

related to the issues deferred.” ITT World Commc’ns, 725 F.2d at 754. But here, the

Department “has attempted to restructure the entire industry on a piecemeal basis.”

Id. It finalized an unworkable exemption (the BICE) while kicking down the road the

question of whether it could finalize workable “insurance intermediary” exemptions.

The Department has since proposed BICE-II. That proposal’s very existence

reflects that the Department resolved some issues and deferred resolution of other,

inextricably related issues. Id. (agency acted irrationally by establishing “a policy of

promoting intermodal competition without considering issues which concern directly

the likelihood of intermodal competition”); see also Nat’l Fed’n of Indep. Bus. v. Perez,

2016 WL 3766121, at *38 (N.D. Tex. June 27, 2016) (the Department acted

irrationally when it “failed to consider the ramifications that its New Rule would have

on consultants” and “left such concerns to a separate rulemaking”). Such a

fragmented process again illustrates how the Department “entirely failed to consider

an important aspect of the problem.” Motor Vehicle Mfrs., 463 U.S. at 43.

The Department’s regulation-in-installments approach is particularly disturbing

because, in these circumstances, its “small errors in predictive judgments can have


54

catastrophic effects on the public welfare.” Nat’l Ass’n of Broadcasters, 740 F.2d at

1211. Here, the Department has virtually ensured the destruction of an 80,000-plus

member industry, which is stranded without a workable prohibited transaction

exemption. Although it might grant limited relief to a tiny number of qualifying

insurance intermediaries, if any, proposed BICE-II will not save the industry. Nor can

BICE-II repair the flaws in the Department’s case. Courts “may uphold agency

action only on the grounds that the agency invoked when it took the action.”

Michigan, 135 S. Ct. at 2710. Put bluntly, the Department has done too little, too late.

CONCLUSION

The judgment below should be reversed, and the Department enjoined from

enforcing, implementing, or interpreting PTE 82-24, or taking any other action,

directly or indirectly, to exclude or prohibit transactions involving FIAs from

occurring under the same conditions that apply to Fixed Rate Annuity Contracts.

Dated: July 20, 2017 CARLTON FIELDS JORDEN BURT, P.A. By: /s/ James F. Jorden

/s/ Brian P. Perryman James F. Jorden

[email protected] Brian P. Perryman [email protected]

1025 Thomas Jefferson Street, NW Suite 400 West Washington, DC 20007 (202) 965-8100 Telephone

Michael A. Valerio [email protected]


55

One State Street, Suite 1800 Hartford, Connecticut 06103 (860) 392-5000 Telephone

WALTERS BENDER STROHBEHN & VAUGHAN, P.C. J. Michael Vaughan [email protected] 2500 City Center Square, 1100 Main Kansas City, Missouri 64105 (816) 421-6620 Telephone

Attorneys for Plaintiff-Appellant Market Synergy Group, Inc.


56

STATEMENT REGARDING ORAL ARGUMENT

Plaintiff-appellant Market Synergy Group, Inc. respectfully requests oral

argument at the earliest possible date. This appeal concerns a major rulemaking effort

that threatens the viability of hundreds of small businesses and the livelihood of tens

of thousands of independent insurance agents. Market Synergy believes that oral

argument may be helpful to the Court in resolving the issues on appeal. Both sides

are represented by able counsel who can assist the Court in resolving issues that will

have an impact beyond the parties themselves.


57

CERTIFICATE OF TYPE-VOLUME COMPLIANCE

Pursuant to Fed. R. App. P. 32(g)(1), I hereby certify that this Appellant’s

Opening Brief complies with the requirements of Fed. R. App. P. 32(a)(5) and (6)

because it has been prepared in 14-point Garamond, a proportionally spaced font.

I further certify that this brief complies with the type-volume limitation of Fed.

R. App. P. 32(a)(7)(B) because it contains 12,991 words, excluding the parts exempted

under Rule 32(a)(7)(B)(iii), according to the count of Microsoft Word.

/s/ James F. Jorden /s/ Brian P. Perryman James F. Jorden [email protected] Brian P. Perryman [email protected]

CARLTON FIELDS JORDEN BURT, P.A. 1025 Thomas Jefferson Street, NW

Suite 400 West Washington, DC 20007 (202) 965-8100 Telephone


ADDENDUM


IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS

MARKET SYNERGY GROUP, INC., Plaintiff, v. Case No. 16-CV-4083-DDC-KGS UNITED STATES DEPARTMENT OF LABOR, et al., Defendants.

MEMORANDUM AND ORDER This matter comes before the court on plaintiff’s Motion for Preliminary Injunction (Doc.

10). Defendants submitted an Opposition to plaintiff’s motion (Docs. 25, 41-1 (corrected

version)), and plaintiff filed a Reply (Doc. 36). On September 21, 2016, the court conducted a

hearing on the motion. Afterwards, the parties submitted supplemental briefing (Docs. 52, 53).

After considering the parties’ submissions and arguments, the court now is prepared to rule. For

reasons explained below, the court denies plaintiff’s Motion for Preliminary Injunction.

I. Introduction

Plaintiff Market Synergy Group, Inc. brings this lawsuit under the Administrative

Procedure Act, 5 U.S.C. § 500 et seq., and the Regulatory Flexibility Act of 1980, 5 U.S.C. § 601

et seq., challenging a final regulatory action taken by the Department of Labor (“DOL”) on April

8, 2016. With its Motion for Preliminary Injunction, plaintiff asks the court to issue an order

under Fed. R. Civ. P. 65 that preliminarily enjoins the DOL from taking any action to adopt or

enforce the DOL’s Amendment to and Partial Revocation of Prohibited Transaction Exemption

Case 5:16-cv-04083-DDC-KGS Document 59 Filed 11/28/16 Page 1 of 63


2

(“PTE”) 84-24,1 as it applies to fixed indexed annuity (“FIA”) sales. Plaintiff further seeks an

order requiring that PTE 84-24, as it existed before the DOL’s April 8, 2016 amendment and

partial revocation, remain in effect during the pendency of this litigation. Unless the court orders

the requested injunctive relief, PTE 84-24 will apply to transactions occurring on or after April

10, 2017.2

PTE 84-24 provides regulatory relief to insurance agents and others who, according to the

DOL’s new regulatory definition, are “fiduciaries” and who receive compensation from third

parties in connection with transactions involving an ERISA3 plan or individual retirement

account (“IRA”). Unless an exemption like PTE 84-24 applies, ERISA and the IRS Code4

prohibit fiduciaries from receiving third-party compensation. With the new rule, the DOL

revoked PTE 84-24’s exemption of annuity contracts that do not satisfy the DOL’s newly created

definition of a “Fixed Rate Annuity Contract.” In doing so, the DOL specifically excluded FIAs

from the PTE 84-24 exemption.

The parties have conflicting views about the purpose and effects of the DOL’s

amendment to PTE 84-24. Plaintiff asserts that the rule change will have grave consequences for

its business. Plaintiff describes its business model as one depending heavily on its ability to

receive compensation generated from FIA sales. Plaintiff estimates that its revenue will decline

1 Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters, 81 Fed. Reg. 21,147 (Apr. 8, 2016) (to be codified at 29 C.F.R. pt. 2550) [“Final PTE 84-24”]. 2 Id. at 21,171 (stating that the DOL determined that “an Applicability Date of April 10, 2017, is appropriate for plans and their affected financial services and other service providers to adjust to” the rule change). 3 Employee Retirement Income Security Act of 1974, as amended (“ERISA”), 29 U.S.C. § 1001 et seq. 4 The Internal Revenue Code of 1986, as amended (“the IRS Code”), 26 U.S.C. § 1 et seq.



3

by almost 80% under the amended version of PTE 84-24 because the rule change prohibits

plaintiff and others affiliated with it from receiving third-party compensation for FIA sales.

Plaintiff also anticipates that the independent market organizations (“IMOs”) and insurance

agents that it works with to distribute FIAs will experience significant revenue losses. And,

plaintiff forecasts that more than 20,000 independent insurance agents will exit the marketplace

if the rule change takes effect.

Plaintiff also complains that the DOL lacked a sufficient basis to remove FIAs from the

exemption in PTE 84-24 when it allowed other types of fixed annuities to remain under the

exemption. Plaintiff contends that other types of transactions that still enjoy exemption under

the amended version of PTE 84-24 are indistinguishable from FIAs and present no different risks

or conflicts of interest compared to FIAs.

The DOL responds that the rule change is necessary to protect consumers. The DOL

asserts that FIAs are complex transactions that involve significant conflicts of interest at the

point of sale. Because of these characteristics, the DOL contends that FIA sales require more

stringent rules governing the payment of third-party compensation, and thus should not enjoy

exemption under PTE 84-24.

To reach the decision announced in this Order, the court need not decide whether the

DOL’s amendment to PTE 84-24 is appropriate given the DOL’s consumer protection concerns.

It also need not question whether the DOL’s amendment is improper because it imposes

significant challenges to plaintiff’s business model. Instead, because this 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



4

concludes below 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.

II. Factual Background

Plaintiff Market Synergy Group, Inc.

Plaintiff is a Kansas corporation and a licensed insurance agency based in Topeka,

Kansas. Plaintiff works with insurance companies to develop specialized, proprietary FIAs and

other insurance products for exclusive distribution. It partners with IMOs to distribute these

products. About 3,000 agents and other financial professionals sell proprietary products

developed through plaintiff’s relationships with insurance companies.

Plaintiff also conducts market research and provides training and product support for

IMO network members and the independent insurance agents who IMOs recruit. Plaintiff

describes its business as dependent upon the viability of the IMO/independent insurance agent

distribution channel for sales of FIAs and other fixed insurance products.

Plaintiff distributes FIAs and other insurance products through 11 IMO network

members. These IMO network members are independently owned insurance wholesalers that

assist independent agents and financial advisers who aspire to increase their life insurance and

annuity business. About 20,000 individual agents work with the 11 IMOs in plaintiff’s network.

In 2015, plaintiff and its network members collectively generated about $15 billion of FIA sales,

measured by premiums paid. Nationwide, about 80,000 independent insurance agents are

engaged in the sale of FIAs.

The Different Types of Annuities

Annuities are retirement investments sold by life insurance companies. All annuities

have one common feature—that is, with an annuity, an insurance company promises to pay



5

income on a regular basis for an agreed period of time. The annuity contract may provide for

immediate or deferred payments. A “deferred” annuity has two phases. The first, called the

“accumulation” or “deferral” phase, occurs when the contract accrues value through the

purchaser’s payment of premiums and credited interest. The second, called the “payout” phase,

occurs when the insurance company pays the purchaser a stream of payments based on a

designated payment option. The three most common types of deferred annuities are: (1)

declared rate annuities, (2) FIAs (fixed indexed annuities), and (3) variable annuities.

The first type of annuity—a declared rate annuity—provides a guaranteed minimum

interest rate during the accumulation phase. The insurance company establishes a specific

interest rate, normally on an annual basis, which may be above but cannot be below the

guaranteed minimum interest rate. With a declared rate annuity, the insurance company bears

the investment risk because it guarantees that the annuity will earn the declared interest rate for

the upcoming year (or other period as specified in the annuity contract). When the declared rate

annuity reaches the payout phase, the insurance company makes annuity income payments that

are based on the payment rates guaranteed at the time the annuity was issued (or the insurer’s

current payment rates, if higher) and are guaranteed for the selected payout duration.

The second type of annuity is an FIA.5 An FIA earns credited interest based on positive

changes in a market index, such as the Dow Jones Industrial Average, Nasdaq 100 Index, or

Standard & Poor’s 500 Index. The purchaser’s annuity premiums are not invested in index

funds. Instead, the market index’s performance is used simply as a reference to determine the

amount of credited interest under the specified index crediting method. So, depending on the

performance of the specific market index, a FIA may produce much higher or lower returns than

5 This is the type of annuity that the DOL’s final rule excludes from the PTE 84-24 exemption, a decision that plaintiff challenges and is the subject of this lawsuit.



6

the guaranteed rate of return offered by a declared rate annuity. But, the crediting rate is

guaranteed never to fall below zero, even if the market goes down and the index is net negative

for the crediting period. Thus, the principal is protected from market downturns. Both declared

rate annuities and FIAs are governed by state insurance laws, and they are exempt from federal

securities laws.

The third type of annuity is a variable annuity. Variable annuities differ from the other

two types of annuities in that they do not have guaranteed returns. Variable annuities are

securities whose investment returns vary depending on the value of the assets in which their

funds are invested. Variable annuities earn investment returns and are exposed to losses based

on the performance of the investment. Variable annuities are regulated by the federal securities

laws.

How FIAs Are Sold

Insurance companies generally do not recruit independent insurance agents to sell their

products. Instead, IMOs recruit independent insurance agents to sell FIAs and other types of

insurance products to the independent agents’ clients. An IMO serves as a third-party

intermediary between the agents and the insurance companies, providing product education,

marketing, and distribution services. Insurance companies generally compensate IMOs for their

support services based on a percentage of agent sales volume.

IMOs and their networks of independent insurance agents constitute the largest overall

distribution channel for FIAs. In 2015, about 65% of FIAs were sold by independent insurance

agents who were not affiliated with a broker-dealer. FIAs also represent a significant portion of

a typical IMO’s independent agent’s sales. For agents within plaintiff’s IMO network, FIAs



7

represent more than 90% of all sales. Similarly, plaintiff attributes 100% of its 2015 revenue, in

some fashion, to developing, marketing, or distributing FIAs.

The DOL Proposed Rulemaking

On April 20, 2015, the DOL issued a new proposed rule redefining who is a “fiduciary”

of an employee benefit plan under ERISA and the IRS Code. See Definition of the Term

“Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice, 80 Fed. Reg. 21,928

(proposed Apr. 20, 2015) [“2015 Proposed Fiduciary Definition”]. The DOL explained that the

new rule, if adopted, “would treat persons who provide investment advice or recommendations

to an employee benefit plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner

as fiduciaries under ERISA and the [IRS] Code in a wider array of advice relationships than the

existing ERISA and [IRS] Code regulations, which would be replaced.” Id. at 21,928. As such,

the proposed rule would subject sellers of financial products to a new set of regulatory standards.

The DOL also explained that it was “proposing new exemptions and amendments to

existing exemptions from the prohibited transaction rules applicable to fiduciaries under ERISA

and the [IRS] Code.” Id. The exemptions “would allow certain broker-dealers, insurance agents

and others that act as investment advice fiduciaries to continue to receive a variety of common

forms of compensation that otherwise would be prohibited as conflicts of interest.” Id.

To that end, the DOL proposed a new exemption called the Best Interest Contract

Exemption (“BICE”). Id. at 21,929; see also Proposed Best Interest Contract Exemption, 80

Fed. Reg. 21,960 (proposed Apr. 20, 2015) [“2015 Proposed BICE”]. As the DOL explained,

the BICE “would allow certain investment advice fiduciaries, including broker-dealers and

insurance agents, to receive these various forms of compensation that, in the absence of an

exemption, would not be permitted under ERISA and the [IRS] Code.” 2015 Proposed BICE, 80



8

Fed. Reg. at 21,961. But, the BICE would impose a more stringent set of requirements on

prohibited transactions than those required under PTE 84-24.

To apply, the BICE would require a “Financial Institution” (as defined in the proposed

BICE) and the adviser to acknowledge fiduciary status by contract, to commit to adhere to basic

standards of impartial conduct, including a duty to act in the customer’s “best interest” and

receive no more than “reasonable compensation,” to adopt policies and procedures reasonably

designed to minimize the effect of conflicts of interest, and to disclose basic information about

their conflicts of interest and the cost of their advice. Id. at 21,961, 21,969–72. The BICE would

apply to fiduciaries providing investment advice for all types of insurance and annuity contracts

as well as other investment products. Id. at 21,984, 21,987.

