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Tenth Circuit Upholds Exclusion of Fixed Indexed Annuities from PTE 84-24
Practical Law Legal Update w-013-7211 (Approx. 5 pages)
Tenth Circuit Upholds Exclusion of Fixed Indexed Annuities from PTE 84-24
by Practical Law Employee Benefits & Executive Compensation
| Published on 19 Mar 2018 • USA (National/Federal) |
In Market Synergy Group, Inc. v. U.S. Department of Labor, the US Court of Appeals for the Tenth Circuit upheld the Department of Labor's (DOL) decision to exclude fixed indexed annuities from prohibited transaction exemption (PTE) 84-24 and place them in the Best Interest Contract Exemption (BICE).
On March 13, 2018, in Market Synergy Group, Inc. v. U.S. Department of Labor, the US Court of Appeals for the Tenth Circuit upheld the DOL's decision to exclude fixed indexed annuities from prohibited transaction exemption (PTE) 84-24 and place them in the Best Interest Contract Exemption (BICE) ( (10th Cir. Mar. 13, 2018)).
Background
The DOL partially revoked PTE 84-24 in conjunction with its issuance of the final rule that replaces the existing regulatory interpretation of fiduciary investment advice under Section 3(21)(A)(ii) of ERISA (fiduciary rule) (81 Fed. Reg. 21147 (Apr. 8, 2016); 81 Fed. Reg. 20946 (Apr. 8, 2016); see Practice Note, Definition of Fiduciary Investment Advice and Fiduciary Investment Advice Toolkit). The proposed rule on PTE 84-24 included fixed indexed annuities. The final rule, however, excluded them and subjected them to the more stringent standards of the newly created BICE (see Practice Note, Best Interest Contract Prohibited Transaction Exemption).
The plaintiff in this case is an insurance agency that develops fixed indexed annuity products. The insurance agency sued the DOL under the Administrative Procedure Act (APA), arguing that the DOL's decision to remove fixed indexed annuities from PTE 84-24 was arbitrary and capricious.
The district court granted summary judgment in favor of the DOL. According to the district court, the DOL:
- Provided adequate notice that fixed indexed annuities might be excluded from the final rule amending PTE 84-24.
- Did not arbitrarily treat fixed rate and fixed indexed annuities differently.
- Performed a sufficient economic impact analysis.
Outcome
The Tenth Circuit affirmed.
Adequacy of Notice
The Tenth Circuit agreed that the DOL gave adequate notice that the final rule might exclude fixed indexed annuities. In the proposed rule, the DOL requested comments on whether its proposal to move variable annuities to the BICE but keep fixed rate and fixed indexed annuities in PTE 84-24 "[struck] the appropriate balance" (Market Synergy Group, Inc., , at *4). This request gave interested parties adequate notice that the final rule might not include fixed indexed annuities. In the court's view, the final rule was a logical outgrowth of the proposed rule.
Differential Treatment of Fixed Indexed Annuities
The Tenth Circuit rejected the insurance agency's argument that the DOL's differential treatment of fixed rate and fixed indexed annuities was arbitrary, reasoning that:
- Fixed rate and fixed indexed annuities are not identical.
- The DOL adequately considered existing state regulations on fixed indexed annuities.
Differences Between Fixed Rate and Fixed Indexed Annuities
The insurance agency argued that fixed rate and fixed indexed annuities are identical except for the amount of interest accrued. In rejecting this argument, the Tenth Circuit concluded that the record supported the DOL's determinations that:
- Fixed indexed annuities are more complex than fixed rate annuities.
- Fixed indexed annuities are riskier than fixed rate annuities.
- Sales involving fixed indexed annuities are more prone to conflicts of interests than sales of fixed rate annuity products.
State Regulations
The Tenth Circuit also determined that the DOL adequately considered existing state regulations on fixed indexed annuities.
Economic Impact Analysis
Regarding the DOL's economic impact analysis, the Tenth Circuit held that the DOL could reasonably have concluded that the benefits to investors outweighed the compliance costs. The insurance agency argued that the DOL failed to adequately consider the impact on the fixed indexed annuities market. In response, the Tenth Circuit noted that the DOL considered the potential impact on the fixed indexed annuities market in its economic impact analysis but ultimately concluded that the fears regarding compliance costs were overstated. The DOL also predicted that the final rule would:
- Encourage the development of new markets.
- Promote innovation.
- Save investors millions of dollars by reducing fiduciaries' conflicts of interests.
Practical Implications
Shortly after the Tenth Circuit upheld the exclusion of fixed indexed annuities from PTE 84-24, the Fifth Circuit vacated the fiduciary rule, including the amendments to PTE 84-24, in Chamber of Commerce of the United States of America v. U.S. Department of Labor (, (5th Cir. Mar. 15, 2018)). In the Fifth Circuit's view, the DOL "outflanked" Congressional initiatives to secure further oversight of broker-dealers handling IRA investments and the sale of fixed indexed annuities.
Practitioners should continue to monitor developments in these cases, including possible appeals to the US Supreme Court. For more information on the impact of the Fifth Circuit's decision, see Article, Expert Q&A on Chamber of Commerce of the United States of America v. United States Department of Labor and Legal Update, Fifth Circuit Vacates DOL's Fiduciary Rule.