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10th Circ. Sides With DOL In Row Over New Fiduciary Rule

10th Circ. Sides With DOL In Row Over New Fiduciary Rule

By Dave Simpson of Law360.com

A Tenth Circuit panel Tuesday affirmed a decision upholding the U.S. Department of Labor’s new fiduciary rule for retirement account advisers related to fixed indexed annuity sales, agreeing with the lower court that the rule’s critics were given an opportunity to comment on it.

The panel agreed with a Kansas federal judge’s opinion that the DOL didn’t overstep its authority in enacting the rule, which aims to combat conflicts of interest for financial advisers. (Law360)

In a unanimous published decision penned by U.S. Circuit Judge Paul Joseph Kelly Jr., the panel agreed with a Kansas federal judge’s opinion that the DOL didn’t overstep its authority in enacting the rule, which aims to combat conflicts of interest for financial advisers. It rejected Market Synergy Group Inc.’s appeal, which claimed that it wasn’t given a proper sense of the DOL’s approach during the rule’s comment phase.

While Market Synergy might not have anticipated the DOL’s final rule, the panel said, other commenters, including organizations within its own network, did address the very issue that Market Synergy is now concerned with.

The case revolves around new regulations for fixed indexed annuities, a type of annuity that provides returns based on a specified market index. Under a DOL rule called the Prohibited Transaction Exemption 84-24, insurance agents and others had previously been exempted from regulations prohibiting fiduciaries from receiving third-party compensation on sales of fixed indexed annuities and other annuities.

But the DOL’s final fiduciary rule amended PTE 84-24 to specifically exclude fixed indexed annuities from the exemption. Independent market organizations and insurance agencies that want to continue to collect compensation from FIA sales will instead have to comply with a portion of the new fiduciary rule called the best interest contract exemption, which allows advisers to engage in otherwise prohibited transactions if they enter a written contract with investors acknowledging their fiduciary status.

Market Synergy sued the agency in June 2016, arguing in part that the DOL violated the Administrative Procedure Act for allegedly failing to provide sufficient notice that FIAs would be included in the new rule.

The group’s bid for a preliminary injunction to halt a portion of the new rule was denied by U.S. District Judge Daniel D. Crabtree in November 2016. The judge held that the DOL properly analyzed the effect of stiffening rules around sales of FIAs before including them in the new regulations that require financial professionals who advise retirement accounts to act in their clients’ best interests.

He held that other insurance agencies and investors had submitted comments around the FIA issue, indicating they knew the changes “were a logical outgrowth of the proposed rule.” Even if the DOL provided inadequate notice, he said, it was harmless error, since Market Synergy’s arguments were already raised in submitted comment letters prior to the rule’s passage.

In February 2017, Judge Crabtree granted summary judgment to the DOL in a challenge brought by Market Synergy. He relied much upon his November 2016 order, saying no additional evidence had come to the court’s attention to deviate from that past ruling.

The panel Tuesday also rejected Market Synergy’s argument that fixed rate annuities are nearly identical to FIAs and its claims that the DOL was dismissive of state regulation.

Stephen W. Hall, legal director and securities specialist for Better Markets, a financial reform advocacy group, lauded the Tenth Circuit’s affirmation.

“Today’s decision is another victory for every American trying to save for a safe and secure retirement,” he said in a release. “The decision will help ensure that millions of Americans will not be swindled out of billions of dollars every year at the hands of financial advisers seeking to boost their profits and bonuses by recommending overpriced, underperforming and high-risk investments for retirement savers.”

Representatives for Market Synergy did not immediately respond to request for comment Tuesday.

U.S. Circuit Judges Paul Joseph Kelly Jr., Carlos F. Lucero, and Scott Matheson Jr., sat on the panel for the Tenth Circuit.

Market Synergy is represented Brian P. Perryman of Carlton Fields Jorden Burt PA.

The DOL is represented by Michael S. Raab of the U.S. Department of Justice.

The case is Market Synergy Group Inc. v. U.S. Department of Labor et al., case number 17-3038, in the U.S. Court of Appeals for the Tenth Circuit.

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The team of investment fraud lawyers at Starr Austen & Miller LLP fights for the protection of investors and handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence and breach of trust.