Multiple Documents

NATIONAL ASSOCIATION FOR FIXED ANNUITIES v. UNITED STATES DEPARTMENT OF LABOR et al, Docket No. 1:16-cv-

Multiple Documents Part Description 1 5 pages 2 Memorandum in Support 3 Exhibit 1 - Anderson Affidavit 4 Exhibit 2 - Marrion Affidavit 5 Exhibit 3 - Engels Affidavit 6 Exhibit 4 - James Affidavit 7 Exhibit 5 - White Affidavit 8 Exhibit 6 - Rafferty Affidavit 9 Exhibit 7 - Foguth Affidavit 10 Exhibit 8 - Wong Affidavit 11 Exhibit 9 - Perkins Affidavit 12 Text of Proposed Order

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

The National Association for Fixed Annuities,

Plaintiff,

vs.

Thomas E. Perez, in his official capacity as Secretary of the United States Department of Civil Action No. 1:16-cv-1035 Labor and

United States Department of Labor,

Defendants.

PLAINTIFF’S APPLICATION FOR PRELIMINARY INJUNCTION TO STAY THE APRIL 10, 2017 APPLICABILITY DATE OF THE DEPARTMENT OF LABOR FIDUCIARY RULE

Plaintiff the National Association for Fixed Annuities (“NAFA”) respectfully moves for preliminary injunctive relief during the pendency of its challenge to the “fiduciary rule” (the

“Rule”) recently promulgated by the Department of Labor (the “Department”), 81 Fed.

Reg.20,946-21,002 (April 8, 2016) (to be codified at 29 C.F.R. § 2510.3-21), and certain related exemptions, id. at 21,002-21,088 & 22,010-22,020. The grounds for NAFA’s application for a preliminary injunction are set forth in detail in the attached memorandum of law.

To briefly summarize, NAFA seeks such relief because the Rule will have an immediate and devastating effect on the fixed annuity industry, causing irreparable harm to its members. If the Rule is allowed to go into effect, and especially if it is allowed to become applicable on the schedule set forth by the Department, in the weeks and months ahead, jobs will be lost, careers

1 Case 1:16-cv-01035-RDM Document 5 Filed 06/02/16 Page 2 of 5

will be altered, firms will close, and vast resources will be invested in what will likely prove to be an unnecessary effort to comply with a Rule that should not be allowed to stand. For several reasons, there is a high likelihood that the Rule will not survive judicial scrutiny under the

Administrative Procedure Act and the Regulatory Flexibility Act.

First, the Rule depends on definitions of “investment advice” and “fiduciary” that vastly exceed both congressional intent in enacting the Employee Income Security Act (“ERISA”) and any reasonable interpretation of those terms. In its new Rule, the Department abandoned an interpretation of these terms that has been in effect for more than 40 years, in favor of a new and patently unreasonable interpretation that would subject insurers and insurance agents to the types of fiduciary duties intended by Congress to govern individuals who provide ongoing investment advice for a fee to employer-sponsored pension plans covered by ERISA. The Department has no authority to expand the scope of ERISA fiduciary duties in this manner.

Second, the Department improperly extends ERISA fiduciary duties to transactions involving individual retirement accounts (“IRAs”). Although Congress created traditional IRAs with the passage of ERISA, it did not apply ERISA fiduciary requirements to parties involved in

IRA transactions, and it has long been understood that ERISA does not apply to IRAs, except in very limited circumstances not present here. Acknowledging as much, the Department relies on its narrow authority to issue regulations under the Internal Revenue Code (the “Code”) that establish when certain IRA transactions are subject to an excise tax. But the Code does not authorize the imposition of fiduciary standards on parties to such transactions, and the

Department has no authority to extend ERISA fiduciary duties to transactions involving the retail sale of insurance products to IRA owners.

2 Case 1:16-cv-01035-RDM Document 5 Filed 06/02/16 Page 3 of 5

Third, the Department purports to create a private cause of action in its prohibited transaction exemption allowing for continued sale of commission based products, including fixed index annuities (“FIAs”). This exemption is referred to as the Best Interest Contract Exemption

(“BICE”), and it is an integral and inseparable part of the Rule. Yet only Congress has the authority to create a cause of action, and it clearly has not done so here.

Fourth, within the BICE, the Department mandates that compensation paid to insurance agents be “reasonable,” which is not in any way defined. The Department then exacerbates this lack of clarity by providing that “customary” compensation does not evidence reasonableness.