The DOL also proposed to amend and revoke parts of the existing PTE 84-24 exemption.

See Proposed Amendment to and Proposed Partial Revocation of Prohibited Transaction

Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers,

Pension Consultants, Insurance Companies and Investment Company Principal Underwriters, 80

Fed. Reg. 22,010 (Apr. 20, 2015) [“2015 Proposed PTE 84-24”]. The DOL explained that the

existing PTE 84-24 includes an “exemption permit[ting] insurance agents, insurance brokers and

pension consultants that are parties in interest or fiduciaries with respect to plans and IRAs to

effect the purchase of the insurance or annuity contracts for the plans or IRAs and receive a

commission on the sale.” Id. at 22,012. The existing PTE 84-24 also provides an exemption for

“the prohibited transaction that occurs when the insurance company selling the insurance or

annuity contract is a party in interest or disqualified person with respect to the plan or IRA.” Id.

The proposal noted that, under the existing PTE 84-24, the term “insurance and annuity contract”

included variable annuities. Id. at 22,013.



9

The DOL proposed an amendment to PTE 84-24 that “would revoke relief for insurance

agents, insurance brokers and pension consultants to receive a commission in connection with

the purchase by IRAs of variable annuity contracts and other annuity contracts that are securities

under federal securities laws and for mutual fund principal underwriters to receive a commission

in connection with the purchase by IRAs of mutual fund shares.” Id. at 22,012. Instead of

relying on PTE 84-24 as an exemption to the rules prohibiting third-party compensation, the

DOL proposed that fiduciaries selling the described investment products must seek an exemption

under the BICE. Id. The DOL proposed this change because it “believes that the provisions in

the [BICE] better protect the interests of IRAs with respect to investment advice regarding

securities products.” Id.

The DOL’s proposal specifically limited the revocation of relief in PTE 84-24 to

“transactions involving variable annuity contracts and other annuity contracts that are securities

under federal securities laws, and mutual fund shares.” Id. at 22,014. The DOL explained that

“this proposal would revoke relief in PTE 84-24 for such transactions.” Id. The DOL went on to

explain: “On the other hand, the [DOL] has determined that transactions involving insurance

and annuity contracts that are not securities can continue to occur under this exemption, with the

added protections of the Impartial Conduct Standards.” Id. at 22,015. The DOL reasoned that

the different treatment was appropriate because:

In this proposal, therefore, the [DOL] has distinguished between transactions that involve securities and those that involve insurance products that are not securities. The [DOL] believes that annuity contracts that are securities and mutual fund shares are distributed through the same channels as many other investments covered by the [BICE], and such investment products all have similar disclosure requirements under existing regulations. In that respect, the conditions of the proposed [BICE] are appropriately tailored for such transactions.



10

Id.

After explaining the rule that it had proposed, the DOL noted its uncertainty whether the

BICE would apply to insurance and annuity contracts that are not securities. It stated:

The [DOL] is not certain that the conditions of the [BICE], including some of the disclosure requirements, would be readily applicable to insurance and annuity contracts that are not securities, or that the distribution methods and channels of insurance products that are not securities would fit within the exemption’s framework. While the [BICE] will be available for such products, the [DOL] is seeking comment in that proposal on a number of issues related to use of that exemption for such insurance and annuity products. The [DOL] requests comment on this approach. In particular, the [DOL] requests comment on whether the proposal to revoke relief for securities transactions involving IRAs (i.e., annuities that are securities and mutual funds) but leave in place relief for IRA transactions involving insurance and annuity contracts that are not securities strikes the appropriate balance and is protective of the interests of the IRAs.

Id.

The DOL also requested public comment about this topic in the proposed rule for the

BICE. The DOL explained that it “has determined that PTE 84-24 should remain available for

investment advice fiduciaries to receive commissions for IRA (and plan) purchases of insurance

and annuity contracts that are not securities.” 2015 Proposed BICE, 80 Fed. Reg. at 21,975. The

DOL asked the public to “comment on this approach” and stated:

In particular, we ask whether we have drawn the correct lines between insurance and annuity products that are securities and those that are not, in terms of our decision to continue to allow IRA transactions involving non-security insurance and annuity contracts to occur under the conditions of PTE 84-24 while requiring IRA transactions involving securities to occur under the conditions of this proposed [BICE].

Id.



11

The DOL described its uncertainty about “whether the disclosure requirements proposed

herein are readily applicable to insurance and annuity products that are not securities” and

“whether the distribution methods and channels of insurance products that are not securities fit

within this exemption’s framework.” Id. So, “to evaluate [its] approach,” the DOL sought

“public comment [about] the current disclosure requirements applicable to insurance and annuity

contracts that are not securities.” Id. Also, the DOL questioned whether the BICE “can be

revised with respect to such non-securities insurance and annuity contracts to provide meaningful

information to investors as to the costs of such investments and the overall compensation

received by Advisers and Financial Institutions in connection with the transactions?” Id.

The DOL also requested “information on the distribution methods and channels

applicable to insurance and annuity products that are not securities” and asked commenters to

provide information about “common structures of insurance agencies.” Id. And, it questioned

“whether any conditions of this proposed [BICE], other than the disclosure conditions discussed

above, would be inapplicable to non-security insurance and annuity products?” Finally, it asked

if “any aspects of this exemption [are] particularly difficult for insurance companies to comply

with?” Id.

Regulatory Impact Analysis

As part of its proposed rulemaking in 2015, the DOL issued on its website a Regulatory

Impact Analysis of fiduciary investment advice. See Dep’t of Labor, Fiduciary Investment

Advice: Regulatory Impact Analysis (Apr. 14, 2015),

http://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf. The DOL described its analysis as “an

in-depth economic assessment of current market conditions and the likely effects of reform.” Id.

at 6. In conducting its analysis, the DOL reviewed various economic evidence including



12

“statistical analyses of investor results in conflicted investment channels, experimental studies,

government reports documenting abuse, and economic theory on the dangers posed by conflicts

of interest.” Id. at 75–94, 137, 140, 235. The analysis concluded that widespread conflicts of

interest were causing harm to retirement investors. Id. at 8–9, 99–100, 235–36. It also

determined that the 2015 proposal would produce large financial gains for IRA and plan

investors as well as other important economic benefits, easily justifying the compliance costs of

the rule change. Id.

Public Comment and Hearing

The DOL initially provided a 75-day comment period, ending on July 6, 2015.

Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice,

81 Fed. Reg. 20,946, 20,958 (Apr. 9, 2016) [“Final Fiduciary Definition”]. But, later, the DOL

extended the comment period to July 21, 2015, to allow interested persons the opportunity to

comment on the new proposal and proposed related exemptions. Id. The DOL held a public

hearing from August 10 to 13, 2015, in Washington D.C. Id. More than 75 speakers testified at

this four-day hearing. Id. The DOL published the hearing transcript on its website on September

8, 2015, and provided another opportunity to comment on the proposed regulation, exemptions,

and hearing transcript until September 24, 2015. Id. The DOL received more than 3,000

individual comment letters and more than 30,000 submissions as part of 30 separate petitions on

the proposal. Id. These comments and petitions “came from consumer groups, plan sponsors,

financial services companies, academics, elected government officials, trade and industry

associations, and others, both in support of, and in opposition to, the proposed rule and proposed

related exemptions.” Id. The DOL also “held numerous meetings with interested stakeholders at



13

which the Regulatory Impact Analysis was discussed.” Regulatory Impact Analysis for Final

Rule and Exemptions 6 (Apr. 2016), https://www.dol.gov/ebsa/pdf/conflict-of-interest-ria.pdf.

The DOL received comments discussing whether the proposed terms of PTE 84-24 and

the BICE were appropriate for annuities, including FIAs. The DOL also received comments

from groups representing FIA providers urging the DOL to maintain the portions of the proposed

rules that would allow advisers involved in FIA transactions to rely on the exemption in PTE 84-

24. See Administrative Record6 at AR042356–81, AR047030–41 (comments submitted by the

National Association for Fixed Annuities); AR042535–66, AR047074–78 (comments submitted

by the Indexed Annuity Leadership Council); see also AR060663–70 (testimony of Jim

Poolman, Executive Director of the Indexed Annuity Leadership Council, at the Aug. 12, 2015

hearing).

Other groups urged the DOL to treat variable annuities, FIAs, and declared annuities the

same, preferably in PTE 84-24. See, e.g., AR037545–58 (comments submitted by Voya

Financial); AR037743–95 (comments submitted by Chamber of Commerce); AR037928–34,

AR038206–22 (comments submitted by Securities Industry and Financial Markets Association);

AR040087–138 (comments submitted by Insured Retirement Institute); AR046885–92

(comments submitted by Prudential Financial, Inc.); AR041101–17, AR046919–27 (comments

submitted by Northwest Mutual Life Insurance Co.); AR041617–49 (comments submitted by

Allianz Life Insurance Co.); AR042412–49 (comments submitted by Guardian Life Insurance

Co.); AR046745–50 (Jackson National Life Insurance Co.); AR060340–41 (testimony of

Bradford Campbell, Chamber of Commerce, at the Aug. 11, 2015 hearing).

6 The parties filed the portions of the administrative record that they cite in their briefs on September 16, 2016. See Docs. 48, 48-1, 48-2, 48-3.



14

Still, other commenters asked the DOL to require advisers involved in FIA transactions to

satisfy the conditions of the BICE, instead of PTE 84-24. See AR039093–96 (arguing in the

comments submitted by the University of Miami School of Law Investor Rights Clinic that all

types of annuities and life insurance products should come within the BICE, not PTE 84-24),

AR039214–78, AR045696–753 (comments submitted by Ron Rhoades), AR046846–82

(comments submitted by Fund Democracy).

Plaintiff did not submit public comment to the DOL about the proposed rule changes. It

asserts that it “reli[ed] on the [DOL’s] determination to continue to include non-security annuity

products, including all forms of fixed annuities, within the scope of amended PTE 84-24” and

“determined that it had no need to, and would not, submit a comment.” Doc. 11-1 at 11.

Plaintiff interpreted the proposed rule as drawing “a line between variable annuities, which are

securities, and fixed annuities which are not securities” and “so [plaintiff] had no reason to think

the [DOL] would ultimately switch” FIAs out of the PTE 84-24 exemption and into the BICE in

the final rulemaking. Id.

The DOL’s Final Action

On April 8, 2016, the DOL published its final rule. Final Fiduciary Definition, 81 Fed.

Reg. 20,946 (Apr. 8, 2016). That same day, the DOL also published the final BICE. Best

Interest Contract Exemption, 81 Fed. Reg. 21,002 (Apr. 8, 2016) [“Final BICE”]. And the DOL

issued the final amendment to PTE 84-24. Final PTE 84-24, 81 Fed. Reg. 21,147 (Apr. 8, 2016).

In the final version of amended PTE 84-24, the DOL created a new defined term that did

not appear in the notice of proposed rulemaking. The new term, “Fixed Rate Annuity Contract,”

expressly excludes FIAs from the exemption provided under PTE 84-24. Id. at 21,174, 21,176–

77 (“A Fixed Rate Annuity Contract does not include a variable annuity or an indexed annuity or



15

similar annuity.”). Thus, under the final rule, fiduciaries providing investment advice cannot

rely on PTE 84-24 to permit them to receive third-party compensation in connection with

purchases of FIA products. Instead, fiduciaries must satisfy the conditions of the BICE to enjoy

exemption from the prohibition against third-party commissions that would otherwise apply

under ERISA and the IRS Code. Id. at 21,153.

The DOL described the differences it perceived between FIAs and other types of fixed

annuities. The DOL explained that it decided to leave other types of fixed annuities within PTE

84-24 because they “provide payments that are the subject of insurance companies’ contractual

guarantees and that are predictable.” Id. at 21,152. The DOL concluded that leaving such

transactions in PTE 84-24 “will promote access to these annuity contracts which have important

lifetime income guarantees and terms that are more understandable to consumers.” Id. But, the

DOL revoked the exemption for FIAs because it concluded: “These investments typically

require the customer to shoulder significant investment risk and do not offer the same

predictability of payments as Fixed Rate Annuity Contracts.” Id. at 21,152–53. The DOL

explained that FIAs are “often quite complex and subject to significant conflicts of interest at the

point of sale” and, thus, as the DOL determined, “should be sold under the more stringent

conditions of the [BICE].” Id.

The DOL acknowledged that some commenters had asserted that no meaningful

distinction exists between FIAs and other types of fixed annuities:

In this regard, some industry commenters focused on indexed annuities, in particular. These commenters asserted that [FIAs] and fixed annuities are identical insurance products except for the method of calculating interest credited to the contract. They said that indexed annuities are treated the same as other fixed annuities under state insurance law and federal securities law, and stated that indexed annuities can offer the same income, insurance and contractual guarantees as fixed annuities. Moreover, some



16

commenters noted that significant investment risk is borne by the insurer and there is no risk of principal loss, assuming that the investor does not incur surrender charges. According to some commenters, indexed annuities are no more complex than other fixed annuities, and there are no different conflicts of interest created with their sales, as compared to fixed annuities.

Id. at 21,157.

The DOL also acknowledged that “like Fixed Rate Annuity Contracts, indexed annuities

are generally not regulated as registered securities under federal securities laws” and that the

Dodd-Frank Wall Street Reform and Consumer Protection Act “calls for certain annuity

contracts to be considered exempt securities by the SEC if the conditions of that section are

met.” Id. at 21,156. Still, the DOL recognized that other commenters urged the DOL to remove

FIAs from PTE 84-24 and subject them to the BICE’s more stringent requirements. The DOL

described these comments in this manner:

[S]ome commenters argued that due to their complexity, fee structure, inherent conflicts of interest, as well as lack of regulation under the securities laws, indexed annuities similarly require heightened regulation. Consistent with this position, commenters argued that indexed annuities should be treated the same as variable annuities under the [DOL’s] exemptions. Additionally, one commenter noted that the compensation structure for indexed annuities is similar to that of variable annuities, raising comparable concerns regarding conflicts of interest. As a result, commenters said that recommendations of such products by fiduciaries should be subject to the same protective conditions as those proposed for variable annuities under the [BICE].

Id. at 21,156.

The DOL explained that “[a]fter consideration of all of the comments,” it decided to limit

the scope of covered annuity contracts under PTE 84-24 “to plan and IRA transactions involving

Fixed Rate Annuity Contracts.” Id. at 21,157. It described the amended version of PTE 84-24 as

“a streamlined exemption for relatively straightforward guaranteed lifetime income products



17

such as immediate and deferred income annuities.” Id. And, the DOL explained that it had

decided to omit “coverage of variable annuity contracts, indexed annuity contracts, and similar

annuity contracts” under PTE 84-24 and instead made them subject to the requirements of the

BICE “[b]ased upon its significant concerns about the complexity, risk, and conflicts of interest

associated with recommendations of variable annuity contracts, indexed annuity contracts and

similar contracts.” Id.

