Mkt. Synergy Grp., Inc. v. U.S. Dep't of Labor

• Decision Date: 13 March 2018
• Docket Number: No. 17-3038,17-3038
• Citation: 885 F.3d 676
• Parties: MARKET SYNERGY GROUP, INC., Plaintiff–Appellant, v. UNITED STATES DEPARTMENT OF LABOR; R. Alexander Acosta, in his official capacity as Secretary of the United States Department of Labor; Phyllis C. Borzi, in her official capacity as Assistant Secretary of the United States Department of Labor, Defendants–Appellees. AARP; AARP Foundation; Americans for Financial Reform; Better Markets ; Consumer Federation of America; National Employment Law Project; Public Investors Arbitration Bar Association, Amici Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

885 F.3d 676

MARKET SYNERGY GROUP, INC., Plaintiff–Appellant,

v. UNITED STATES DEPARTMENT OF LABOR; R. Alexander Acosta, in his official capacity as Secretary of the United States Department of Labor; Phyllis C. Borzi, in her official capacity as Assistant Secretary of the United States Department of Labor, Defendants–Appellees.AARP; AARP Foundation; Americans for Financial Reform; Better Markets ; Consumer Federation of America; National Employment Law Project; Public Investors Arbitration Bar Association, Amici Curiae.

No. 17-3038

United States Court of Appeals, Tenth Circuit.

March 13, 2018

James F. Jorden (Brian P. Perryman of Carlton Fields Jorden Burt, P.A., Washington, D.C.; Michael A. Valerio of Carlton Fields Jorden Burt, P.A., Hartford, Connecticut; J. Michael Vaughan of Walters Bender Strohbehn & Vaughan, P.C., Kansas City, Missouri, with him on the briefs), for Plaintiff–Appellant.

Michael Shih (Michael S. Raab and Thais–Lyn Trayer, Civil Division, U.S. Department of Justice; Hashim M. Mooppan, Deputy Assistant Attorney General, Tom Beall, United States Attorney; Of Counsel: Nicholas C. Geale, Acting Solicitor of Labor, G. William Scott, Associate Solicitor, Edward D. Sieger, Senior Attorney, Thomas Tso, Counsel for Appellate Litigation, and Megan Hansen, Attorney for Regulations, U.S. Department of Labor, Office of the Solicitor, with him on the brief), Washington, D.C., for Defendants–Appellees.

Mary Ellen Signorille and William Alvarado Rivera of AARP Foundation Litigation, Washington, D.C. for Amici Curiae.

Before LUCERO, KELLY, and MATHESON, Circuit Judges.

KELLY, Circuit Judge.

Plaintiff–Appellant Market Synergy Group appeals from the district court's judgment in favor of Defendant–Appellee United States Department of Labor. Having jurisdiction under 28 U.S.C. § 1291, we affirm.

Background

This case stems from the Department of Labor's (DOL) final regulatory action on April 8, 2016, as it applies to fixed indexed annuity (FIA) sales. See 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 (Final PTE 84-24), 81 Fed. Reg. 21,147 (Apr. 8, 2016) (to be codified at 29 C.F.R. pt. 2550).¹ Plaintiff–Appellant Market Synergy Group (MSG) is a licensed insurance agency that works with insurers to develop specialized, proprietary FIAs and other insurance products for exclusive distribution. It partners with independent marketing organizations² (IMOs) to distribute these products. MSG does not directly sell FIAs but conducts market research and provides training and products for IMO member networks and the independent insurance agents that IMOs recruit. Market Synergy and its 11 IMO network members had $15 billion in FIA sales in 2015 and substantially all of Market Synergy's revenues involve developing, marketing, and distributing FIAs. Aplt. Br. at 7–8.

Annuities are investments, often for retirement, sold by financial institutions including life insurers. An annuity involves a promise to pay amounts on a regular basis for a set period of time. Deferred annuities have a deferral or accumulation phase where the contract accumulates value through premiums paid and interest credited. The payout phase occurs when the contract holder receives a set stream of payments, for example, upon attaining a certain age. What that interest will be during the deferred phase generally separates the three types of annuities at issue in this case—fixed rate (or fixed declared rate), fixed indexed, and variable.³

In a fixed rate annuity, the insurer guarantees a return of principal and minimum crediting rate during the deferral or accumulation phase. When the annuity reaches the payout phase, minimum payments are based upon rates guaranteed at issuance. In contrast, a variable annuity's return is not guaranteed but rather based upon the returns or losses of the underlying assets in which the funds are invested. Variable annuities are securities.