As a result, insurers are put in an impossible quandary deciding how much to compensate thousands of agents involving millions of transactions, in turn leaving insurers vulnerable to easy attack through the aforementioned newly created private right of action. This is nothing more than entrapment on a massive scale, offends the most basic tenets of fairness and must be struck down on void-for-vagueness principles.

Fifth, in its notice of Proposed Rulemaking, the Department treated FIAs as insurance products for exemption purposes. When it issued its final Rule, however, the Department abruptly changed course, deciding to treat FIAs the same as securities under the BICE, without performing any analysis of the impact that such a dramatic change would have on a nearly $50 billion per year industry. This re-classification of FIAs is contrary to federal law, which treats them as insurance products and not securities. Further, the Department made no effort whatsoever to assess the effects of this change on the fixed annuity industry, which will be profound because the BICE is based on securities industry practices. This arbitrary and capricious decision of the Department forces the FIA industry to reconfigure itself to accommodate unworkable compliance requirements that do not fit the insurance industry

3 Case 1:16-cv-01035-RDM Document 5 Filed 06/02/16 Page 4 of 5

business model. This will not harm not only the FIA industry but also consumers who rely on

FIAs to meet their retirement needs.

For all of these reasons and for the reasons set forth in the memorandum of law accompanying this application, the Rule must be vacated. Until then, to avoid the immediate and irreparable harm described below and in the attached Affidavits, NAFA respectfully requests that the Court issue a preliminary injunction staying applicability of the Rule until this litigation is concluded. If NAFA prevails on the merits, all the harms the Rule imposes will have been avoided. If the Department prevails in toto on the merits, then a new applicability date can be set that provides NAFA and its members adequate time to come into compliance with the Rule.

Respectfully submitted,

BRYAN CAVE LLP

/s/ Philip D. Bartz Philip D. Bartz (D.C. Bar No. 379603) Jacob A. Kramer (D.C. Bar No. 494050) 1155 F Street, N.W., Suite 700 Washington, D.C. 20004 (202) 508-6000

Of Counsel:

Sheldon H. Smith, Esq. 1700 Lincoln Street, Suite 4100, Denver, CO 80203-4541

Adam L. Shaw, Esq. 1155 F Street, N.W., Suite 700 Washington, D.C. 20004

Counsel for NAFA

Dated: June 2, 2016

4 Case 1:16-cv-01035-RDM Document 5 Filed 06/02/16 Page 5 of 5

CERTIFICATE OF SERVICE

I hereby certify that the above Application for a Preliminary Injunction and all attachments and exhibits, will be served on the following via hand delivery or U.S. certified mail on the 3rd day of June 2016 (or within one business day of the date on which the Court issues a summons):

By Hand Delivery: United States Attorney for the District of Columbia 555 4th Street, N.W. Washington, D.C. 20530

By U.S. Certified Mail: Attorney General of the United States at Washington D.C. U.S. Department of Justice 950 Pennsylvania Avenue, N.W. Washington, DC 20530-0001

By U.S. Certified Mail: Thomas E. Perez 200 Constitution Avenue, N.W. Washington DC 20210

By U.S. Certified Mail: U.S. Department of Labor 200 Constitution Avenue, N.W. Washington DC 20210

/s/ Philip D. Bartz

5 Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 1 of 102

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

The National Association for Fixed Annuities,

Plaintiff,

vs.

Thomas E. Perez, in his official capacity as Secretary of the United States Department of Civil Action No. 1:16-cv-1035 Labor and

United States Department of Labor,

Defendants.

MEMORANDUM IN SUPPORT OF PLAINTIFF NAFA’S APPLICATION FOR PRELIMINARY INJUNCTION TO STAY THE APRIL 10, 2017 APPLICABILITY DATE OF THE DEPARTMENT OF LABOR FIDUCIARY RULE Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 2 of 102

TABLE OF CONTENTS

Page

I. Introduction...... 1

II. Factual Background ...... 4

A. NAFA And Its Members...... 4

B. Fixed Annuity Products ...... 4

C. Fixed Annuity Distribution...... 5

D. Existing State Regulation of Fixed Annuities...... 6

E. Classification of FIAs Under Federal Securities Law ...... 8

F. Federal Regulation of Plan Fiduciaries...... 8

1. ERISA...... 8

a. Definition of “Plan” ...... 8

b. Definition of “Fiduciary” and Fiduciary Duties ...... 9

c. The Department’s Five-Part Test...... 10

2. The Code...... 11

3. The Reorganization Plan...... 13

G. The New Rule And Exemptions ...... 13

1. Definition of “Fiduciary”...... 15

2. PTE 84-24 ...... 16

3. The Best Interest Contact Exemption (BICE) ...... 19

4. The Department’s Decision To Include FIAs In The BICE ...... 21

III. Preliminary Injunctive Relief Is Needed To Avoid Irreparable Harm ...... 23

IV. NAFA Is Likely To Succeed On The Merits...... 25

A. APA Standards...... 25

i Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 3 of 102

B. The Department Exceeded Its Statutory Authority and Acted In An Arbitrary and Capricious Manner...... 26

1. Under Ch e vron Step One, The Department Redefined “Investment Advice” and “Fiduciary” Beyond What Congress Authorized...... 26