So, under the final version of the rule, fiduciaries providing investment advice for FIAs,

who wish to obtain third-party compensation for sales of those products, must operate under the

BICE. To do so, the “Financial Institution” that employs or partners with the investment advice

fiduciary must acknowledge its fiduciary status and adhere to enforceable standards of fiduciary

conduct and fair dealing with respect to the investment advice. Final BICE, 81 Fed. Reg. at

21,003. Generally, the BICE requires a “Financial Institution” to do the following:

• Acknowledge fiduciary status with respect to investment advice to the Retirement Investor;

• Adhere to Impartial Conduct Standards requiring them to:

○ Give advice that is in the Retirement Investor’s Best Interest (i.e., prudent advice that is based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to financial or other interests of the Adviser, Financial Institution, or their Affiliates, Related Entities or other parties);

○ Charge no more than reasonable compensation; and ○ Make no misleading statements about investment

transactions, compensation, and conflicts of interest;

• Implement policies and procedures reasonably and

prudently designed to prevent violations of the Impartial Conduct Standards;



18

• Refrain from giving or using incentives for Advisers to act

contrary to the customer’s best interest; and • Fairly disclose the fees, compensation, and Material

Conflicts of Interest, associated with their recommendations.

Id. at 21,007. When providing investment advice for IRAs and plans not covered by Title I of

ERISA, the BICE requires the “Financial Institution” to enter into a written contract with the

investor that includes the first three and final one of the provisions described above. Id. at

21,020. The BICE also requires the “Financial Institution” to disclose “whether or not they will

monitor the Retirement Investor’s investments and alert the Retirement Investor to any

recommended changes to those investments and, if so, the frequency with which the monitoring

will occur and the reasons for which the Retirement Investor will be altered.” Id. at 21,019.

When deciding the scope of the term “Financial Institutions,” the DOL considered

whether to include “marketing or distribution affiliates and intermediaries” and “entities within

an insurance group that arrange for the marketing of financial products” in the BICE’s definition

of “Financial Institution.” Id. at 21,067. The DOL declined to expand the definition to include

“such intermediaries” but “made provision to add entities to the definition of Financial

Institution through the grant of an individual exemption.” Id. To meet the individual exemption

under BICE, an entity “can submit an application to the [DOL] . . . with information regarding

their role in the distribution of financial products, the regulatory oversight of such entities, and

their ability to effectively supervise individual Advisers’ compliance with the terms of this

exemption.” Id. If the DOL grants the individual exemption, the entity qualifies as a “Financial

Institution” under BICE’s definition. Id. at 21,083 (“‘Financial Institution’ means . . . [a]n entity

that is described in the definition of Financial Institution in an individual exemption granted by



19

the Department . . . , after the date of this exemption, that provides relief for the receipt of

compensation in connection with investment advice provided by an investment advice fiduciary,

under the same conditions as this class exemption.”).

Regulatory Impact Analysis

When the DOL published the new rules in April 2016, it also issued the final Regulatory

Impact Analysis of the final rule and exemptions. AR000304–698. This analysis found “that

conflicted [fiduciary investment] advice is widespread, causing serious harm to plan and IRA

investors, and that disclosing conflicts alone would fail to adequately mitigate the conflicts or

remedy the harm.” AR000324. The final Regulatory Impact Analysis specifically addressed

FIAs. Id. It described them as products that “blend limited financial market exposures with

minimum guaranteed values.” Id. The DOL recognized that FIAs “can play a beneficial and

important role in retirement preparation,” but “public comments and other evidence demonstrate

that these products are particularly complex, beset by adviser conflicts, and vulnerable to abuse.”

Id.

The DOL concluded the rule changes were necessary to “mitigate conflicts, support

consumer choice, and deliver substantial gains for retirement investors and economic benefits

that more than justify the costs.” Id. To support its findings, the final Regulatory Impact

Analysis cited a “wide body of economic evidence” demonstrating that “conflicts of interest on

retirement investment outcomes is large and negative.” Id. The DOL’s review of the evidence

“suggest[ed] that IRA holders receiving conflicted investment advice can expect their

investments to underperform by an average of 50 to 100 basis points per year over the next 20

years.” AR000325. And, this underperformance in the mutual funds segments alone “could cost

IRA investors between $95 billion and $189 billion over the next 10 years and between $202



20

billion and $404 billion over the next 20 years.” Id. The DOL also noted that these losses,

though large, “represent only a portion of what retirement investors stand to lose as a result of

adviser conflicts” because they “pertain only to IRA investors’ mutual fund investments” and

thus reflected “only one of the multiple types of losses that conflicted advice provides.” Id.

The DOL anticipated that the new rules and exemptions could rectify these concerns

about underperformance and instead produce investor gains. Specifically, the DOL estimated

that “gains to IRA front-end-load mutual fund investors alone will be worth between $33 billion

and $36 billion over 10 years and between $66 billion and $76 billion over 20 years.”

AR000413; see also AR000483. In addition to these gains, the DOL recognized that the rule

changes also could include “a broad array of potential additional gains to investors and social

benefits.” AR000413. The DOL concluded that the rule change would produce benefits that

justify the costs associated with implementing them. Id.

Specific to the annuity market, the DOL recognized that conflicts of interest “can be

more pronounced than the mutual fund market because commissions in the annuity market . . .

are generally higher than commissions earned in connection with the recommendation of mutual

funds.” AR000484. The DOL cited research suggesting that this commission structure

“incentivizes insurance agents to steer consumers toward insurance products with higher

commissions” which “may have led consumers to purchase annuities that were not in their best

interest.” Id. The DOL was not able to quantify the gains because it lacked sufficient data, but it

concluded that the rule change “is expected to create benefits in the annuity market by enhancing

efficiencies through better matches between consumers and the annuity product.” Id.

The DOL estimated that the costs required for compliance with the final rule and

exemptions “will be between $10.0 billion and $31.5 billion over 10 years with a primary



21

estimate of $16.1 billion.” AR000326. The DOL examined the BICE’s compliance costs

specific to insurers. AR000553. The DOL predicted that insurers would incur costs similar to

broker-dealers since they would have to perform the same tasks to comply with the rule changes,

even though they sell different products. Id. The DOL thus used the same data that it used to

determine broker-dealers’ costs to estimate the costs to insurers to comply with the rule changes.

AR000554 fig. 5-11; see also AR000564–66. The DOL also assessed the costs to annuity

providers of complying with the BICE instead of PTE 84-24 for FIA transactions. AR000578–

79, AR000601–02.

The final Regulatory Impact Analysis also discussed the requirements of the Regulatory

Flexibility Act. AR000570–76. Attempting to satisfy those requirements, the DOL described

the rule’s impact on small entities and how the agency made its decisions to apply the rule to

small entities, as the Regulatory Flexibility Act requires. Id. The DOL considered 99.3% of all

insurers as small entities under the Small Business Administration’s definition. AR000571. It

then analyzed the costs that these insurers would incur under the rule change, and it discussed the

changes made to the rule that were intended to reduce those costs. AR000571–76. The DOL

recognized the “possib[ility] that some small service providers may find that the increased costs

associated with ERISA fiduciary status outweigh the benefit of continuing to service the ERISA

plan market or the IRA market.” AR000574. But the DOL “does not believe that this outcome

will be widespread or that it will result in a diminution of the amount or quality of advice

available to small or other retirement savers, because some firms will fill the void and provide

services to the ERISA plan and IRA market.” Id. The DOL also considered the “possib[ility]

that the economic impact of the rule on small entities would not be as significant as it would be



22

for large entities, because anecdotal evidence indicates that small entities do not have as many

business arrangements that give rise to conflicts of interest.” Id.

Applicability Dates

As stated above, the DOL has established an applicability date of April 10, 2017, for the

rule changes and exemptions. Final Fiduciary Definition, 81 Fed. Reg. at 20,992–93. The DOL

concluded that “one year after publication of the final rule in the Federal Register is adequate

time for plans and their affected financial services and other service providers to adjust to the

basic change from non-fiduciary to fiduciary status.” Id. at 20,993.

The DOL also included an additional nine-month transition period after the April 10,

2017 applicability date for the industry to meet the requirements of BICE. Final BICE, 81 Fed.

Reg. at 21,069. The DOL established a “Transition Period” beginning on the applicability date

(April 10, 2017) and ending on January 1, 2018, which is “intended to give Financial Institutions

and Advisers time to prepare for compliance with the conditions of [the BICE] while

safeguarding the interests of Retirement Investors.” Id. at 21,069. During the transition period,

fiduciary investment advisers may rely on the BICE to receive third-party compensation for

investment transactions if they adhere to certain standards of conduct and make certain

disclosures. But, during the transition period, fiduciary investment advisers are not yet required

to enter into a contract with investors or warrant affirmatively that they have adopted and will

comply with the written policies that BICE requires. Id. at 21084–85.

Applications for Individual Exemptions Under BICE

As explained above, the BICE includes a provision that allows an entity (such as plaintiff

or one of its IMOs) to apply for an individual exemption that would bring the entity within the

definition of “Financial Institution” and thus allow it to receive third-party compensation for



23

sales of investment products so long as it complies with the other requirements of the BICE.

Final BICE, 81 Fed. Reg. at 21,002. As of September 14, 2016, the Office of Exemption

Determinations has received 10 applications for individual exemptions under the BICE. See

Declaration of Karen Lloyd ¶ 4 (Doc. 49-1 at 1). All 10 applicants are IMOs seeking approval to

serve as “Financial Institutions” under the BICE. Three of these applicants are IMOs that are

members of plaintiff’s network: (1) Financial Independence Group, (2) Brokers International,

and (3) Advisors Excel. See Doc. 25-1 at 90–106; see also Doc. 49-1 at 3–19, 38–57. The

Office of Exemption Determinations must process the applications following the DOL’s

regulations governing exemptions. See 29 C.F.R. §§ 2570.30–2570.52. These regulations

authorize the DOL to grant exemptions when:

following an evaluation of the facts and representations comprising the administrative record of the proposed exemption (including any comments received in response to a notice of proposed exemption and the record of any hearing held in connection with the proposed exemption), [the DOL] finds that the exemption is:

(1) Administratively feasible; (2) In the interests of the plan (or the Thrift Savings Fund in the case of FERSA) and of its participants and beneficiaries; and (3) Protective of the rights of participants and beneficiaries of such plan (or the Thrift Savings Fund in the case of FERSA).

29 C.F.R. § 2570.48.

This Lawsuit

In this lawsuit, plaintiff challenges the DOL’s rulemaking. It contends that the DOL has

violated the Administrative Procedure Act and Regulatory Flexibility Act by issuing a final rule

that amends and partially revokes PTE 84-24’s coverage for FIA transactions and, instead,



24

requires them to comply with the BICE. And, with its motion for preliminary injunction,

plaintiff asks the court to stay the April 2017 applicability date for the amended version of PTE

84-24, pending final adjudication of the action’s claims.

III. Legal Standard

Federal Rule of Civil Procedure 65(a) authorizes district courts to issue preliminary

injunctions. The relief afforded under this rule has a limited purpose—a preliminary injunction

is “merely to preserve the relative positions of the parties until a trial on the merits can be held.”

Univ. of Tex. v. Camenisch, 451 U.S. 390, 395 (1981). To prevail on a motion for preliminary

injunction, the movant must demonstrate that: (1) it is substantially likely to succeed on the

merits; (2) it will suffer irreparable injury if the injunction is denied; (3) its threatened injury

outweighs the injury the opposing party will suffer under the injunction; and (4) the injunction, if

issued, will not be adverse to the public interest. Winter v. Nat’l Res. Def. Council, Inc., 555

U.S. 7, 20 (2008); Verlo v. Martinez, 820 F.3d 1113, 1126 (10th Cir. 2016).

Whether to grant a preliminary injunction rests within the court’s sound discretion.

Beltronics USA, Inc. v. Midwest Inventory Distrib., LLC, 562 F.3d 1067, 1070 (10th Cir. 2009).

A preliminary injunction is an extraordinary remedy. Winter, 555 U.S. at 24. So, the right to

relief must be “clear and unequivocal.” Petrella v. Brownback, 787 F.3d 1242, 1256 (10th Cir.

2015) (quoting Beltronics USA, Inc., 562 F.3d at 1070). “In general, ‘a preliminary injunction .

. . is the exception rather than the rule.’” Gen. Motors Corp. v. Urban Gorilla, LLC, 500 F.3d

1222, 1226 (10th Cir. 2007) (quoting GTE Corp. v. Williams, 731 F.2d 676, 678 (10th Cir.

1984)).



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IV. Analysis

The court considers the four requirements for a preliminary injunction, in turn, below. It

finds that plaintiff has established none of the four. The court thus concludes that plaintiff is not

entitled to the extraordinary relief it seeks in a preliminary injunction.

A. Likelihood of Success on the Merits

Plaintiff asserts that the DOL’s rulemaking violated the Administrative Procedure Act

(“APA”) and Regulatory Flexibility Act (“RFA”). The APA grants federal courts authority to

review agency decisions. See 5 U.S.C. § 702. The reviewing court must set aside an agency

action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with

law,” “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right,”

“without observance of procedure required by law,” or “unsupported by substantial evidence.” 5

U.S.C. § 706(2)(A), (C), (D), & (E); see also Kobach v. U.S. Election Assistance Comm’n, 772

F.3d 1183, 1197 (10th Cir. 2014) (explaining that agency action “must be reversed if it is

‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’” (quoting

5 U.S.C. § 706(2)(A))). When a court applies the “arbitrary and capricious” standard of review

under the APA, it “must ‘ascertain whether the agency examined the relevant data and

articulated a rational connection between the facts found and the decision made.’” Kobach, 772

F.3d at 1197 (quoting Aviva Life & Annuity Co. v. FDIC, 654 F.3d 1129, 1131 (10th Cir. 2011)).

The Supreme Court describes the scope of review under this standard as “narrow,” and it

cautions that a court must not “substitute its judgment for that of the agency.” Judulang v.

Holder, 132 S. Ct. 476, 483 (2011) (citations and internal quotation marks omitted); see also

Kobach, 772 F.3d at 1197 (“This [arbitrary and capricious] standard of review is very deferential

to the agency’s determination, and a presumption of validity attaches to the agency action such



26

that the burden of proof rests with the party challenging it.” (citations and internal quotation

marks omitted)). Despite this deferential standard, a court’s review still plays an important role

by “ensuring that agencies have engaged in reasoned decisionmaking.” Judulang, 132 S. Ct. at

483–84. This standard requires a court to “assess, among other matters, whether the decision

was based on a consideration of the relevant factors and whether there has been a clear error of

judgment.” Id. at 484 (citations and internal quotation marks omitted).

The RFA “requires all agencies, as part of the rulemaking process, to conduct a

‘regulatory flexibility analysis’ for their proposed rules.” State of Colorado ex rel. Colo. State

Banking Bd. v. Resolution Tr. Corp., 926 F.2d 931, 947 (10th Cir. 1991) (quoting 5 U.S.C. §§

603–04). “In the analysis, the agency must evaluate how the proposed rule will affect small

entities, consider alternatives that would ‘minimize any significant economic impact of the rule

on [such] entities,’ and explain ‘why each one of such alternatives was rejected.’” Id. (first

quoting 5 U.S.C. § 604(a)(3); then citing 5 U.S.C. § 603(a), (c)). When reviewing an agency’s

compliance with the RFA, the court is “‘highly deferential’ . . . to the substance of the analysis,

particularly where an agency is predicting the likely economic effects of a rule.” Council for

Urological Interests v. Burwell, 790 F.3d 212, 227 (D.C. Cir. 2015) (quoting Helicopter Ass’n

Int’l, Inc. v. FAA, 722 F.3d 430, 438 (D.C. Cir. 2013)).

