Nat'l Ass'n for Fixed Annuities v. Perez

• Decision Date: 04 November 2016
• Docket Number: Civil Action No. 16-1035 (RDM)
• Citation: 217 F.Supp.3d 1
• Parties: The NATIONAL ASSOCIATION FOR FIXED ANNUITIES, Plaintiff, v. Thomas E. PEREZ, Secretary of the United States Department of Labor, et al., Defendants.
• Court: U.S. District Court — District of Columbia

217 F.Supp.3d 1

The NATIONAL ASSOCIATION FOR FIXED ANNUITIES, Plaintiff,

v.Thomas E. PEREZ, Secretary of the United States Department of Labor, et al., Defendants.

Civil Action No. 16-1035 (RDM)

United States District Court, District of Columbia.

Signed November 4, 2016

Jacob A. Kramer, Philip Dean Bartz, Bryan Cave, LLP, Washington, DC, for Plaintiff.

Emily Sue Newton, Galen Nicholas Thorp, U.S. Department of Justice, Washington, DC, for Defendants.

MEMORANDUM OPINION

RANDOLPH D. MOSS, United States District Judge

Plaintiff the National Association for Fixed Annuities ("NAFA") brings this action under the Administrative Procedure Act ("APA"), 5 U.S.C. § 701 et seq. , and the Regulatory Flexibility Act ("RFA"), 5 U.S.C. § 604 et seq. , challenging three final rules promulgated by the Department of Labor on April 8, 2016. Taken together, the three rules substantially modify the regulation of conflicts of interest in the market for retirement investment advice under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. , and the Internal Revenue Code ("Code"), 26 U.S.C. §§ 408, 4975. NAFA focuses its challenge on how the new rules will affect the market for the fixed annuities that its members sell.

Both ERISA and the Code define a "fiduciary" to include, among others, those who "render[ ] investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or [who] ha[ve] any authority or responsibility to do so." 29 U.S.C. § 1002(21)(A) (ERISA) ; 26 U.S.C. § 4975(e)(3) (Code). Qualifying as a "fiduciary," in turn, triggers the "prohibited transaction" rules under both ERISA and the Code, which then prohibit conflicted transactions unless a statutory or regulatory exemption applies. See 29 U.S.C. § 1106 (ERISA) ; 26 U.S.C. § 4975(c) (Code). Significantly, under the prohibited transaction rules, fiduciary advisers to ERISA employee benefit plans and individual retirement accounts ("IRAs") may not receive compensation—including commissions—that varies based on the fiduciary's investment advice. See Best Interest Contract Exemption , 81 Fed. Reg. 21,002, 21,075 –76 (Apr. 8, 2016). Because insurance companies that sell fixed annuities typically compensate their employees and agents through the payment of commissions, see Dkt. 5–3 at 6 (Marion decl. ¶ 24), they would be unable to operate (at least as currently structured) if treated as fiduciaries and not granted an exemption from the prohibited transaction rules.

Prior to the promulgation of the new rules, most NAFA members were able to avoid this difficulty because the governing regulations defined a "fiduciary," in relevant part, as someone who renders investment advice "on a regular basis," 29 C.F.R. § 2510.3–21 (2015) (ERISA regulation); 26 C.F.R. § 54.4975–9 (2015) (Code regulation), and fixed annuities are typically acquired in a single transaction, see Definition of the Term "Fiduciary"; Conflict of Interest Rule—Retirement Investment Advice , 81 Fed. Reg. 20,946, 20,955 (Apr. 8, 2016). Moreover, in those cases in which advice regarding the sale of a fixed annuity might have otherwise fallen within the prohibited transaction rules, the relevant transactions were exempted under Prohibited Transaction Exemption 84-24 ("PTE 84-24"), subject to certain conditions. See 1984 Amendment to PTE 84-24 , 49 Fed. Reg. 13,208, 13,211 (Apr. 3, 1984). The three challenged rules, however, change this arrangement in significant respects.

The first new rule—Definition of the Term "Fiduciary"; Conflict of Interest Rule—Retirement Investment Advice , 81 Fed. Reg. 20,946 (Apr. 8, 2016) ("Final Fiduciary Definition ")—modifies the definition of "fiduciary" by, among other things, dropping the condition that the relevant investment advice be provided on a "regular basis." The second new rule— 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) ("Final PTE 84-24 ")—removes variable and fixed indexed annuities (but not fixed rate annuities) from PTE 84-24. And, recognizing the sweeping consequences of the first two rules, the third new rule—the Best Interest Contract ("BIC") Exemption , 81 Fed. Reg. 21,002 (Apr. 8, 2016) ("Final BIC Exemption ")—creates a new exemption for variable and fixed indexed annuities (among other products) that permits financial institutions and advisers to receive compensation—including commissions—based on their provision of investment advice.