a. The Department’s New Definition Of “Investment Advice” Improperly Expands The Universe Of “Fiduciaries.”...... 27

b. Under Ch e vron Step One, Congress Intended ERISA Fiduciary Duties To Apply Only To Those Who Participate In Ongoing Management Of A Plan Or Its Assets...... 28

c. Congress Has Ratified and Thereby Adopted The Five-Part Test.33

2. Under Ch e vron Step Two The Department’s Expansion of ERISA Fiduciary Obligations Is Arbitrary, Capricious, and Unreasonable...... 37

C. The Department Has No Authority To Impose Fiduciary Duties On Parties To Transactions Involving IRAs As Provided In The Rule...... 41

1. ERISA Does Not Authorize The Department To Impose Fiduciary Duties On Parties To Transactions Involving IRAs...... 41

2. The Code Does Not Authorize The Department To Impose Fiduciary Standards On Parties To Transactions Involving IRAs...... 43

3. The Department Has No Other Authority To Impose Fiduciary Standards On Parties To Transactions Involving IRAs...... 45

D. The BICE Creates An Impermissible Private Right Of Action Which Renders It Fatally Defective And Without It The Entire Rule Must Be Invalidated...... 47

E. The BICE Is Fatally Flawed Based on Void For Vagueness Grounds...... 51

F. The Department’s Placement Of FIAs In The BICE As Opposed To PTE 84-24 Was Arbitrary, Capricious And Contrary To Law...... 53

1. The Department Treats FIAs As Securities, Contrary To Federal Law. ...54

2. The Department Failed to Provide A Meaningful Explanation For How The BICE Can Work With Respect To FIAs...... 56

3. The Department’s Determination That FIAs Are Covered By The BICE Is Irrational and Unworkable, Leading To Devastating Industry Effects...... 59

a. Inability Of Carriers To Comply With BICE Requirements...... 60

ii Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 4 of 102

i. It Is Impossible For Insurance Carriers To Comply With The BICE Requirements With Respect To Independent Agents...... 60

ii. It Is Impossible For Insurance Carriers To Comply With The BICE Without Filing BICs With State Insurance Departments for Approval...... 62

b. It Will Be Impossible For Independent Agents And Insurers To Comply With The BICE Without Becoming Investment Advisers Under Securities Laws...... 66

4. ERISA Requires That The Department Adequately Consider Costs And Benefits When It Promulgates A Rule...... 70

5. The Department’s Final Regulatory Impact Analysis Failed To Adequately Consider The Impact On Small Businesses, Especially Insurance Agents And IMOs Within The FIA Industry...... 71

V. Without A Preliminary Injunction, NAFA’s Members Will Suffer Immediate and Irreparable Harm...... 73

A. Legal Standards...... 73

B. NAFA Members Face Immediate And Irreparable Harm...... 75

1. Irreparable Harm To Insurance Carriers...... 76

2. Irreparable Harm To IMOs ...... 77

3. Irreparable Harm To Independent Agents ...... 79

4. Harm to Consumers ...... 81

C. Irreparable Harm Legal Analysis In Light Of The Injuries That The Rule Inflicts On The Fixed Annuity Industry...... 82

VI. The Balance of Harms Favors Granting an Injunction...... 84

VII. An Injunction Will Further The Public Interest...... 85

VIII. Scope Of The Requested Equitable Relief...... 85

IX. Conclusion ...... 88

iii Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 5 of 102

TABLE OF AUTHORITIES

CASES

Air Transp. Ass’nofAm ., Inc. v.Export-Im portBank ofUnited States, 840 F. Supp.2d 327 (D.D.C. 2012) ...... 74