Here, plaintiff asserts that the DOL violated the APA and RFA in four ways: (1) the

DOL failed to provide notice that it would remove FIAs from the scope of the exemption in PTE

84-24; (2) the DOL arbitrarily treated FIAs differently from all other fixed annuities; (3) the

DOL failed to consider the detrimental effects of its actions on independent insurance agent

distribution channels; and (4) the DOL exceeded its statutory authority by seeking to manipulate



27

the financial product market instead of regulating fiduciary conduct. The court considers each of

plaintiff’s arguments below.

1. Plaintiff is not likely to prove that the DOL provided insufficient notice that it would remove FIAs from the scope of PTE 84-24.

Plaintiff asserts that the DOL gave no warning that it intended to remove FIAs from the

scope of PTE 84-24 in its final rule making. Plaintiff argues that the proposed rule stated that the

DOL would revoke relief under PTE 84-24 only for “transactions involving variable annuity

contracts and other annuity contracts that are securities under federal securities law, and mutual

fund shares,” but did not include FIAs in this proposal. 2015 Proposed PTE 84-24, 80 Fed. Reg.

at 22,014; see also 2015 Proposed BICE, 80 Fed. Reg. at 21,975. The DOL also stated in the

proposed rule that “transactions involving insurance and annuity contracts that are not securities

can continue to occur” under PTE 84-24, as they had under the existing rules. 2015 Proposed

PTE 84-24, 80 Fed. Reg. at 22,015. Plaintiff contends that it could not anticipate from this

proposed language that the DOL was considering the removal of FIAs from PTE 84-24. And,

plaintiff asserts, this lack of notice deprived it of the opportunity to submit meaningful comments

to the DOL about the proposed rule.

Defendants respond that the DOL gave proper notice because the decision to remove

FIAs from PTE 84-24 “logically grew out of” the proposed rule that it issued. Defendants assert

that the DOL specifically raised the question whether the proposed rule “to revoke relief for

securities transactions involving IRAs (i.e., annuities that are securities and mutual funds) but

leave in place relief for IRA transactions involving insurance and annuity contracts that are not

securities strikes the appropriate balance and is protective of the interests of the IRAs.” Id. at

22,015. Thus, defendants argue, this statement shows that the DOL was considering what types



28

of products to include and exclude from PTE 84-24. And, defendants assert, this statement

should have made it apparent to plaintiff that the DOL was considering whether to remove FIAs

from the exemption.

The APA requires that an agency provide notice of proposed rulemaking, including

“either the terms or substance of the proposed rule or a description of the subjects and issues

involved.” 5 U.S.C. § 553(b)(3). After providing the requisite notice, the agency must “give

interested parties an opportunity to participate in the rulemaking through submission of” written

comments. 5 U.S.C. § 553(c). After complying with the notice and comment requirement, an

agency need not provide a second opportunity for comment merely because it issues a final rule

that differs from the proposal. Kaw Valley, Inc. v. EPA, 844 F. Supp. 705, 710 (D. Kan. 1994).

The Tenth Circuit has explained: “It is a well settled and sound rule which permits

administrative agencies to make changes in the proposed rule after the comment period without a

new round of hearings.” Beirne v. Sec’y of Dep’t of Agric., 645 F.2d 862, 865 (10th Cir. 1981)

(citing Am. Iron & Steel Inst. v. EPA, 568 F.2d 284, 293 (3d Cir. 1977)). But this rule is not

without limits—any changes to a final rule must “be in ‘character with the original scheme and

(be) foreshadowed in proposals and comments advanced during the rulemaking.’” Id. (quoting

S. Terminal Corp. v. EPA, 504 F.2d 646, 658 (1st Cir. 1974)).

“The Courts of Appeals have generally interpreted [the APA notice and comment

requirement] to mean that the final rule the agency adopts must be ‘a “logical outgrowth” of the

rule proposed.’” Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 174 (2007) (quoting

Nat’l Black Media Coal. v. FCC, 791 F.2d 1016, 1022 (2d Cir. 1986) (further citations omitted));

see also Am. Mining Cong. v. Thomas, 772 F.2d 617, 639 (10th Cir. 1985) (holding that an

agency’s final rule did not “represent a logical outgrowth from the proposed regulations”). “A



29

final rule is a logical outgrowth if affected parties should have anticipated that the relevant

modification was possible.” Allina Health Servs. v. Sebelius, 746 F.3d 1102, 1107 (D.C. Cir.

2014) (citing CSX Transp., Inc. v. Surface Transp. Bd., 584 F.3d 1076, 1080 (D.C. Cir. 2009)).

An agency’s proposed rule “satisfies the logical outgrowth test if it ‘expressly ask[s] for

comments on a particular issue or otherwise ma[kes] clear that the agency [is] contemplating a

particular change.’” U.S. Telecom Ass’n v. FCC, 825 F.3d 674, 700 (D.C. Cir. 2016) (quoting

CSX Transp., 584 F.3d at 1081). Interpreting the APA’s requirements, the Supreme Court has

noted: “The object, in short, is one of fair notice.” Long Island Care at Home, 551 U.S. at 174.

For reasons explained below, the court finds that plaintiff is not likely to show that the

DOL failed to satisfy this standard under the APA. Instead, the administrative record shows that

the APA provided fair notice of the proposed rule change.

a. The language of the proposed rule was sufficient to put the public on notice of the final rulemaking.

At oral argument, plaintiff sifted through the language of the proposed rule, arguing that

the DOL was silent in its proposed rulemaking about the possibility of removing FIAs from PTE

84-24. In the proposed rule, the DOL stated:

As the [BICE] was designed for IRA owners and other investors that rely on fiduciary investment advisers in the retail marketplace, the [DOL] believes that some of the transactions involving IRAs that are currently permitted under PTE 84-24 should instead occur under the conditions of the [BICE], specifically, transactions involving variable annuity contracts and other annuity contracts that are securities under federal securities laws, and mutual fund shares. Therefore, this proposal would revoke relief in PTE 84-24 for such transactions. This change is reflected in a proposed new Section I(b), setting forth the scope of the exemption. On the other hand, the [DOL] has determined that transactions involving insurance and annuity contracts that are not securities can continue to occur under this exemption, with the added protections of the Impartial Conduct Standards.



30

2015 Proposed PTE 84-24, 80 Fed. Reg. at 22,014–15. Plaintiff asserts that this language

provides notice only that the DOL intended to remove transactions involving variable annuity

contracts and other annuity contracts that are securities under the federal securities law and

mutual funds. Plaintiff also asserts that the DOL has determined that insurance and annuity

contracts that are not securities will remain under PTE 84-24. Since FIAs are not securities,

plaintiff argues, it could not have anticipated that the DOL intended to remove them from PTE

84-24 because the above-cited passage only talks about the removal of annuities that are

securities.

The DOL’s proposed rule continues:

In this proposal, therefore, the [DOL] has distinguished between transactions that involve securities and those that involve insurance products that are not securities. The [DOL] believes that annuity contracts that are securities and mutual fund shares are distributed through the same channels as many other investments covered by the [BICE], and such investment products all have similar disclosure requirements under existing regulations. In that respect, the conditions of the proposed [BICE] are appropriately tailored for such transactions.

Id. at 22,015. Plaintiff argues that this provision explains that the BICE is the appropriate

prohibited transaction exemption for securities transactions instead of PTE 84-24, but it makes

no mention of including FIAs in the BICE as well. And, again, because FIAs are not securities,

plaintiff contends that it had no reason to anticipate that the DOL was considering a rule that

treated FIAs as transactions subject to the BICE. More specifically, the language discussed how

annuity contracts that are securities are subject to similar regulations as the other investment

products in the BICE and, so, it made sense for the DOL to include them in the BICE with those

other investment products. Plaintiff underscores that these products are regulated under the

federal securities laws, unlike FIAs, which are governed by state insurance laws.



31

The DOL next explained in the proposed rule its uncertainty about how it categorized

different types of transactions for inclusion in the BICE:

The [DOL] is not certain that the conditions of the [BICE], including some of the disclosure requirements, would be readily applicable to insurance and annuity contracts that are not securities, or that the distribution methods and channels of insurance products that are not securities would fit within the exemption’s framework. While the [BICE] will be available for such products, the [DOL] is seeking comment in that proposal on a number of issues related to use of that exemption for such insurance and annuity products.

Id. Plaintiff argues that this language merely addresses whether non-security annuity products

are appropriate for inclusion in the BICE. Plaintiff contends that the proposed rule does not

address whether the DOL should remove non-security annuity products from PTE 84-24, as the

agency did in the final rule. The DOL ended its discussion of the scope of it rulemaking

consideration with the following:

The [DOL] requests comment on this approach. In particular, the [DOL] requests comment on whether the proposal to revoke relief for securities transactions involving IRAs (i.e., annuities that are securities and mutual funds) but leave in place relief for IRA transactions involving insurance and annuity contracts that are not securities strikes the appropriate balance and is protective of the interests of the IRAs.

Id. Again, plaintiff asserts that this provision provided no notice that the DOL was considering

whether to remove FIAs from PTE 84-24.

The court disagrees. In this section, the DOL specifically requested public comments

about whether its approach—leaving within the scope of PTE 84-24 “insurance and annuity

contracts that are not securities”—is appropriate when the proposal revokes the relief afforded

under PTE 84-24 for annuities that are securities and mutual funds. This language is sufficient to

put the public on notice that the DOL was considering whether to remove from PTE 84-24 other



32

types of insurance and annuity products that are not securities—which would include FIAs. The

proposed rulemaking thus provided sufficient notice of “a description of the subjects and issues

involved,” to satisfy the APA’s requirements. 5 U.S.C. § 553(b)(3); see also United

Steelworkers of Am. v. Schuylkill Metals Corp., 828 F.2d 314, 317–18 (5th Cir. 1987) (holding

that an agency provided adequate notice when it sought comments about the appropriate scope of

a proposed rule; the agency’s “questions and descriptions more than adequately sufficed to

apprise fairly an interested party that there was an issue regarding the breadth of” the proposed

rule and “it certainly was not necessary that [the agency] spell out with particularly the proposed

meaning of” a particular term within the proposed rule).

b. Plaintiff’s arguments against the court’s reading of the proposed language fail to demonstrate insufficient notice.

Plaintiff asserts several reasons why, in its estimation, the DOL’s proposed language

provided insufficient notice of the DOL’s final decision to remove FIAs from PTE 84-24. The

court addresses each argument below, but concludes none demonstrate that the DOL failed to

provide sufficient notice of the final rulemaking.

First, plaintiff argues that the proposed language only referenced the BICE, but did not

give notice that the DOL might alter PTE 84-24. The court disagrees with plaintiff’s reading of

the proposed rule. Although part of the proposal discussed the scope of the BICE, see 2015

Proposed PTE 84-24, 80 Fed. Reg. at 22,015 (“[T]he [DOL] is seeking comment . . . on a

number of issues related to use of that exemption [i.e., the BICE] for [non-securities] insurance

and annuity products.”), the proposal also requested comment discussing whether it was

appropriate to revoke relief under PTE 84-24 for annuities that are securities but “leave in place

relief for IRA transactions involving insurance and annuity contracts that are not securities,” id.



33

The proposed rule thus referenced, explicitly, whether the DOL should allow certain transactions

to remain in PTE 84-24 while moving other types of transactions to the BICE.

Second, plaintiff argues that the above-quoted language merely questioned whether the

DOL should remove annuities that are securities from PTE 84-24 and place them into the BICE.

It did not raise, plaintiff contends, the possibility of removing other transactions (such as FIAs)

from the scope of PTE 84-24. Plaintiff’s construction of the proposed language is far too

narrow. The proposed rule explicitly states that the DOL is seeking comments addressing

whether the distinctions it has made between different types of transactions “strikes the

appropriate balance and is protective of the interests of IRAs.” Id. A plain reading of the

proposed rule fairly apprised interested parties that the DOL was considering where to place non-

securities annuities under the new rules—either within or outside the PTE 84-24 exemption.7

The proposed rule provided sufficient notice under the APA.

Third, plaintiff asserts that the proposed language referenced only transactions involving

IRAs, but not ERISA plans. And yet, the final rule revoked relief under PTE 84-24 for FIAs

involving both IRAs and ERISA plans. 2015 Proposed PTE 84-24, 80 Fed. Reg. at 22,015

(stating in the proposed rule that “the [DOL] requests comment on whether the proposal to

revoke relief for securities transactions involving IRAs (i.e., annuities that are securities and

mutual funds) but leave in place relief for IRA transactions involving insurance and annuity

contracts that are not securities strikes the appropriate balance and is protective of the interests of

7 The District Court for the District of Columbia recently reached a similar conclusion. In a related case challenging whether the DOL provided sufficient notice that it might remove FIAs from the scope of PTE 84-24, the District of Columbia court held that the DOL’s notice was adequate. See Nat’l Ass’n for Fixed Annuities v. Perez, __ F. Supp. 3d __, 2016 WL 6573480, at *34 (D.D.C. Nov. 4, 2016) (interpreting the DOL’s proposed rule as “expressly request[ing] comment on its decision to ‘continue to allow IRA transactions involving’ [FIAs] ‘to occur under the conditions of PTE 84-24,’ while requiring that similar transactions involving variable annuities occur under the conditions contained in the proposed [BICE]. That is, it asked whether [FIAs] should be grouped under PTE 84-24 or not” (quoting 2015 Proposed BICE, 80 Fed. Reg. at 21,975)).



34

the IRAs.” (emphasis added)). At oral argument, defendants urged the court to reject this

argument because plaintiff did not plead this notice claim in its Complaint or in its opening brief.

See N.H. Ins. Co. v. Westlake Hardware, Inc., 11 F. Supp. 2d 1298, 1301 n.1 (D. Kan. 1998)

(refusing to consider claims that plaintiff did not make in the complaint); see also Liebau v.

Columbia Cas. Co., 176 F. Supp. 2d 1236, 1244–45 (D. Kan. 2001) (explaining that our court

generally refuses to consider new arguments first raised in a reply brief).

Even considering this argument, the court agrees with defendants that it is largely

irrelevant. The record shows that FIAs are sold primarily through IRA transactions, not ERISA

plans. See AR000433 fig. 3-9 (showing that, in 2014, only 2% of FIA sales involved ERISA

plans). And, unlike IRA transactions, ERISA plans are governed by federal statutes that already

provide certain protections to investors. For this reason, the DOL did not include them in the

contract requirement of the BICE. See Final BICE, 81 Fed. Reg. at 21,008 (“The exemption

does not similarly require the Financial Institution to execute a separate contract with ERISA

investors (which includes plan participants, beneficiaries, and fiduciaries), but the Financial

Institution must acknowledge its fiduciary status and that of its advisers, and ERISA investors

can directly enforce their rights to proper fiduciary conduct under ERISA section 502(a)(2) and

(3).”). So, while the final rule revoked relief under PTE 84-24 for FIAs involving ERISA plans,

the BICE affords an exemption for these transactions under less onerous requirements than that

required for FIA transactions involving IRA transactions. The proposed rule’s reference only to

IRA transactions does not render the agency’s notice insufficient under the APA.

