In the latest legal gambit in what is becoming an uphill battle for opponents of the U.S. Department of Labor’s fiduciary rule, the National Association of Fixed Annuities is asking the U.S. Court of Appeals for the District of Columbia to delay implementation of the fiduciary rule by at least 10 months.
The first so-called applicability date for compliance with the rule is April 10, 2017, at which point NAFA members — insurance carriers, insurance agents and independent marketing organizations — will have to act as fiduciaries when selling fixed indexed annuities to IRAs.
In its emergency motion to delay the rule’s applicability, or implementation date, attorneys for NAFA argue the fast-approaching deadline has forced organization members to reorganize a massive product distribution system that has been in place for decades.
NAFA’s argument centers on the fact that an ultimate legal ruling for or against the rule, at the Circuit Court level, or potentially the Supreme Court, will not be determined before the April 10 implementation date.
“NAFA members face extraordinary challenges to comply with this flawed rule, which was adopted improperly by DOL and foisted on the fixed annuity industry with a short time to comply,” wrote NAFA attorneys in the emergency motion for an injunction pending the appeal of the case.
The “chaos” in the fixed indexed annuity industry resulting from the rule has been exacerbated by the Labor Department, which has “dragged its feet” on writing an exemption that would allow independent marketing organizations, which provide the primary marketing channel for fixed indexed annuities to independent insurance agents, to apply the rule’s Best Interest Contract Exemption that will be necessary to sell the guaranteed income products to IRAs.
Recent decisions at the district court level in the District of Columbia and Kansas upheld the Labor Department fiduciary rule.
Notably, in both rulings, the judges based their decisions, in part, on the fact that Labor Department's rule considers giving independent marketing organizations relief by granting them individual exemptions that would assure they could continue to market fixed indexed annuities.
Threat to independent marking organizations
In a recent FAQ issued by the Labor Department, regulators said they are considering issuing a class-wide exemption for independent marketing organizations. But the Labor Department did not give a timeframe for when that exemption would be issued, or assurance that it ever will.
Absent that exemption, the independent marketing organization distribution model may go extinct under the fiduciary rule.
Some insurance carriers are already considering moving fixed indexed annuities from independent market organization channels to broker-dealers and other financial institutions the that Labor Department rule says can use the Best Interest Contract Exemption, according to an affidavit submitted to the appellate court.
And independent marketing organizations are expecting massive layoffs resulting from the rule, beginning early in 2017. Some firms are expected to close altogether, according to court documents.
Beyond the Labor Department's delay in issuing an exemption, the election of Donald Trump as president has added to the fixed indexed annuity industry’s plight, argue NAFA’s attorneys in requesting the delay, as the new administration may consider delay or repeal of the rule.
NAFA wants the court to delay the implementation period for a minimum of 10 months and up to two years after the lawsuit is ultimately resolved.
|Delay the rule instead of rushing a review
On Nov. 4, the lower court in the D.C. Circuit denied NAFA’s motions for preliminary injunction and summary judgment, ruling that the Labor Department acted within its statutory authority to promulgate the fiduciary rule.
Last week, U.S. District Judge Randolph Moss, who authored the opinion that upheld the Labor Department rule in the District Court, denied NAFA’s request to delay the rule pending the outcome of the appeal.
The request to do the same that is now before the appellate court was expected by legal experts. Emergency motions are assigned to the circuit court’s special panel for review, and not the panel of judges that will hear the full appeal of the case, according to Erin Sweeney, an Employee Retirement Income Security Act attorney with Miller & Chevaliar in Washington.
NAFA is not asking the appellate court to hear the case on expedited review, because absent an injunction to delay the rule’s first deadline, even the court’s rushed ruling would be too late for NAFA members, according to attorneys’ arguments.
The Labor Department's response to the emergency motion is due by Dec. 9. Sweeney said a decision to delay the rule by the Special Panel could come as soon as next month.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