Alabam a Educ.Ass’nv.Ch ao, 455 F.3d 386 (D.C. Cir. 2006)...... 37

Alenco Com m c’ns, Inc. v.F.C.C., 201 F.3d 608 (5th Cir. 2000)...... 72

*Alexande r v.Sandoval, 532 U.S. 275 (2001) ...... 48, 49, 50

Allie d-Signal,Inc. v.U.S. Nuclear Re gulatory Com m ’n, 988 F.2d 146 (D.C. Cir. 1993) ...... 51

Am . Z urich Ins. Co. v.Country VillaSe rv.Corp., No. 2:14-cv-03779-RSWL-AS, 2015 WL 4163008 (C.D. CaL. July 9, 2015)...... 64

*Ame rican Equity Inv.Life Ins. Co. v.SEC, 613 F.3d 166 (D.C. Cir. 2010) ...... Passim

Am e rican Fed’nofGov’tEm ps., AFL-CIO v.United States, 104 F. Supp.2d 58 (D.D.C. 2000) ...... 75

Am e rican Fed’nofUnions Local102H e alth & W e lfare Fund v.EquitableLife Assur. Soc’y, 841 F.2d 658 (5th Cir. 1988)...... 37

Am e rican Library Ass’nv.F.C.C., 406 F.3d 689 (D.C. Cir. 2005) ...... 26, 41

Association ofPrivate Se ctorColls. & Univs. v.Duncan, 681 F.3d 427 (D.C. Cir. 2012) ...... 66

Board ofTrs. ofCe dar Rapids Pediatric Clinic, P.A., Pension Planv.Contine ntalAssur. Co., 690 F. Supp.792 (W.D. Ark. 1988)...... 43

Boggs v.Boggs, 89 F.3d 1169 (5th Cir. 1996)...... 42

Bow e n v.Ge orge town Univ.H osp., 488 U.S. 204 (1988) ...... 41

*Bracco Diagnostics, Inc. v.Sh alala, 963 F. Supp. 20 (D.D.C. 1997) ...... 75, 83, 84

iv Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 6 of 102

BurlingtonTruck Line s, Inc. v.United States, 371 U.S. 156 (1962) ...... 54

Burns v.De laware Ch arter Guarantee & Tr. Co., 805 F. Supp.2d 12 (S.D.N.Y. 2011)...... 43, 49

CardinalH e alth, Inc. v.H olde r, 846 F. Supp.2d 203 (D.D.C. 2012) ...... 75

Ce ntralStates, Se . & Sw . Are as Pension Fund v.Ce ntralTransp., Inc. , 472 U.S. 559 (1985) ...... 30

Ce radyne , Inc.v.ArgonautIns. Co., No. G039873, 2009 WL 1526071 (Cal. Ct. App. 4th Dist. June 2, 2009)...... 64

Ch ao v.Day, 436 F.3d 234 (D.C. Cir. 2006) ...... 31, 38, 72

Ch aplaincy ofFullGospe lCh urch e s v.England, 454 F.3d 290 (D.C. Cir. 2006) ...... 82, 85

Ch arles Sch w ab & Co. v.De bick e ro, 593 F.3d 916 (9th Cir. 2010)...... 42

*Ch e vron,U.S.A., Inc. v.NaturalRe s. De f.Council,Inc. , 467 U.S. 837 (1984) ...... Passim

Clarkv.Fede r Se m o & Bard, P.C., 739 F.3d 28 (D.C. Cir. 2014) ...... 30

Clarke v.Office ofFed. H ous. Enter. Oversigh t, 355 F. Supp.2d 56 (D.D.C. 2004) ...... 75

Coalition forCom m on Se nse in Gov’tProcure m e ntv.United States, 576 F. Supp.2d 162 (D.D.C. 2008) ...... 74

Consolidated Be e fIndus., Inc. v.Ne w York Life Ins. Co., 949 F.2d 960 (8th Cir. 1991)...... 37

Cottonv.M assach use tts M ut.Life Ins. Co., 402 F.3d 1267 (11th Cir. 2005)...... 36

Cousins v.Se cre tary ofU.S. De p’tofTransp., 880 F.2d 603 (1st Cir. 1989) ...... 55