A fixed indexed annuity falls somewhere in-between a fixed rate and variable annuity. Like a fixed rate annuity, principal and prior credited interest are protected from market downturns. Like a variable annuity, however, the amount of interest actually credited varies based on a market index the FIA is tied to, such as the S&P 500 index. Unlike a variable annuity though, FIAs are not actually invested in the market; rather, the market index's performance is used simply as a reference to determine the amount of interest credited. The crediting rate for an FIA is never less than zero. FIAs, like fixed rate annuities, generally are governed by state insurance law and are exempt from federal securities law.

When an investor speaks with an insurance agent about buying an annuity, that insurance agent will often give advice and receive a commission for selling the annuity. This conduct is governed under Title II of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, which broadly defines a fiduciary as someone who "renders investment advice for a fee."⁴ 26 U.S.C. § 4975(e)(3)(B). These insurance agents selling annuities would generally be classified as fiduciaries and therefore be barred from receiving commissions; however, they are exempt from that prohibition under a Department of Labor rule—Prohibited Transaction Exemption (PTE) 84-24.⁵

In April 2015, the DOL issued a proposed rule redefining who is a "fiduciary" of an employee benefit plan under ERISA and the Internal Revenue Code, which would "update existing rules to distinguish more appropriately between the sorts of advice relationships that should be treated as fiduciary in nature and those that should not." 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 (Proposed PTE 84-24), 80 Fed. Reg. 22,010, 22,011 (Apr. 20, 2015) (to be codified at 29 C.F.R. pt. 2550). The final rule contained two changes important to this case.⁶ First, it created a new exemption, with added regulatory requirements, entitled the Best Interest Contract Exemption (BICE). Much like PTE 84-24, the BICE "would allow certain investment advice fiduciaries ... to receive ... compensation." Proposed Best Interest Contract Exemption (Proposed BICE), 80 Fed. Reg. 21,960, 21,961 (Apr. 20, 2015) (to be codified at 29 C.F.R pt. 2550). The BICE, however, also imposes a more stringent set of requirements on prohibited transactions than those required under PTE 84-24. See Final Best Interest Contract Exemption (Final BICE), 81 Fed. Reg. 21,002, 21,007 (Apr. 8, 2016) (to be codified at 29 C.F.R. pt. 2550).

Second, the DOL removed FIAs (as well as variable annuities) from the PTE 84-24 exemption and placed them in the newly created BICE. Final PTE 84-24, 81 Fed. Reg. at 21,152 –53. Fixed rate annuities, however, were kept within the PTE 84-24 exemption. The DOL's stated reason for this change was because FIAs (1) require the customer to shoulder significant investment risk, (2) "do not offer the same predictability of payments as Fixed Rate Annuity Contracts," (3) are "often quite complex," and (4) are "subject to significant conflicts of interest at the point of sale." Final PTE 84-24, 81 Fed. Reg. at 21,152 –53. Those engaged in selling FIAs would now have to satisfy the conditions set forth in the BICE to be granted an exemption.

MSG then filed this suit under the Administrative Procedure Act (APA) and the Regulatory Flexibility Act (RFA). Only the APA claim is at issue on appeal. MSG claimed that the DOL violated the APA in three ways: (1) it failed to provide adequate notice of its intention to exclude transactions involving FIAs from PTE 84-24, (2) it arbitrarily treated FIAs differently from other fixed annuities by excluding FIAs from PTE 84-24, and (3) it did not adequately consider the detrimental economic impact of its exclusion of FIAs from PTE 84-24. MSG alleged that it would lose 80% of its revenue if the new regulation were to be enforced and sought a preliminary injunction to prevent the DOL from implementing the new regulation. The district court denied the preliminary injunction. On cross-motions for summary judgment, the district court ruled in favor of the DOL, finding that there was adequate notice, no arbitrary treatment of FIAs as compared to other fixed annuities, and an adequate economic impact analysis. MSG filed this timely appeal.

Discussion

The district court's grant of summary judgment is reviewed de novo. Cerveny v. Aventis, Inc., 855 F.3d 1091, 1095 (10th Cir. 2017). The APA grants federal courts the authority to review agency action, 5 U.S.C. § 702, and requires a court to set aside agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," id. § 706(2)(A).

A. The DOL Provided Sufficient Notice

MSG first argues that the DOL did not provide sufficient notice of the possible final rule in its Notice of Proposed Rule Making (NPRM). Agencies must provide "either the terms or substance of the proposed rule or a description of the subjects and issues involved," id. § 553(b)(3), which, in turn, "give[s] interested persons an opportunity to participate in the rule making through submission of" written comments, id. § 553(c).

While the agency must give notice of the rule it proposes to implement, "[i]t 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). The final rule must, however, be a "logical outgrowth" of the proposed rule. "A final rule qualifies as a logical outgrowth ‘if interested parties "should have...