In order to qualify for the BIC Exemption, however, financial institutions and advisers must abide by certain conditions: First, advisers to employee benefit plans and IRAs must abide by the Department's newly adopted "Impartial Conduct Standards," and "[f]inancial [i]nstitutions must adopt policies and procedures designed to ensure that their individual [a]dvisers adhere to" these standards. Final BIC Exemption , 81 Fed. Reg. at 21,076. The Impartial Conduct Standards, in turn, require that financial institutions and advisers "provide investment advice that is, at the time of the recommendation, in the [b]est [i]nterest of the [r]etirement [i]nvestor." Id. at 21,077. As explained in the rule, this means that qualifying financial institutions and advisers are subject to the same duties of loyalty and prudence applicable under title I of ERISA, even with respect to advice regarding IRAs and other plans that are not subject to title I (and thus not otherwise subject to the duties of prudence and loyalty). Id. In addition, financial institutions and advisers must ensure that they will not "receive, directly or indirectly, compensation for their services that is in excess of reasonable compensation within the meaning of" 29 U.S.C. § 1108(b)(2) (ERISA) and 26 U.S.C. § 4975(d)(2) (Code). Id. (emphasis added). And, finally, the Impartial Conduct Standards require that financial institutions and advisers ensure that "[s]tatements by the [f]inancial [i]nstitutions and [their] [a]dvisers ... about the recommended transaction, fees, and compensation, [m]aterial [c]onflicts of [i]nterest, and any other matters relevant to a [r]etirement [i]nvestor's investment decisions, will not be materially misleading at the time they are made." Id.

Second, financial institutions seeking to rely on the BIC Exemption must also affirmatively represent in writing that they and their advisers are fiduciaries under ERISA and the Code and must warrant, among other things, that they have written policies in place "designed to ensure that [their] [a]dvisers adhere to the Impartial Conduct Standards." Id.

Third, with respect to IRAs and other plans that are not subject to title I of ERISA, financial institutions seeking to rely on the BIC Exemption must go a step further and "agree that they and their [a]dvisers will adhere to the exemption's standards in a written contract that is enforceable by the [r]etirement [i]nvestors." Id. at 21,076. The contract, moreover, may not include a provision "disclaiming or otherwise limiting liability," waiving the "right to bring or participate in a class action," or agreeing "to arbitrate or mediate individual claims in venues that are distant or that otherwise unreasonably limit the ability of the [r]etirement [i]nvestors to assert the claims safeguarded by" the BIC Exemption. Id. at 21,078.

NAFA challenges the new rules on numerous grounds. It argues that the new definition of "fiduciary"—and, in particular, the Department's decision to drop the "on a regular basis" condition—fails at Chevron steps one and two. See Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. , 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). It contends that the Department acted beyond its authority in extending ERISA fiduciary duties to IRAs and other plans that are not subject to title I of ERISA. It contends that the BIC Exemption impermissibly creates a private cause of action and that the condition contained in the BIC Exemption limiting compensation to a "reasonable" level is void for vagueness. It argues that Department's decision to move fixed indexed annuities from PTE 84-24 to the BIC Exemption was arbitrary and capricious. And finally, it maintains that the Department's regulatory flexibility analysis was inadequate.

Based on these arguments, and its further contention that the new rules will have catastrophic consequences for the fixed indexed annuities industry, NAFA seeks both a preliminary injunction and summary judgment. The Department opposes both motions and has cross-moved for summary judgment. For the reasons explained below, the Court will deny NAFA's motions for a preliminary injunction and summary judgment and will grant the Department's cross-motion for summary judgment.

I. BACKGROUND

A. Annuities

Although the three rules that NAFA challenges apply to various segments of the market for retirement investments, NAFA understandably focuses its challenge on how the rules affect its members. Those members include insurance companies, independent marketing organizations, and insurance agents involved in the sale of fixed annuities. Dkt. 5–2 at 2–3 (Anderson decl. ¶ 2). Annuities fall into three general categories: variable annuities, fixed indexed annuities, and fixed rate annuities. See Regulatory Impact Analysis 40, AR 356.

A "variable annuity" is "[a]n annuity that makes payments in varying amounts depending on the success of the underlying investment strategy." Annuity, BLACK'S LAW DICTIONARY (10th ed. 2014). For purposes of the Securities Act of 1933, a variable annuity is both an insurance product and a security. See SEC v. Variable Annuity Life Ins. Co. of Am. , 359 U.S. 65, 69–71, 79 S.Ct. 618, 3 L.Ed.2d 640 (1959). Because the "underlying assets are held in separate accounts ... with a variety of underlying...