Dartv.United States, 848 F.2d 217 (D.C. Cir. 1988) ...... 36

v Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 7 of 102

Davis Cnty. Solid W aste M gm t.v.EPA, 108 F.3d 1454 (D.C. Cir. 1997) ...... 51

Davis v.Pension Be ne fitGuar. Corp., 571 F.3d 1288 (D.C. Cir. 2009) ...... 24

FDA v.Brow n & W illiam son Tobacco Corp., 529 U.S. 120 (2000) ...... 34

FinancialPlanning Association v.SEC, 482 F.3d 481 (D.C. Cir. 2007)...... 32

Fink v.Union Ce nt.Life Ins. Co., 94 F.3d 489 (8th Cir. 1996)...... 36

Fire stone Tire & Rubbe r Co. v.Bruch , 489 U.S. 101 (1989) ...... 30

Flacch e v.Sun Life Assur. Co., 958 F.2d 730 (6th Cir. 1992)...... 36

ForestGrove Sch . Dist.v.T.A., 557 U.S. 230 (2009) ...... 36

*Goldstein v.SEC, 451 F.3d 873 (D.C. Cir. 2006) ...... 38, 39, 40

Grayne d v.City ofRock ford, 408 U.S. 104 (1972) ...... 53

H artline v.Sh e e tM e talWork e rs’Nat’lPension Fund, 134 F. Supp.2d 1 (D.D.C. 2000), aff’d, 286 F.3d 598 (D.C. Cir. 2002) ...... 31

H artline v.Sh e e tM e talWork e rs’Nat’lPension Fund, 286 F.3d 598 (D.C. Cir. 2002) ...... 31

*H e arth, Patio & Barbe cue Ass’nv.U.S. De p’tofEne rgy, 706 F.3d 499 (D.C. Cir. 2013) ...... Passim

H offmann-Laroch e , Inc. v.Califano, 453 F. Supp.900 (D.D.C. 1978) ...... 75

In re Buzza, 287 B.R. 417 (Bankr. S.D. Ohio 2002)...... 43

In re Galvin, 121 B.R. 79 (Bankr. D. Kan. 1990)...... 43

vi Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 8 of 102

In re North , 50 F.3d 42 (D.C. Cir. 1995) ...... 36

Johns v.Roze t, 826 F. Supp.565 (D.D.C. 1993) ...... 43

LaCh ape llev.Fech tor,De twiler & Co., 901 F. Supp.22 (D. Me. 1995)...... 43

Langstonv.Bige low , 820 So. 2d 752 (Miss. Ct. App. 2002)...... 31

Lorillardv.Pons, 434 U.S. 575 (1978) ...... 36

M ande lbaum v.Fise rv,Inc. , 787 F. Supp.2d 1226 (D. Colo. 2011) ...... 43

M ich igan v.E.P.A., 135 S. Ct. 2699 (2015) ...... 71

*MotorVeh icleM frs. Ass’nv.State Farm M ut.Auto. Ins. Co., 463 U.S. 29 (1983) ...... Passim

NationalAss’nofClean Air Age ncie s v.EPA, 489 F.3d 1221 (D.C. Cir. 2007) ...... 29

NationalMining Ass’nv.Jack son, 768 F. Supp.2d 34 (D.D.C. 2011) ...... 75

NationalSoftDrink Ass’nv.Block , 721 F.2d 1348 (D.C. Cir. 1983) ...... 34

NationalTr.forH istoric Prese rvation v.FDIC, 1993 WL 328134 (D.D.C. May 7, 1993) ...... 75

*Ne xtWave PersonalCom m c’ns, Inc. v.F.C.C., 254 F.3d 130 (D.C. Cir. 2001), aff’d, 537 U.S. 293 (2003)...... 55, 56

North Carolina v.FERC, 730 F.2d 790 (D.C. Cir. 1984) ...... 51

Northe rn M ariana Islands v.United States, 686 F. Supp.2d 7 (D.D.C. 2009) ...... 23, 24

Palmore v.United States, 411 U.S. 389 (1973) ...... 36

vii Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 9 of 102

Peoria Union Stock Yards Co. Re t. Planv.Penn M ut.Life Ins. Co., 698 F.2d 320 (7th Cir. 1983)...... 37

Petitv.U.S. De p’tofEduc., 675 F.3d 769 (D.C. Cir. 2012) ...... 26

Public Citize n v.De p’tofH e alth and H um an Svcs., 332 F. 3d 654 (2003)...... 35

Robe rtson v.Cartinh our, 429 F. App’x 1 (D.C. Cir. 2011) ...... 75

Sch e duled Airline s Traffic Office s, Inc. v.De p’tofDe f., 87 F.3d 1356 (D.C. Cir. 1996) ...... 55