And, finally, at oral argument, plaintiff asserted that the proposed rule fails to mention

the standards that the DOL ultimately used to determine whether to remove FIAs from PTE 84-

24. Under this standard, the DOL considered the complexity, investment risk, and conflicted



35

sales practices of the transactions when deciding whether to remove them from PTE 84-24 and

subject them to the requirements of the BICE. Although these standards do not appear in the

proposed rule, the governing legal principles do not require that level of detail to satisfy the

APA’s notice requirements. See Am. Fed’n of Labor & Cong. of Indus. Orgs. v. Donovan, 757

F.2d 330, 338 (D.C. Cir. 1985) (explaining that “a final rule need not be identical to the original

proposed rule” because “[t]he whole rationale of notice and comment rests on the expectation

that the final rules will be somewhat different—and improved—from the rules originally

proposed by the agency”; instead, “the question for the court is whether the final rule is a logical

outgrowth of the rulemaking proceeding” (citations and internal quotation marks omitted)); see

also Schuylkill Metals Corp., 828 F.2d at 317–18 (holding it was not necessary for an agency to

“spell out with particularity the proposed meaning” of the term in the proposed rule).

c. Other commenters anticipated the final rulemaking.

The DOL also received comments from other interested parties discussing whether FIAs

should remain covered under PTE 84-24 or move into the BICE. These comments demonstrate

that other recipients of the DOL’s notice discerned the possibility of changes that appeared in the

final rule. Their comments also support the conclusion that those changes were a logical

outgrowth of the proposed rule.

For example, one commenter interpreted the proposed rule as “specifically request[ing]

comment on which exemption, the [BICE] or a revised PTE 84-24, should apply to different

types of annuity products.” AR041624 (comment from Allianz Life Insurance Company of

North America). Other commenters praised the DOL for keeping FIAs within the PTE 84-24

exemption and urged the DOL to let them remain there instead of moving them into the BICE.

See, e.g., AR047030–31 (stating in a comment from the National Association for Fixed

Annuities (“NAFA”) that it “commends the [DOL] for recognizing that PTE 84-24 is the



36

appropriate regulatory exemption for non-security annuities—i.e., fixed annuities—under the

proposed rule” because it will “encourage the purchase of fixed annuities for the risk-free growth

of principal and lifetime income feature these products offer” but also expressing concern about

the treatment of FIAs and urging the DOL to “continue to include [FIAs ] as non-security

annuities under the proposed modifications to PTE 84-24”);8 AR042540–41 (stating in a

comment from the Indexed Annuity Leadership Council that it “appreciates the [DOL] retaining

and modifying PTE 84-24 to provide an exemption” for “fixed annuities, including fixed indexed

annuities” and, in response to the proposal’s question whether “it has struck the right balance in

terms of providing exemptions for securities and non-securities,” urging the DOL to keep fixed

annuities in PTE 84-24 instead of subjecting them to the requirements of the BICE (emphasis

added)).

Moreover, one of the IMOs in plaintiff’s network—Advisors Excel—submitted a

comment stating that it “concur[s] with many of the concerns outlined in the Indexed Annuity

Leadership Council’s (“IALC”) July 20, 2015, comment letter, and in the interest of brevity, will

not revisit each of the points laid out in the IALC comments.” AR051884. As cited above, the

IALC’s comment specifically addressed the DOL’s question whether it had “struck the right

balance” and argued that all fixed annuity transactions—including FIAs —should remain within

the scope of PTE 84-24 and should not move into the BICE. AR042540–41. The IALC thus

recognized that, by asking whether the proposed rule “strikes the right balance,” the DOL was

questioning whether the final rule should move all fixed annuity transactions out of PTE 84-24

8 Plaintiff suggests that defendants’ citation to this comment is troubling because the National Association for Fixed Annuities has explained in other litigation against the DOL that the comment was prompted by an informal telephone conference it had with the DOL on the day before the comment period closed. Plaintiff asserts that the comment “only underscores the surreptitious manner in which the [DOL] chose to force its rule through.” Doc. 36 at 15 n.2. Even if the court disregarded NAFA’s comment for that reason, the other submitted comments show that other commenters discerned the possibility of the final rule change from the language of the proposed rule.



37

and into the BICE, even though the proposed rule provided that fixed annuity transactions would

remain in PTE 84-24.

Advisors Excel’s letter does not address this topic specifically. Indeed, plaintiff describes

Advisor Excel’s letter as “not offer[ing] a focused or extensive discussion of” the issues that

plaintiff raises in this lawsuit. Doc. 53 at 3 n.2. But Advisors Excel must have read the IALC’s

interpretation of the proposed rule because it concurred with many of the concerns outlined by

IALC. Yet Advisors Excel’s comment was silent about this interpretation. The court recognizes

that the APA requires the agency to provide notice to interested parties—notice cannot come

from one of the commenters. See Fertilizer Inst. v. EPA, 935 F.2d 1303, 1312 (D.C. Cir. 1991)

(finding that comments suggesting the rule change were of “little significance” because

“[c]ommenting parties cannot be expected to monitor all other comments submitted to an

agency” and the agency “cannot bootstrap notice from a comment”). But IALC’s letter shows

that it anticipated the possibility of the final modification, and it argued against it in its

comment—the same comment that Advisors Excel adopted in its comment. This submission

provides additional support for the conclusion that the final rule was a logical outgrowth of the

proposed rule.

d. Public reaction does not demonstrate an APA violation.

Plaintiff also relies on the public’s reaction to the final rule change to demonstrate

insufficient notice. Plaintiff contends that the press, state insurance regulators, and the industry

all were shocked by the DOL’s decision to remove FIAs from PTE 84-24.9 This surprise,

plaintiff contends, shows that the public could not have anticipated the changes in the final rule,

9 Plaintiff asserts that the court may consider these materials, even though they are outside of the administrative record, because they constitute “evidence coming into existence after the agency acted [that] demonstrates that the actions were right or wrong.” Valley Cmty. Pres. Comm’n v. Mineta, 373 F.3d 1078, 1089 n.2 (10th Cir. 2004) (quoting Am. Mining Cong. v. Thomas, 772 F.2d 617, 626 (10th Cir. 1985)).



38

and thus the DOL’s notice was insufficient. But one also can interpret this “surprise” as

resulting not from a lack of notice, but from a miscalculation about how the DOL would “draw

the lines” when it decided which transactions would remain covered by PTE 84-24 and which

would fall under the BICE in the final rules. This kind of surprise fails to demonstrate

insufficient notice. See Brazos Elec. Power Coop., Inc. v. Sw. Power Admin., 819 F.2d 537, 543

(5th Cir. 1987) (explaining that, although a member of the public “might have been surprised or

disappointed by a particular allocation,” it “provides no basis for claiming a statutorily deficient

notice of rulemaking”). The court does not find the cited materials compelling evidence to

demonstrate that the proposed rule failed to provide appropriate notice under the APA.

e. Even if the DOL provided insufficient notice, it was harmless error because other commenters made the same comments that plaintiff says it would have asserted with proper notice.

Finally, defendants assert that, even if the DOL’s notice was insufficient, any violation of

the APA was harmless because other commenters expressed concerns about removing FIAs from

PTE 84-24. Defendants contend that these are the same concerns that plaintiff claims it would

have voiced during the public comment period had it received proper notice, and thus plaintiff

can show no prejudice.

When a court reviews an agency action, the APA requires that “due account shall be

taken of the rule of prejudicial error.” 5 U.S.C. § 706. The Tenth Circuit thus applies the

harmless error rule when reviewing administrative proceedings. Bar MK Ranches v. Yuetter, 994

F.2d 735, 740 (10th Cir. 1993). Under this rule, “errors in such administrative proceedings will

not require reversal unless [a plaintiff] can show [it was] prejudiced.” Id.; see also Allina Health

Servs. v. Sebelius, 746 F.3d 1102, 1110 (D.C. Cir. 2014) (explaining that “[e]ven if a final rule

were regarded objectively as an abrupt departure from a proposed rule, if parties directed



39

comments to such a denouement, it might well be properly regarded as a harmless error—

depending on how pointed were the comments and by who made”). In Allina Health, the District

of Columbia Circuit explained that if another member of the public makes a comment that was

“the same point that petitioner would press,” any lack of notice “would still presumably be non-

prejudicial because all that is necessary in such a situation is that the agency had an opportunity

to consider the relevant views.” 746 F.3d at 1110. Such is the case here.

As described above, commenters urged the DOL to keep fixed annuities—including FIAs

—within the scope of PTE 84-24. See, e.g., AR047030–31 (NAFA comment); AR042540–41

(IALC comment); see also AR042375–76 (stating in an earlier comment from NAFA that it

“applauds the [DOL] for recognizing the distinction between securities and insurance products”

and “agrees with the [DOL] that PTE 84-24 is the appropriate exemption to use for non-security

annuity contracts (i.e. fixed annuities)” because the requirements under the BICE are

inapplicable to non-security annuities).

Plaintiff tries to nullify this conclusion by asserting that, if it had received sufficient

notice of the rule change, it would have provided data to the DOL about the final rule change’s

effect on the independent distribution channel for FIAs. But the administrative record contains

information about this distribution channel. The IALC’s comment specifically described the

distribution channels for fixed annuities, FIAs, and variable annuities. AR042535–66; see also

AR042541 (explaining in the IALC’s comment why the products offered by IMOs are not

appropriate for treatment under the BICE framework); AR042545 (explaining in the IALC’s

comment how the commission structure works between the insurance company, IMO, and

independent insurance agent); AR042547–48 (describing the “numerous operational and

procedural changes” that the new rule will impose on “insurance companies, insurance agents,



40

IMOs, broker-dealers, and registered investment advisers”). The DOL’s final Regulatory Impact

Analysis also discussed the independent distribution channel for the annuity market.

AR000418–19. This discussion demonstrates that the DOL understood that annuities are sold

through this channel, how this channel functioned under the existing regulations, and how it

would operate under the new rules.

Plaintiff also contends that, had it received sufficient notice, it would have submitted

comments to the DOL about the impracticability of including FIAs in the BICE. Other

commenters made these same points in their comments to the DOL. See AR042376 (stating in a

footnote in the earlier NAFA comment that the BICE is inapplicable to sales of non-securities

annuities); AR042540–41 (stating in the IALC comment that the BICE is in applicable to fixed

annuity products, including FIAs); AR047077 (same in a later IALC comment). Plaintiff also

asserts that it would have provided data to the DOL showing that FIAs present no more risk,

complexity, or conflicts of interest than fixed annuities. The record shows that IALC and NAFA

submitted comments on these topics as well. See, e.g., AR047030–41 (NAFA comment);

AR047074–78 (IALC comment).

In sum, the administrative record shows that other commenters made the points that

plaintiff contends it would have presented to the DOL had it received proper notice. Because the

DOL received such comments, plaintiff sustained no prejudice. And, even if the notice was

insufficient, the error was harmless. For all these reasons, the court concludes that plaintiff is not

likely to prevail on its claim that the DOL violated the APA by providing insufficient notice that

the final rule would remove FIAs from PTE 84-24.



41

2. Plaintiff is not likely to show that the DOL arbitrarily treated FIAs differently from all other fixed annuities.

Plaintiff next asserts that the DOL violated the APA because it is arbitrary and capricious

to treat FIAs differently than all other fixed annuities. Plaintiff contends that the DOL provided

no reasoned basis for excluding FIAs from PTE 84-24 and moving them into the BICE while

keeping other annuities (like declared rate annuities) under PTE 84-24. Plaintiff argues that the

DOL’s distinction arbitrarily treats similar products differently.

An agency’s action is arbitrary and capricious if:

the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

Motor Vehicle Mfrs. Ass’n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43

(1983). Although a court cannot “supply a reasoned basis for the agency’s action” if the agency

has not provided one, the court will “uphold a decision of less than ideal clarity if the agency’s

path may reasonably be discerned.” Id. at 43–44 (first quoting SEC v. Chenery Corp., 332 U.S.

194, 196 (1947); then quoting Bowman Transp. Inc. v. Ark.-Best Freight Sys., Inc., 419 U.S. 281,

286 (1974)). Under this framework, a court will set aside the agency’s “factual determinations

only if they are unsupported by substantial evidence.” Forest Guardians v. U.S. Fish & Wildlife

Serv., 611 F.3d 692, 704 (10th Cir. 2010) (quoting Wyo. Farm Bureau Fed’n v. Babbit, 199 F.3d

1224, 1231 (10th Cir. 2000)).

The court’s review under the arbitrary and capricious standard “is narrow in scope, but is

still a ‘probing, in-depth review.’” Sorenson Commc’ns, Inc. v. FCC, 567 F.3d 1215, 1221 (10th

Cir. 2009) (quoting Qwest Commc’ns Int’l, Inc. v. FCC, 398 F.3d 1222, 1229 (10th Cir. 2005)).



42

“An agency’s action is entitled to a presumption of validity, and the burden is upon the petitioner

to establish the action is arbitrary or capricious.” Id. (citing Citizens’ Comm. to Save Our

Canyons v. Krueger, 513 F.3d 1169, 1176 (10th Cir. 2008)). When conducting its review, “[t]he

court must rely upon the reasoning set forth in the administrative record and disregard post hoc

rationalizations of counsel.” Id. (citing Olenhouse v. Commodity Credit Corp., 42 F.3d 1560,

1580 (10th Cir. 1994)).

Here, the DOL announced that it based its decision to exclude FIAs from PTE 84-24 on

“the complexity, risk, and conflicts of interest associated with recommendations of variable

annuity contracts, indexed annuity contracts and similar contracts.” Final PTE 84-24, 81 Fed.

Reg. at 21,157–58. A review of the administrative record shows that the DOL’s determination is

supported by substantial evidence.

First, the DOL determined that FIAs are “complex products requiring careful

consideration of their terms and risks.” Final BICE, 81 Fed. Reg. at 21,018; Final PTE 84-24, 81

Fed. Reg. at 21,154. For an investor to “assess[ ] the prudence of a particular indexed annuity[,]”

one must have an understanding of:

surrender terms and charges; interest rate caps; the particular market index or indexes to which the annuity is linked; the scope of any downside risk; associated administrative and other charges; the insurer’s authority to revise terms and charges over the life of the investment; and the specific methodology used to compute the index-linked interest rate and any optional benefits that may be offered, such as living benefits and death benefits.

Final BICE, 81 Fed. Reg. at 21,018; Final PTE 84-24, 81 Fed. Reg. at 21,154. Also, “[i]n

operation, the index-linked interest rate can be affected by participation rates; spread, margin or

asset fees; interest rate caps; the particular method for determining the change in the relevant

index over the annuity’s period (annual, high water mark, or point-to-point); and the method for



43

calculating interest earned during the annuity’s term (e.g., simple or compounded interest).”

Final BICE, 81 Fed. Reg. at 21,018; Final PTE 84-24, 81 Fed. Reg. at 21,154.

Because of these characteristics, “[i]nvestors can all too easily overestimate the value of

these contracts, misunderstand the linkage between the contract and index performance,

underestimate the costs of the contract, and overestimate the scope of their protection from

downside risk (or wrongly believe they have no risk of loss).” Final BICE, 81 Fed. Reg. at

21,018; Final PTE 84-24, 81 Fed. Reg. at 21,154. And, “[a]s a result, retirement investors are

acutely dependent on sound advice that is untainted by the conflicts of interest posed by

advisers’ incentives to secure the annuity purchase, which can be quite substantial.” Final BICE,

81 Fed. Reg. at 21,018; Final PTE 84-24, 81 Fed. Reg. at 21,154.

The Regulatory Impact Analysis supports these findings. It described how FIAs “provide

crediting for interest based on changes in a market index” and why this makes them different

“from [declared rate] annuities although both products are treated as exempt securities under

current federal law.” AR000435; see also Final PTE 84-24, 81 Fed. Reg. at 21,157 (quoting a

FINRA publication that described FIAs as “anything but easy to understand”). The Regulatory

Impact Analysis also explained that the selection of the crediting index “is an important, and

often complex, decision.” AR000435. And, the Regulatory Impact Analysis described how

several methods exist “for determining changes in the index such as point-to-point, annual reset,

high-water-mark, and low-water-mark.” AR000439. The DOL recognized that “[b]ecause

different indexing methods can result in varying rates of return, investors need to understand the

trade-offs that they make by choosing a particular indexing method.” Id. And, it explained that

“[t]he rate of return is further affected by participation rates, cap rates, and the rules regarding

interest compounding.” Id.



44

The Regulatory Impact Analysis also described how FIA products may offer insurance

features such as death benefits and guaranteed living benefits, which come in three types: (1)

guaranteed minimum income, (2) guaranteed minimum accumulation, and (3) guaranteed

minimum withdrawal (including lifetime withdrawal benefits). AR000435; see also AR000442

(comparing how this feature is “seldom” offered with declared rate annuities but was offered

“with 84% of all new [FIA] sales in 2014”). “But these benefits may come at an extra cost and,

because of their variability and complexity, may not be fully understood by the consumer.”

AR000435. These citations demonstrate that the DOL considered evidence about the complexity

of FIAs.

Plaintiff disagrees with the DOL’s conclusion. Plaintiff asserts that the DOL’s

conclusion is wrong because FIAs are no more complex than other annuity products. In its final

rule, the DOL considered comments that expressed this view but, ultimately, rejected them. See

Final PTE 84-24, 81 Fed. Reg. at 21,157 (discussing the comments that asserted that FIAs and

declared rate annuities are similar investment products). The DOL instead relied on other

evidence from the administrative record to reach the opposite conclusion—that FIAs are more

complex financial products. Because this decision is supported by evidence within the

administrative record, the court must defer to the DOL’s decision. See Forest Guardians, 611

F.3d at 704 (explaining that a court cannot “displace the [agency’s] choice between two fairly

conflicting views, even though the court would justifiably have made a different choice had the

matter been before it” (citation and internal quotation marks omitted)).

Second, the DOL concluded that FIAs pose risks that require more stringent regulation

under the BICE instead of PTE 84-24. To reach this conclusion, the DOL described the risks



45

involved with FIAs that make them more like variable annuities and different from declared rate

annuities. They include:

[T]he insurance company bears the investment risk in a [declared rate] annuity, because the insurer guarantees a minimum interest rate at the beginning of crediting period. In contrast, in a variable annuity, the investment risk is borne by the contract owner because the account value fluctuates based on the performance of underlying funds. Fixed-indexed annuities fall between [declared] rate annuities and variable annuities in terms of the extent to which insurers bear investment risks. In fixed-indexed annuities, insurers generally guarantee at least a zero return. However, as long as the return is above the minimum guarantee, the actual return on a fixed-indexed annuity is not determined until the end of the crediting period and is based on the performance of a specified index or other external reference. Similar to variable annuities, the returns of fixed-indexed annuities can vary widely, which results in a risk to investors. Furthermore, insurers generally reserve rights to change participation rates, interest caps, and fees, which can limit the investor’s exposure to the upside of the market and effectively transfer investment risks from insurers to investors.

AR000439; see also AR000440–42 (chart comparing the features and risk involved with

declared rate annuities, fixed-indexed annuities, and variable annuities).

The DOL also recognized that FINRA and the SEC have concluded that FIAs present

more risks than declared rate annuities. FINRA has stated that FIAs “give you more risk (but

more potential return) than a fixed annuity but less risk (and less potential return) than a variable

annuity.” AR000600 (internal quotation marks omitted). And, the SEC has explained:

You can lose money buying an indexed annuity. If you need to cancel your annuity early, you may have to pay a significant surrender charge and tax penalties. A surrender charge may result in a loss of principal, so that an investor may receive less than his original purchase payments. Thus, even with a specified minimum value from the insurance company, it can take several years for an investment in an indexed annuity to break even.

Id. (internal quotation marks omitted).



46

Finally, the DOL determined that sales of FIAs involve more conflicts of interest than

sales of other types of fixed annuity products. The DOL explained, “[T]he increasing

complexity and conflicted payment structures associated with [FIA] products have heightened

the conflicts of interest experienced by investment advice providers that recommend them.”

Final PTE 84-24, 81 Fed. Reg. at 21,154. It cited the Regulatory Impact Analysis, which found

that “conflicts of interest in the marketplace for retail investments result in billions of dollars of

underperformance to investors saving for retirement.” Id.; see also AR000465–74; AR000483.

The DOL thus concluded that “[b]oth categories of annuities, variable and indexed annuities, are

susceptible to abuse, and all retirement investors—plans and IRAs alike—would benefit from a

requirement that advisers adhere to enforceable standards of fiduciary conduct and fair dealing.”

Final PTE 84-24, 81 Fed. Reg. at 21,154. The Regulatory Impact Analysis also concluded: “If

anything, the potential harm from conflicts of interest would be larger in the annuity market

because purchasers of annuities are often older individuals who are less sophisticated in financial

matters than the purchasers of commercial property-casualty insurance.” AR000438.

The administrative record establishes that the DOL was presented with conflicting

viewpoints: “[O]ne commenter noted that the compensation structure for indexed annuities is

similar to that of variable annuities, raising comparable concerns regarding conflicts of interest.”

Final PTE 84-24, 81 Fed. Reg. at 21,157. Because of this, commenters suggested that the sale of

FIAs “should be subject to the same protective conditions as those proposed for variable

annuities under the BICE.” Id.

Also, the administrative record contains evidence showing that commissions for FIAs

typically exceed those for other products, including declared rate annuities. See AR000447

(stating that “[c]ommissions on indexed annuities average 6.3 percent of the principal



47

payment”); see also AR046849 (describing in a comment from Fund Democracy how indexed

and variable annuities raise similar conflicted compensation issues and stating that “the

compensation paid to advisers for selling indexed annuities may vary from and is typically

higher than the compensation received for sales of other products, which means that advisers

may have an incentive to recommend them solely on the basis of the relative compensation

received”). The DOL concluded that “[s]uch high and variable commissions can encourage

agents and brokers to recommend products that are not suitable for their customers and/or to

favor one suitable product over others that would better serve their customers’ interests.”

AR000447.

Plaintiff argues that the evidence does not support these conclusions. It claims that

commission rates for FIAs are actually lower than other insurance products. It cites the

Regulatory Impact Analysis, which states that “[c]ommissions on indexed annuities average 6.3

percent of the principal payment” while “aggregate commission payments accounted for 7

percent of aggregate total expenses and amounted to 9 percent of total premiums in 2013.” Doc.

36 at 20 (citing AR000447). But, in that same section, the DOL cited evidence showing that

“U.S. sales commissions on annuities were about 4% of premiums.” AR000447. The court

recognizes that a rational person could reach conflicting conclusions from this data. But the

governing law is clear. It is not the court’s role to decide the proper way to interpret the data—it

must leave that decision to the agency. See Forest Guardians, 611 F.3d at 704 (explaining that a

court cannot “displace the [agency’s] choice between two fairly conflicting views, even though

the court would justifiably have made a different choice had the matter been before it” (citation

and internal quotation marks omitted)).



48

Plaintiff also asserts that the amendment to PTE 84-24 was unnecessary because FIAs

already are governed, appropriately, by state insurance laws. But, the DOL specifically

addressed this argument in the final rule. It recognized that “[a] number of commenters objected

generally to changes to PTE 84-24 on the basis that the original exemption, in combination with

other regulatory safeguards under insurance law or securities law, provides sufficient protections

to plans and IRAs.” Final PTE 84-24, 81 Fed. Reg. at 21,153. Thus, commenters asserted, the

current rules do not expose consumers to demonstrated harms. Id. The DOL did not agree. Id.

It explained:

The extensive changes in the retirement plan landscape and the associated investment market in recent decades undermine the continued adequacy of the original approach in PTE 84-24. In the years since the exemption was originally granted in 1977, the growth of 401(k) plans and IRAs has increasingly placed responsibility for critical investment decisions on individual investors rather than professional plan asset managers. Moreover, at the same time as individual investors have increasingly become responsible for managing their own investments, the complexity of investment products and range of conflicted compensation structures have likewise increased. As a result, it is appropriate to revisit and revise the exemption to better reflect the realities of the current marketplace.

Id.

Plaintiff argues, however, that the administrative record lacks evidence of conflicted or

abusive sales practices to warrant the new regulation. Plaintiff relies on data that, it contends,

shows an absence of complaints about FIA transactions, which must mean that such transactions

are not subject to abuse. Indeed, in 2015, only 52 of all 3,994 life insurance and annuity

complaints involved FIAs. Doc. 11-2 ¶ 19. But, as the DOL explained, FIAs are likely to

involve complex fee arrangements that make conflicts of interest and other abuses difficult for

consumers to discern. AR000435; see also AR000439 (explaining that the complexity of FIAs



49

makes investors “acutely dependent on financial advice they receive from broker-dealers and

insurance agents” and renders “[u]nbiased and sound advice . . . even more crucial in guarding

the best interests of investors in fixed-indexed annuities”). One commenter also criticized

complaint data as unrepresentative of abusive practices because, with opaque transactions,

consumers lack the information to complain. AR031685. So, it is reasonable to conclude that

consumers will lodge fewer complaints about FIAs than other types of transactions if they are

unaware of the potential for conflicts or abuse. And, it was reasonable for the DOL to conclude

that FIAs thus require additional regulation beyond the existing state laws to protect consumers

from this potential for conflicted advice.

Also, plaintiff contends that the DOL has committed the same error that the SEC did

when it tried to regulate FIAs without adequately considering whether existing state law

provided sufficient protections. See Am. Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 178–79

(D.C. Cir. 2010). In that case, the court invalidated the SEC’s final action because it determined

that the SEC had violated a provision of the Securities Act of 1933 requiring the SEC when

“engaged in rulemaking . . . to consider or determine whether an action is necessary or

appropriate in the public interest . . . [and for] the protection of investors [and] whether the action

will promote efficiency, competition, and capital formation.” Id. at 176–77 (citing 15 U.S.C. §

77b(b)). But plaintiff cites no similar statutory requirement that the DOL must follow when

engaging in rulemaking of this kind. And, thus, American Equity Investment has no persuasive

value here.10

10 The court’s other holding in American Equity Investment, however, supports the DOL’s conclusions about treating FIAs differently than declared rate annuities. In the same opinion, the District of Columbia Circuit held that the SEC reasonably interpreted the term, “annuity contract,” as excluding FIAs under the Chevron test. 613 F.3d at 172–76 (citing Chevron U.S.A. Inc. v. Nat’l Res. Def. Council, Inc., 467 U.S. 837, 842–43 (1984)). That court described FIAs as “hybrid financial product[s] that combine[ ] some of the benefits of fixed annuities with the added earning potential of a security.” Id. at



50

And, even if plaintiff could point to a similar statutory prerequisite, the administrative

record shows the DOL considered comments urging for more regulation “to enhance retirement

investor protection in an area lacking sufficient protections for investors in tax qualified

accounts.” Final PTE 84-24, 81 Fed. Reg. at 21,157. Indeed, one commenter argued that “IRA

owners need greater protections when investing in index annuities precisely because such

products are not regulated securities.” Id. The DOL also considered comments that described

the role of state insurance regulators and recognized the shared regulatory responsibility that

state insurance regulators have with federal agencies. Final Fiduciary Definition, 81 Fed. Reg. at

20,959. The DOL also met with the National Association of Insurance Commissioners to ensure

that the federal and state laws governing consumer protection in this area are consistent and

compatible. Id. at 20,960. And, the DOL considered comments expressing concern that the

proposed rule would interfere with state insurance regulatory programs and that it ignored the

role that state insurance regulators play in protecting consumers. Final BICE, 81 Fed. Reg. at

21,018. The DOL “[did] not agree with these comments,” citing its meetings with state

insurance regulators, its review of model state insurance laws, and its commitment to ensuring

that the final rule complimented and did not conflict with state insurance regulations. Id. at

21,018–19.

In sum, the court concludes that the DOL provided a reasoned explanation for its decision

to move FIAs from the scope of PTE 84-24, and thus the DOL’s final rule is not arbitrary and

capricious. See Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2125 (2016) (explaining

168. It also explained that FIAs “appeal to the purchaser not on the usual insurance basis of stability and security but on the prospect of growth through sound investment management.” Id. at 174 (citation and internal quotation marks omitted). And, like securities, FIAs involve “a variability in the potential return that results in a risk to the purchaser.” Id. The District of Columbia Circuit thus concluded that all these characteristics of FIAs “involve considerations of investment not present in the conventional contract of insurance.” Id. (citation and internal quotation marks omitted).



51

that an agency decision is not arbitrary and capricious if the agency provides adequate reasons

for its decision); see also Nat’l Ass’n for Fixed Annuities, 2016 WL 6573480, at *34–35

(concluding that the DOL provided a reasoned explanation for its decision to move FIAs out of

PTE 84-24 and into the BICE and thus did not violate the APA).

3. Plaintiff is not likely to prove that the DOL failed to consider the detrimental effects of its actions on independent insurance agent distribution channels.

Plaintiff also contends that the DOL violated the APA and RFA by failing to consider the

economic impact that the final rule would impose on independent insurance agent distribution

channels (including independent insurance agents, IMOs, and other business like Market

Synergy that support the distribution channel). The administrative record belies this assertion.

The Regulatory Impact Analysis described the various roles that insurers, insurance

agents, and intermediaries such as IMOs play in the independent distribution channel.

AR000416–21. It also recognized that “in the indexed annuity market insurers heavily rely on

independent insurance agents.” AR000420. When discussing the existence of conflicts, the

Regulatory Impact Analysis analyzed the distribution channel, providing data about the amount

of sales of each type of annuity through various channels. AR000447. It also expressed concern

that “potential conflicts affecting insurance intermediaries are likewise varied, complex, and

difficult for consumers to discern.” AR000460.

The Regulatory Impact Analysis also addressed the effect the rule changes could have on

the independent distribution channel. It considered the costs that insurers will incur for

complying with the rule and exemptions. AR000553–54. It also recognized that “[i]ndependent

insurance agents could be affected” by the rule changes, and that insurers may impose some of

their incurred costs on independent agents. AR000554. The DOL was mindful that its analysis



52

may not account for costs for independent insurance agents. Id. But the DOL also explained

that it lacked sufficient data and the industry had declined to provide that information even

though the DOL requested it. Id. at n.519; see also Doc. 41-1 at 50. But, “to the extent insurers

provided support some costs could be accounted for in the total costs for insurers.” AR000554 at

n.519.11

The Regulatory Impact Analysis further concluded that the final rule “will . . . impose

costs on small service providers rendering investment advice to plan or IRA investors . . .

includ[ing] . . . insurance companies and agents . . . and others providing investment advice to

plan and IRA investors.” AR000570. And, it recognized that independent insurance agents and

IMOs will face choices about how best to respond to the new rule and its exemptions.

AR000626–27. It predicted that firms “will gravitate toward structures and practices that

efficiently avoid or manage conflicts to deliver impartial advice consistent with fiduciary

conduct standards.” AR000626. And the DOL’s analysis noted that “[f]irms that achieve these

ends most efficiently will gain market share.” Id.