SEC v.Ch e ne ry Corp., 318 U.S. 80 (1943) ...... 66

SEC v.Ch e ne ry Corp., 332 U.S. 194 (1947) ...... 54

Se lectM ilkProduce rs, Inc. v.Johanns, 400 F.3d 939 (D.C. Cir. 2005) ...... 85

Sie rra Club v.Jack son, 833 F. Supp.2d 11 (D.D.C. 2012) ...... 24

Slovak v.Adam s, 753 N.E.2d 910 (Ohio Ct. App. 2001) ...... 31

*Sm ok ing Everyw h e re , Inc. v.FDA, 680 F. Supp.2d 62 (D.D.C.), aff’dsub nom . Sottera, Inc. v.FDA, 627 F.3d 891 (D.C. Cir. 2010)...... 74, 75, 83

Sterling Com m e rcialCre dit–Mich igan, LLCv.Ph oe nix Indus. I,LLC, 762 F. Supp.2d 8 (D.D.C. 2011) ...... 74, 82, 83

Sugar Cane Grow e rs Coop. v.Vene m an, 289 F.3d 89 (D.C. Cir. 2002) ...... 85

Texas Apartme ntAss’nv.United States, 869 F.2d 884 (5th Cir. 1989)...... 34

Texas Ch ildre n’sH osp. v.Burw e ll, 76 F. Supp.3d 224 (D.D.C. 2014) ...... 24

U.S. Ce llularCorp. v.F.C.C., 254 F.3d 78 (D.C. Cir. 2001) ...... 72 viii Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 10 of 102

University ofTex. v.Cam e nisch , 451 U.S. 390 (1981) ...... 85

Varity Corp. v.H ow e , 516 U.S. 489 (1996) ...... 29

VillageofH offman Estates v.Flipside , H offman Estates, Inc., 455 U.S. 489 (1982) ...... 53

Virginia Petroleum Jobbe rs Ass’nv.Fede ralPow e r Com m ’n, 259 F.2d 921 (D.C. Cir. 1958) ...... 75