In the final rule, the DOL addressed the effect the amendments would impose on the

distribution channel. The DOL recognized that “marketing or distribution affiliates and

intermediaries” would not meet the definition of “Financial Institution” allowing them to operate

under the BICE. Final BICE, 81 Fed. Reg. at 21,067. But, the DOL explained that the final rule

11 This analysis shows, plaintiff argues, that the DOL only considered the rule’s effect on insurance companies, not independent insurance agents or IMOs, thus violating the APA and RFA. The court disagrees. The cited portions of the administrative record show that the DOL analyzed the economic impact on independent insurance agents using the data that the industry made available. Plaintiff cites no authority requiring the DOL to engage in a more specific analysis under the APA. The DOL’s actions also satisfied the requirements of RFA. See N.C. Fisheries Ass’n, Inc. v. Gutierrez, 518 F. Supp. 2d 62, 96 (D.D.C. 2007) (explaining that the RFA does not require “mathematical exactitude” but only a “reasonable, good-faith effort” to carry out the RFA’s mandate (citations and internal quotation marks omitted)). Indeed, the court is persuaded that the DOL performed a final regulatory flexibility analysis that fulfilled the RFA’s requirement. See 5 U.S.C. §§ 603–04; see also Final Fiduciary Definition, 81 Fed. Reg. at 20,993–94; Final BICE, 81 Fed. Reg. at 21,074–75; AR000570–76.



53

permits these entities to qualify for an individual exemption to bring them within the “Financial

Institution” definition. Id. The DOL also recognized that commission payments may pass

through intermediaries, and it explained that it did not intend “to disrupt the practice of paying

commissions through a third party, such as an independent marketing organization.” Final PTE

84-24, 81 Fed. Reg. at 21,166.

While recognizing these effects that the new rule and related exemptions may impose on

the independent distribution channel, the DOL also found that its rulemaking would produce

significant benefits for consumers. See AR000642–44; see also AR000625 (“The

underperformance associated with conflicts of interest—in the mutual funds segment alone—

could cost IRA investors between $95 billion and $189 billion over the next 10 years and

between $202 billion and $404 billion over the next 20 years” but “[t]he [DOL] estimates that

the final rule and exemptions, by mitigating this particular type of adviser conflict, have the

potential to produce gains for IRA investors [in the front-end-load mutual fund segment alone]

worth between $33 billion and $36 billion over 10 years and between $66 and $76 billion over

20 years.”); Final Fiduciary Definition, 81 Fed. Reg. at 20,949 (recognizing that the rule changes

were warranted because, under the existing rules, “[a]n ERISA plan investor who rolls her

retirement savings into an IRA could lose 6 to 12 and possibly as much as 23 percent of the

value of her savings over 30 years of retirement by accepting advice from a conflicted financial

adviser”). Weighing these burdens against the estimated benefits, the DOL concluded that “any

frictional cost associated with this final rule and exemptions will be justified by the rule’s

intended long-term effects of greater market efficiency and a distributional outcome that favors

retirement investors over the financial industry.” AR000625.



54

The DOL also found that entities within the independent distribution channel could adapt

to the changes. The DOL described the “markets for financial advice, financial products and

other financial services” as “highly dynamic” ones. Id. It predicted that “advisers may migrate

from advisory firms where conflicts had been most deeply embedded to firms that are well-

situated to efficiently provide impartial advice compliant with the final rule and exemptions.”

AR000627. And, this would lead to “greater long-term efficiency, with a more efficient

allocation of labor and other resources to investment advice and other productive enterprises.”

Id. The DOL also relied on data from the United Kingdom after it implemented regulatory

changes banning commissions. From this data, the DOL predicted it is unlikely that the

rulemaking will cause advisers to leave the market or otherwise adversely affect consumers’

access to investment advice. AR000393–94.

Plaintiff also contends that the DOL’s analysis is flawed because it never evaluated

whether the independent distribution channel can operate under the BICE. And, plaintiff asserts,

the BICE is unworkable for IMOs and independent agents. Defendants disagree. They identify

several ways IMOs can continue to operate under the BICE.

First, IMOs could retain their current role providing support to independent insurance

agents while insurers can serve as the “Financial Institution” under the BICE. Final BICE, 81

Fed. Reg. at 21,003. That is, the insurer must sign the contract acknowledging its fiduciary

status and commit to adhere to certain standards of conduct. Id. at 21,003, 21,076–79. Plaintiff

claims that this is not a viable option because some insurers have expressed an unwillingness to

take on the role and responsibilities of a “Financial Institution” under the BICE. But, even one

of plaintiff’s declarants recognizes that other insurance companies may “continue to use

independent agents and agree to sign the [contract] as a Financial Institution in those



55

transactions” but “may decide to eliminate the IMO.” Doc. 11-7 ¶ 21. Under this scenario, the

BICE is not unworkable. True, it may disadvantage the IMO; but as defendants’ counsel

explained at oral argument, the DOL need not guarantee that plaintiff and its members will do

well under the new system. Doc. 54 at 126 (Tr. 126:15–25). Instead, the APA only requires that

the DOL consider the issue and provide a reasoned basis for its decision. Id. The DOL satisfied

these requirements. See AR000625–27.

Plaintiff also argues that, unless a large number of insurers elect to serve as the “Financial

Institution,” insurance agents will have access to a limited number of products and thus cannot

recommend the most suitable form of annuity to prospective investors. But the rule makes it

clear: The BICE “does not impose an unattainable obligation on Advisers and Financial

Institutions to somehow identify the single ‘best’ investment for the Retirement Investor out of

all the investments in the national or international marketplace, assuming such advice were even

possible.” Final BICE, 81 Fed. Reg. at 21,029.

Second, insurers or individual agents could affiliate with a broker-dealer, as some of

them have done already. Indeed, as discussed at oral argument, some 35% of independent

insurance agents already are licensed to handle securities. Doc. 54 at 47, 128 (Tr. 47:1–5,

128:1–11). This is another way for independent insurance agents to operate under the BICE.

Third, IMOs may seek individual exemptions to come within the definition of “Financial

Institutions” under the BICE. Final BICE, 81 Fed. Reg. at 21,067. In its rulemaking, the DOL

specifically considered comments requesting that the DOL include marketing or distribution

intermediaries within the definition of “Financial Institution.” Id. The DOL declined these

requests and, instead, provided these entities with an option to seek an exemption. Id. Indeed,

plaintiff concedes this option exists, and also concedes that three of plaintiff’s IMOs already



56

have applied for such exemptions. See Doc. 25-1 at 90–106 (Financial Independence Group);

Doc. 49-1 at 3–19, 38–57 (applications submitted by Advisors Excel and Brokers International).

Plaintiff asserts that the exemption process is uncertain, and it may prove lengthy and

costly. For “marketing intermediaries or other entities” to obtain an exemption, they must

submit an application to the DOL with “information regarding their role in the distribution of

financial products, the regulatory oversight of such entities, and their ability to effectively

supervise individual Advisers’ compliance with the terms of this exemption.” Final BICE, 81

Fed. Reg. at 21,067. Plaintiff asserts that it cannot supervise individual advisers effectively

without expanding its current business model at a substantial cost and with no assurances that the

DOL will grant an exemption. The court realizes that the rulemaking may require plaintiff to

make changes to its business, but no doubt can exist that the new regulations provide this option.

This scenario is not something that the DOL failed to consider. See AR000626–27 (recognizing

that independent insurance agents and IMOs “will face choices about how to respond to this final

rule and exemptions”). To the contrary, the DOL recognized the changes that the new rule and

exemptions would impose, and it provided alternative options for entities engaged in the

distribution channel to pursue. This satisfies the APA’s requirements.

In sum, the DOL considered the effect the rulemaking may impose on the independent

distribution channel. It recognized that the rulemaking will impose costs on the industry and

require its participants to make changes. But the DOL also cited evidence showing that the new

rule and exemptions will benefit retirement investors by protecting them from the potential for

conflicted advice. The DOL weighed these costs and benefits of the rule changes, ultimately

deciding that the benefits to investors outweighed the costs to those in the independent

distribution channel. Another court recently observed this tension, noting “[t]his is not an easy



57

balance to strike.” Nat’l Ass’n for Fixed Annuities, 2016 WL 6573480, at *39. But, under the

APA, “[t]he only question for the [c]ourt . . . is whether the [DOL’s] decision was a reasonable

one,” and the court cannot “substitute its judgment [for] that of the [DOL] regarding matters of

policy and not law.” Id.

After reviewing the administrative record, the court is able to discern the DOL’s path in

its rulemaking. See Motor Vehicle Mfrs. Ass’n of the U.S., 463 U.S. at 43 (instructing courts to

“uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned”).

The DOL recognized the effects that the final rule would have on the industry’s players but

concluded that the need to protect consumers from conflicted investment advice outweighed

those concerns. The DOL’s decision was a reasonable one. The DOL’s action did not violate

the APA. See Nat’l Ass’n for Fixed Annuities, 2016 WL 6573480, at *39 (holding that the DOL

acted lawfully when it removed FIAs from PTE 84-24 and subjected them to the requirements of

the BICE).

4. Plaintiff is not likely to show that the DOL exceeded its statutory authority by seeking to manipulate the financial product market instead of regulating fiduciary conduct.

In its briefing, plaintiff’s last argument contends that the DOL exceeded its statutory

authority by issuing the final rule. Plaintiff’s briefs argue that the DOL has engaged in

preferential treatment by including some retirement investment products in PTE 84-24 while

subjecting other products to the more stringent requirements of the BICE. Plaintiff contends that

the DOL lacks statutory authority to regulate financial products and, with the final rule, it has

manipulated access to particular financial products. This, plaintiff asserts, exceeded the

authority Congress has delegated to the agency under ERISA and the IRS Code.



58

At oral argument, though, plaintiff appeared to abandon this argument. See Doc. 54 at

21, 24–25 (Tr. at 21:6–22, 24:21–25:14). But, even if plaintiff has not conceded this argument, it

is not likely to succeed on it. Congress has delegated authority to the DOL to grant “a

conditional or unconditional exemption of any fiduciary or transaction, or class of fiduciaries or

transactions, from all or part of the” prohibited transactions restrictions under ERISA. 29 U.S.C.

§ 1108(a); see also 29 U.S.C. § 4975(c)(2) (establishing an exemption procedure for tax-favored

plans under the IRS Code). To grant an exemption, the Secretary of the DOL must conclude that

it is: “(A) administratively feasible, (B) in the interests of the plan and of its participants and

beneficiaries, and (C) protective of the rights of participants and beneficiaries of the plan.” 29

U.S.C. § 1108(a); 29 U.S.C. § 4975(c)(2). When issuing the final rule, the DOL applied this

statutory standard and concluded that the exemptions satisfied the requirements established by

Congress. See, e.g., Final PTE 84-24, 81 Fed. Reg. at 21,173–74; Final BICE, 81 Fed. Reg. at

21,009, 21,059–61; AR000605.

When Congress has authorized an agency to grant exemptions, the agency’s actions are

entitled to great deference. See AFL-CIO v. Donovan, 757 F.2d 330, 341 (D.C. Cir. 1985)

(stating that when Congress “expressly delegate[s] the authority to grant the exemption and . . .

to make certain other determinations in order to do so . . . [t]hat grant and those determinations

have legislative effect [and] are thus entitled to great deference”). Such is the case here.

Congress has granted the DOL the authority to issue the exemptions found in the final rule, and

the court must defer to those determinations.

To the extent plaintiff argues that the DOL’s conclusions are unsupported, the court

already has addressed this argument in the sections above. The court concludes that the DOL’s



59

reasoning was neither arbitrary nor capricious, and thus plaintiff is not likely to show that the

agency violated the APA or RFA by issuing the final rule.

B. Irreparable Harm

Because the court concludes that plaintiff has not carried its burden to demonstrate it is

likely to succeed on the merits, plaintiff has not shouldered its burden for injunctive relief.

Nevertheless, the court briefly considers the other requisites of a preliminary injunction and

concludes that plaintiff has not satisfied them either. The court begins this additional analysis

with the irreparable harm requirement.

A plaintiff establishes irreparable harm by demonstrating “a significant risk that he or she

will experience harm that cannot be compensated after the fact by monetary damages.” RoDa

Drilling Co. v. Siegal, 552 F.3d 1203, 1210 (10th Cir. 2009) (quoting Greater Yellowstone Coal.

v. Flowers, 321 F.3d 1250, 1258 (10th Cir. 2003)). A claim of “purely speculative” harm will

not suffice. Id. Instead, a plaintiff must show that “significant risk of irreparable harm” is

present to meet the burden. Id. (quoting Greater Yellowstone, 321 F.3d at 1260). Moreover,

wholly conclusory statements do not amount to irreparable harm. Dominion Video Satellite, Inc.

v. Echostar Satellite Corp., 356 F.3d 1256, 1261 (10th Cir. 2004). The court also must

determine if the harm is likely to take place before a ruling on the merits. RoDa Drilling Co.,

552 F.3d at 1210.

Here, plaintiff asserts that the DOL’s rulemaking will have profound consequences

because, in effect, it prohibits those who sell or are involved in the independent distribution of

FIAs from receiving commissions or other third-party compensation under PTE 84-24 (because

the rule revokes that exemption) or the BICE (because, it contends, that exemption is

unworkable). Plaintiff claims that the rule changes will shift how FIAs are sold and who will sell



60

them. It also asserts that the rule changes will alter the annuity industry radically, and to the

overwhelming detriment of independent agents, IMOs, and plaintiff.

Plaintiff anticipates that the new rule will force insurance companies to move their sales

of FIAs away from independent agent distribution and shift their distribution to career agents,

banks, registered investment advisers, and broker-dealers. This shift will injure plaintiff, IMOs,

and independent agents through loss of customers, market share, goodwill, and competitive

position relative to broker-dealers, banks, registered investment advisers, and captive agent sales

forces. Plaintiff expects that independent agents and IMOs will experience a revenue decline

exceeding 50%. Plaintiff also anticipates its revenue dropping by almost 80%. And plaintiff

forecasts that more than 20,000 independent insurance agents will leave the marketplace.

Plaintiff asserts that consumers will sustain injury as well because, currently, independent agents

offer financial advice tailored to specific consumers at no cost. But, without compensation from

the sale of FIAs, independent agents will lack the financial capacity to offer free investment

advice. This, plaintiff asserts, will preclude these agents from offering free advice to less

affluent customers.

Defendants contend that plaintiff’s assertions of irreparable harm are speculative because

they assume that insurance companies will respond to the new regulations in a particular fashion.

The court agrees. Speculation about how third parties will react to the new rule is insufficient to

demonstrate irreparable harm. See, e.g., Winter v. Nat’l Res. Def. Council, Inc., 555 U.S. 7, 22

(2008) (“Issuing a preliminary injunction based only on a possibility of irreparable harm is

inconsistent with our characterization of injunctive relief as an extraordinary remedy that may

only be awarded upon a clear showing that the plaintiff is entitled to such relief.”); see also Am.

Meat Inst. v. U.S. Dep’t of Agric., 968 F. Supp. 2d 38, 78–79 (D.D.C. 2013) (holding that



61

plaintiffs’ assertions about “what they truly ‘expect’ to happen in the marketplace; what their

customers are ‘likely’ to demand; and what ‘could’ happen to their businesses” under a new

agency rule was speculative and not a showing of actual or certain harm required for injunctive

relief); Voile Mfg. Corp. v. Dandurand, 551 F. Supp. 2d 1301, 1307 (D. Utah 2008) (concluding

that “a probable loss in market share . . . does not amount to irreparable harm”).

Moreover, to make the required showing here, plaintiff must rely on its allegation that the

BICE is unworkable. But the court already rejected that assertion. To the contrary, the DOL has

provided plaintiff several options to operate under the BICE, including applying for an

exemption to come within the definition of “Financial Institution”—an option that three of

plaintiff’s IMOs already are pursuing. Plaintiff thus cannot show irreparable harm when it has

several other ways it can continue its business operations under the new rule and exemptions.

Another shortcoming in plaintiff’s irreparable harm theory is that it relies on the actions

of third parties. That is, plaintiff contends that it will sustain injury because insurance companies

may change the way they do business in light of the rule change. Other courts have determined

that such indirect causation of injury is insufficient to establish irreparable harm because the

injury flows from third parties, not the rule itself. See Safari Club Int’l v. Jewell, 47 F. Supp. 3d

29, 36–37 (D.D.C. 2014) (holding that plaintiff could not establish irreparable harm to economic

interests because any revenue losses resulted from independent decisions made by third parties,

and not from the rule change directly); see also Am. Meat Inst., 968 F. Supp. 2d at 80–81

(concluding no irreparable harm established when the harm “does not flow directly from the

requirements of the Final Rule but is instead based on independent market variables such as how

the supplier’s customers and/or retail consumers might react” and concerns that plaintiffs “will

ultimately lose future business because others may respond to the new . . . rules and react in a



62

manner that may ultimately affect their companies negatively” is an “indirect harm [that] is

neither certain nor immediate”). And, as defendants recognize, even if the court issued the

requested injunctive relief, it is not binding on insurance companies. Such relief thus would

provide no assurances that the insurance companies will modify their behavior based on the

court’s ruling. In sum, plaintiff has not established irreparable harm here.

C. Balance of Harms and Public Interest

Last, the court considers whether plaintiff has shown that “the balance of equities tips in

[its] favor, and that an injunction is in the public interest.” Winter v. Nat’l Res. Def. Council,

Inc., 555 U.S. 7, 20 (2008). Plaintiff asserts that a preliminary injunction will harm no

governmental or public interest because the DOL has no legitimate interest in issuing or

enforcing an invalid regulation. But, as the court concluded above, plaintiff is not likely to show

that the DOL has violated the APA or RFA in its rulemaking.

Also, plaintiff argues that the DOL’s amendment to and partial revocation of PTE 84-24

applies only to transactions occurring on or after April 10, 2017, so the government will not

sustain harm if an injunction is issued now. The court disagrees. As defendants argue, an

injunction will lead to confusion about the law and likely produce unwarranted delay. This is not

in the public’s interest. Any injunction thus will produce a public harm that outweighs any harm

that plaintiff may sustain from the rule change. The DOL has determined that the rule changes

will benefit retirement investors throughout the United States by requiring investment advisers to

act in the best interest of those investors. Congress authorized the DOL to evaluate these

competing interests and it has concluded that significant public interests favor the proposed

regulatory changes. As already explained, evidence in the administrative record supports the

DOL’s determination and the court finds no basis for contradicting those findings.



63

V. Conclusion

Plaintiff has not shouldered its burden to establish the four requirements for a preliminary

injunction. The court thus denies plaintiff’s Motion for Preliminary Injunction.

IT IS THEREFORE ORDERED BY THE COURT THAT the plaintiff’s Motion for

Preliminary Injunction (Doc. 10) is denied.

IT IS SO ORDERED.

Dated this 28th day of November, 2016, at Topeka, Kansas.

s/ Daniel D. Crabtree_____ Daniel D. Crabtree United States District Judge



IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF KANSAS

MARKET SYNERGY GROUP, INC.,

Plaintiff,

v.

Case No. 16-CV-4083-DDC-KGS

UNITED STATES DEPARTMENT OF

LABOR, et al.,

Defendants.

MEMORANDUM AND ORDER

Plaintiff Market Synergy Group, Inc. brings this lawsuit under the Administrative

Procedure Act, 5 U.S.C. § 500 et seq., and the Regulatory Flexibility Act of 1980, 5 U.S.C. § 601

et seq., challenging a final regulatory action taken by the Department of Labor (“DOL”) on April

8, 2016. Specifically, plaintiff challenges the DOL’s Amendment to and Partial Revocation of

Prohibited Transaction Exemption (“PTE”) 84-24,1 as it applies to fixed indexed annuity (“FIA”)

sales. The rule provides that PTE 84-24 will apply beginning on April 10, 2017.2 But, the DOL

also included an additional nine-month transition period after the April 10, 2017 applicability

1 Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for

Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance

Companies, and Investment Company Principal Underwriters, 81 Fed. Reg. 21,147 (Apr. 8, 2016) (to be

codified at 29 C.F.R. pt. 2550).

2 Id. at 21,171 (stating that the DOL determined that “an Applicability Date of April 10, 2017, is

appropriate for plans and their affected financial services and other service providers to adjust to” the rule

change).



2

date for the industry to meet the requirements of the rule changes.3 Thus, the regulation that

plaintiff challenges will not go into full effect until January 1, 2018.4

This matter is before the court on the parties’ cross motions for summary judgment. For

the reasons explained below, the court grants defendants’ Motion for Summary Judgment (Doc.

67), and denies plaintiff’s Motion for Summary Judgment (Doc. 65).

I. Background

Shortly after filing this lawsuit, plaintiff filed a Motion for Preliminary Injunction (Doc.

10). Plaintiff’s motion asked the court to issue an order preliminarily enjoining the DOL from

taking any action to adopt or enforce PTE 84-24, as it applies to FIA sales. It also sought an

order requiring that PTE 84-24, as it existed before the DOL’s April 8, 2016 amendment and

partial revocation, remain in effect during the pendency of this case. The parties submitted

extensive briefing on the motion (Docs. 11, 25, 36, 41-1, 52, 53), and the court conducted a

hearing on the motion on September 21, 2016 (Doc. 51).

On November 28, 2016, the court issued a Memorandum and Order denying plaintiff’s

Motion for Preliminary Injunction (Doc. 59) (“November 28, 2016 Order”). The court

concluded that plaintiff had failed to establish the requirements necessary for preliminary relief.

First, the court determined that plaintiff is not likely to prevail on the merits of its claims that the

3 Best Interest Contract Exemption, 81 Fed. Reg. 21,002, 21,069–71 (Apr. 8, 2016).

4 The court recites the rule in its current form, but recognizes that recent developments may lead to

future changes in this rule-making. The DOL promulgated PTE 84-24 in connection with the Fiduciary

Duty Rule. Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment

Advice, 81 Fed. Reg. 20,946 (Apr. 9, 2016). On February 3, 2017, the President issued a memorandum

directing the Secretary of Labor to “examine the Fiduciary Duty Rule” and to “prepare an updated

economic and legal analysis” of the Rule specifically addressing three enumerated considerations, among

others. Memorandum for the Secretary of Labor on Fiduciary Duty Rule, 82 Fed. Reg. 9,675 (Feb. 3,

2017). The memorandum also directed that if the Secretary “make[s] an affirmative determination as to

any one of the [enumerated] considerations,” or “for any other reason after appropriate review,” the

Secretary “shall publish for notice and comment a proposed rule rescinding or revising the Rule, as

appropriate and as consistent with law.” Id.



3

DOL violated the Administrative Procedure Act (“APA”) and the Regulatory Flexibility Act

(“RFA”) by issuing PTE 84-24. Id. at 25–59. The court also found that plaintiff could not

establish irreparable harm, that the balance of equities tips in its favor, or that an injunction is in

the public interest. Id. at 59–62. The court thus denied plaintiff’s Motion for Preliminary

Injunction.

The factual and regulatory background of plaintiff’s challenge to PTE 84-24 is discussed

extensively in the court’s November 28, 2016 Order denying plaintiff’s Motion for Preliminary

Injunction. See id. at 4–24. With their briefing on the Motion for Preliminary Injunction, the

parties submitted the portions of the administrative record that, they contended, supported their

arguments for and against a preliminary injunction. Doc. 48. The court relied on those portions

of the administrative record to reach its decision denying the preliminary injunction.

Here, the parties rely on their previous citations to the administrative record to support

their cross motions for summary judgment. Doc. 66 at 3; Doc. 67 at 2. The parties’ cross

motions for summary judgment contain no additional citations to the administrative record for

the court’s consideration when deciding summary judgment. The court thus incorporates the

factual background from its earlier ruling. See Doc. 59 at 4–24. And, it decides these motions

on the administrative record (Doc. 48) that the parties filed with the court. See Lewis v. Babbitt,

998 F.2d 880, 882 (10th Cir. 1993) (“Judicial review . . . is generally based on the administrative

record that was before the agency at the time of its decision” (citing Citizens to Preserve Overton

Park v. Volpe, 401 U.S. 402, 419 (1971)).

II. Legal Standard

The APA grants federal courts authority to review agency decisions. See 5 U.S.C. § 702.

The reviewing court must set aside an agency action that is “arbitrary, capricious, an abuse of



4

discretion, or otherwise not in accordance with law,” “in excess of statutory jurisdiction,

authority, or limitations, or short of statutory right,” “without observance of procedure required

by law,” or “unsupported by substantial evidence.” 5 U.S.C. § 706(2)(A), (C)–(E). When a

court applies the APA’s “arbitrary and capricious” standard of review, it “must ‘ascertain

whether the agency examined the relevant data and articulated a rational connection between the

facts found and the decision made.’” Kobach v. U.S. Election Assistance Comm’n, 772 F.3d

1183, 1197 (10th Cir. 2014) (quoting Aviva Life & Annuity Co. v. FDIC, 654 F.3d 1129, 1131

(10th Cir. 2011)). “This [arbitrary and capricious] standard of review is very deferential to the

agency’s determination, and a presumption of validity attaches to the agency action such that the

burden of proof rests with the party challenging it.” Id. (citations and internal quotation marks

omitted).

The RFA “requires all agencies, as part of the rulemaking process, to conduct a

‘regulatory flexibility analysis’ for their proposed rules.” Colorado ex rel. Colo. State Banking

Bd. v. Resolution Tr. Corp., 926 F.2d 931, 947 (10th Cir. 1991) (quoting 5 U.S.C. §§ 603–04).

“In the analysis, the agency must evaluate how the proposed rule will affect small entities,

consider alternatives that would ‘minimize any significant economic impact of the rule on [such]

entities,’ and explain ‘why each one of such alternatives was rejected.’” Id. (first quoting 5

U.S.C. § 604(a)(3); then citing 5 U.S.C. § 603(a), (c)). When reviewing an agency’s compliance

with the RFA, the court is “‘highly deferential’ . . . to the substance of the analysis, particularly

where an agency is predicting the likely economic effects of a rule.” Council for Urological

Interests v. Burwell, 790 F.3d 212, 227 (D.C. Cir. 2015) (quoting Helicopter Ass’n Int’l, Inc. v.

FAA, 722 F.3d 430, 438 (D.C. Cir. 2013)).



5

III. Analysis

In this lawsuit, plaintiff asserts that the DOL violated the APA and RFA in four ways:

(1) the DOL failed to provide notice that it would remove FIAs from the scope of the exemption

in PTE 84-24; (2) the DOL arbitrarily treated FIAs differently from all other fixed annuities;

(3) the DOL failed to consider the detrimental effects of its actions on independent insurance

agent distribution channels; and (4) the DOL exceeded its statutory authority by seeking to

manipulate the financial product market instead of regulating fiduciary conduct. The court

considered each one of plaintiff’s claims in its November 28, 2016 Order. And, it concluded that

plaintiff was not likely to prevail on the merits on any claim.

As noted above, the parties submitted no additional evidence with their cross motions for

summary judgment. The court has conducted no other hearings on the merits since the

September 21, 2016 preliminary injunction hearing. Thus, the arguments and evidence before

the court on plaintiff’s Motion for Preliminary Injunction essentially are the same ones advanced

in the parties’ cross motions for summary judgment at issue here. The court believes it reached

the correct decision in its November 28, 2016 Order, and it finds no reason to depart from the

legal conclusions and reasoning set forth in that Order. The court thus adopts and incorporates

into this Order the factual findings and legal conclusions of its November 28, 2016 Order.

For the same reasons discussed in its November 28, 2016 Order, the court concludes as a

matter of law that plaintiff fails to establish a violation of the APA or RFA. First, the

administrative record establishes that the DOL satisfied the APA’s requirement of providing fair

notice of the proposed rule change. See Doc. 59 at 27–38. That is, the DOL gave proper notice

that it intended to remove FIAs from the final version of PTE 84-24 because this result logically

grew out of the proposed rule. Id. And, even if notice was insufficient, any violation of the APA



6

was harmless because other commenters expressed the same concerns that plaintiff says it would

have submitted if the DOL had given proper notice that it intended to remove FIAs from the final

rule. Id. at 38–40.

Second, the DOL’s decision to treat FIAs differently than all other fixed annuities in PTE

84-24 was not arbitrary and capricious. Id. at 41–51. Instead, the administrative record shows

that the DOL provided a reasoned explanation for its decision to move FIAs out of the scope of

PTE 84-24. Id. And, thus, the DOL’s decision does not violate the APA. Id.

Third, the administrative record shows that the DOL properly considered the economic

impact that the final rule would impose on independent insurance agent distribution channels.

Id. at 51–57. The DOL’s rulemaking thus comports with the requirements of the APA and RFA.

Id.

Fourth, the DOL’s issuance of PTE 84-24 does not exceed the agency’s statutory

authority. Id. at 57–59. As explained in the November 28, 2016 Order, Congress has granted the

DOL the authority to issue the exemptions found in the final rule, and the court must defer to

those determinations. Id.

For all these reasons, the court concludes that plaintiff fails to establish a violation of the

APA or RFA as a matter of law.

IV. Conclusion

After reviewing the administrative record and considering the parties’ arguments, the

court grants defendants’ Motion for Summary Judgment (Doc. 67), and denies plaintiff’s Motion

for Summary Judgment (Doc. 65).

IT IS THEREFORE ORDERED BY THE COURT THAT defendants’ Motion for

Summary Judgment (Doc. 67) is granted.



7

IT IS FURTHER ORDERED THAT plaintiff’s Motion for Summary Judgment (Doc.

65) is denied.

IT IS SO ORDERED.

Dated this 17th day of February, 2017, at Topeka, Kansas.

s/ Daniel D. Crabtree

Daniel D. Crabtree

United States District Judge



CERTIFICATE OF ECF SUBMISSION COMPLIANCE

Pursuant to this Court’s CM/ECF User’s Manual, I hereby certify that: (i) all

required privacy redactions have been made; (ii) the hard copies that have been

submitted to the Clerk’s Office are exact copies of the ECF filing; and (iii) the ECF

submission was scanned for viruses with the most recent version of Kapersky

Endpoint Security for Windows 10.2.4.674 (last updated July 16, 2017) and, according

to that commercial virus scanning program, is free of viruses.

/s/ James F. Jorden /s/ Brian P. Perryman James F. Jorden [email protected] Brian P. Perryman [email protected]

CARLTON FIELDS JORDEN BURT, P.A. 1025 Thomas Jefferson Street, NW

Suite 400 West Washington, DC 20007 (202) 965-8100 Telephone


CERTIFICATE OF SERVICE

I certify that on July 20, 2017, I electronically filed the foregoing Appellant’s

Opening Brief with the Clerk of Court for the United States Court of Appeals for the

Tenth Circuit by using the appellate CM/ECF system. Participants in the case who

are registered CM/ECF users will be served by the appellate CM/ECF system.

/s/ James F. Jorden /s/ Brian P. Perryman James F. Jorden [email protected] Brian P. Perryman [email protected] CARLTON FIELDS JORDEN BURT, P.A.

1025 Thomas Jefferson Street, NW Suite 400 West Washington, DC 20007 (202) 965-8100 Telephone


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