W isconsin Gas Co. v.FERC, 758 F.2d 669 (D.C. Cir. 1985) ...... 74

STATUTES

5 U.S.C. § 551...... 25

5 U.S.C. § 601...... 72

5 U.S.C. § 604(a)(2)...... 73

5 U.S.C. § 611(a)(2)...... 72

5 U.S.C. § 705...... 24

5 U.S.C. § 706(2) ...... 25, 72

5 U.S.C. § 706(2)(A),(E) ...... 26, 54

5 U.S.C. § 801...... 13, 76

5 U.S.C. § 801(a)(3)(B) ...... 14

5 U.S.C. § 903...... 13

5 U.S.C. App. 1...... 13, 43, 44, 46

15 U.S.C. § 632...... 72

15 U.S.C. § 80b-2(a)(11) ...... 32

26 U.S.C. § 408...... 9, 42

26 U.S.C. § 408(a) ...... 12, 42

ix Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 11 of 102

26 U.S.C. § 408(b)(2) ...... 18

26 U.S.C. § 4975...... Passim

26 U.S.C. § 4975 (e)(2)...... 45

26 U.S.C. § 4975(a)-(b) ...... 11, 17,44

26 U.S.C. § 4975(c)(1)...... 12, 44, 45

26 U.S.C. § 4975(d) ...... 12, 44

26 U.S.C. § 4975(d)(10) ...... 52

26 U.S.C. § 4975(d)(17) ...... 35

26 U.S.C. § 4975(e)(1)(C) ...... 43

26 U.S.C. § 4975(e)(3)...... 46

26 U.S.C. § 4975(e)(3)(B) ...... 15, 17

26 U.S.C. § 4975(e)(7)...... 35

26 U.S.C. § 4975(f)(8)(J)(i) ...... 35

26 U.S.C. 4975(d)(2) ...... 52

29 U.S.C. § 1001...... 8

29 U.S.C. § 1002(21)(A)...... 9

29 U.S.C. § 1002(21)(A)(ii)...... 27, 35

29 U.S.C. § 1003(a) ...... 9, 42, 43

29 U.S.C. § 1104...... 46

29 U.S.C. § 1104(a) ...... 13, 45

29 U.S.C. § 1104(a)(1)...... 10

29 U.S.C. § 1108(g)(11)(A)...... 35

29 U.S.C. § 1135...... 71

x Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 12 of 102

29 U.S.C. § 1144(b)(2)(A)...... 47

29 U.S.C. § 1203...... 13

REGULATIONS

26 C.F.R. § 54.4975-6 (e) ...... 52

26 C.F.R. § 54.4975-9...... 12, 13

29 C.F.R. § 2509.2015-01...... 70

29 C.F.R. § 2510.3(d) ...... 42

29 C.F.R. § 2510.3-2(d)...... 9

29 C.F.R. § 2510.3-21...... 1, 11, 27, 28

29 C.F.R. § 2510.3-21(c)(2)...... 39

29 C.F.R. § 2550...... 47

29 C.F.R. § 2550.404a-1...... 69

74 Fed. Reg., 3,137, 3,175 ...... 87

75 Fed. Reg.64,642-43...... 87

Department of Labor, 80 Fed. Reg. 21,928 -21,959 (Apr. 20, 2015)...... Passim

Department of Labor, 80 Fed. Reg. 21,960-21,989 (Apr. 20, 2015)...... Passim

Department of Labor, 80 Fed. Reg. 22,010-22,020 (Apr. 20, 2015)...... Passim

Department of Labor, 81 Fed. Reg. 20,946-21,002 (to be codified at 29 C.F.R. § 2510.3-21) (Apr. 8, 2016) ...... Passim

Department of Labor, 81 Fed. Reg. 21,002-21,089 (Apr. 8, 2016)...... Passim

Department of Labor, 81 Fed Reg. 21,147-21,181 (Apr. 8, 2016)...... Passim

xi Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 13 of 102

OTHER AUTHORITIES

Adm inistrative Law and Practice , 1 Admin. L. & Prac. § 4:43 (3d ed.) ...... 53

Cyril Tuohy, Am e rican Equity: DOLThre atens Inde pe nde ntAnnuity Age nts, InsuranceNewsNet.com (Apr.29, 2016), (available at http://insurancenewsnet.com/innarticle/carrier-exec-dol-rule-pivot-fias-away- independent-channel) ...... 80

Dept. of Labor, Re gulating Advice M ark e ts, De finition ofthe Term “Fiduciary”Conflicts of Intere st- Re tire m e ntInvestme ntAdvice , Re gulatory Im pactAnalysis forFinalRuleand Exe m ptions (the “Regulatory Impact Analysis”), at 254 (Apr.2016) (https://www.dol.gov/ebsa/pdf/conflict-of-interest-ria.pdf)...... 73

Hazel Bradford, Se nate re jects fiduciary rule;Obam a vows toveto, Pensions & Investments (May 24, 2016), http://www.pionline.com/article/20160524/ONLINE/160529938/senate-rejects-fiduciary-rule- obama-vows-to-veto...... 14

Jodi L. Short, The PoliticalTurn in Am e rican Adm inistrative Law: Pow e r, Rationality, and Re asons, 61 Duke L.J. 1811 (2012) ...... 66

NAIC model suitability law (http://www.naic.org/store/free/MDL-275.pdf)...... 7

NAIC’s Model Unfair Trade Practices Act (http://www.naic.org/store/free/MDL-880.pdf)...... 7

National Association of Insurance Commissioners (“NAIC”) Annuity Disclosure Model Regulation (http://www.naic.org/store/free/MDL-245.pdf)...... 7

Ne w Pension Be ne fits Law Provide s M any Protections For W ork e rs Covere d By Private Industry Plans” (September 2, 1974)...... 33

Pub.L. 109-280, § 601, 120 Stat. 952-67 (2006) ...... 35

Pub.L. 111-203, Title 9, Subtitle 1, § 989J...... 55

Pub.L. 93-406, Title II, § 2002(b) ...... 9, 42

Pub.L. 99-514, 100 Stat. 2882, § 1854(f)(3)(A) (1986) ...... 35

State Department of Financial Services, http://www.dfs.ny.gov/insurance/lifeindx.htm ...... 63

xii Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 14 of 102

The W olters Kluw e r Bouvie r Law Dictionary ...... 30

U.S. Department of Labor, Advisory Opinion 2005-23A (Dec. 7, 2005), available at (https://www.dol.gov/ebsa/regs/aos/ao2005-23a.html)...... 38

xiii Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 15 of 102

I. Introduction

The National Association for Fixed Annuities (“NAFA”) respectfully moves for preliminary injunctive relief during the pendency of its challenge to the “fiduciary rule” (the

“Rule”) recently promulgated by the Department of Labor (the “Department”), 81 Fed.

Reg.20,946-21,002 (April 8, 2016) (to be codified at 29 C.F.R. § 2510.3-21), and certain related exemptions, id. at 21,002-21,088 & 22,010-22,020. NAFA seeks such relief because the Rule will have an immediate and devastating effect on the fixed annuity industry, causing irreparable harm to its members. If the Rule is allowed to go into effect, and especially if it is allowed to become applicable on the schedule set forth by the Department, in the weeks and months ahead, jobs will be lost, careers will be altered, firms will close, and vast resources will be invested in what will likely prove to be an unnecessary effort to comply with a Rule that should not be allowed to stand. For several reasons, there is a high likelihood that the Rule will not survive judicial scrutiny under the Administrative Procedure Act (“APA”) and the Regulatory Flexibility

Act (“RFA”).

Second, the Department improperly extends ERISA fiduciary duties to transactions involving individual retirement accounts (“IRAs”). Although Congress created traditional IRAs

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with the passage of ERISA, it did not apply ERISA fiduciary requirements to parties involved in

Department has no authority to extend ERISA fiduciary duties to transactions involving the retail sale of insurance products to IRA owners.

(“BICE”), and it is an integral and inseparable part of the Rule. Yet only Congress has the authority to create a cause of action, and it clearly has not done so here.

Fifth, in its notice of Proposed Rulemaking (“NOPR”), the Department treated FIAs as insurance products for exemption purposes. When it issued its final Rule, however, the

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Department abruptly changed course, deciding to treat FIAs the same as securities under the

BICE, without performing any analysis of the impact that such a dramatic change would have on a nearly $50 billion per year industry. This re-classification of FIAs is contrary to federal law, which treats them as insurance products and not securities. Further, the Department made no effort whatsoever to assess the effects of this change on the fixed annuity industry, which will be profound because the BICE is based on securities industry practices. This arbitrary and capricious decision of the Department forces the FIA industry to reconfigure itself to accommodate unworkable compliance requirements that do not fit the insurance industry business model. This will not harm not only the FIA industry but also consumers who rely on

FIAs to meet their retirement needs.

While this memorandum covers considerable technical and legal ground, at bottom this case is a simple one. It is built on five propositions: (1) insurance agents selling annuity products were never intended by Congress to be fiduciaries, (2) fiduciary duties applicable to ERISA advisers were never intended apply to IRA advisers, (3) no federal agency on its own has authority to create a private cause of action, (4) mandating compensation be “reasonable” with nothing more is a regulatory trap that is void for vagueness, and (5) placing FIAs within the

BICE is flawed because it is contrary to federal securities law and no consideration was given to the effect it would have on the fixed annuity industry. For all of these reasons, the Rule must be vacated. Until then, to avoid the immediate and irreparable harm described below and in the attached Affidavits, NAFA respectfully requests that the Court issue a preliminary injunction during the pendency of this litigation.

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II. Factual Background

A. NAFA And Its Members

Founded in 1998, NAFA is a trade association dedicated to educating and informing the public, including consumers and policymakers, about the value of fixed annuities and their benefits in financial and retirement planning. Anderson Aff. ¶ 2. NAFA’s membership includes insurance companies (or “carriers”), independent marketing organizations (“IMOs”), and individual insurance agents, representing every aspect of the fixed annuity industry and covering 85 percent of fixed annuity sales. Id.

B. Fixed Annuity Products

Fixed annuities are a form of insurance. Anderson Aff. ¶ 4. They are contracts offering guarantees of (1) a predictable income stream the owner cannot outlive, (2) protection from market risk to principal and credited interest, and (3) minimum account value accumulation as required under state standard non-forfeiture laws. Id.; Marrion Aff. ¶ 15. Surrender penalties may apply if the annuity is not held to maturity. Marrion Aff. ¶ 15. There are two basic types of deferred fixed annuities: (1) fixed declared rate annuities and (2) fixed indexed annuities, or

FIAs. Anderson Aff. ¶ 5. The difference is the manner in which interest is calculated. Id.

A fixed declared rate annuity guarantees a minimum interest rate set by the insurance company. Anderson Aff. ¶ 6. The contract may provide a guaranteed interest rate for the life of the annuity or may allow the insurance company to reset the interest rate periodically but no more than once every twelve months. Id. An FIA bases its interest rate on the performance of an external market index, such as the S&P 500, with a guarantee that the rate will never fall below zero. Anderson Aff. ¶ 7. The policyholder does not directly participate in any security investment. Id. Rather, the insurance carrier assumes the investment risk, guaranteeing the FIA can never lose value based on performance of the equity markets. Id. The advantage of an FIA

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over a declared rate annuity is the opportunity to earn higher interest from potentially favorable changes in the applicable market index. Id. Aside from the manner in which interest is determined and credited, FIAs function in all other respects the same as fixed declared rate annuities. Id.

Fixed annuities, including both declared rate annuities and FIAs, are distinguishable from variable annuities. Anderson Aff. ¶ 11. Variable annuities earn investment returns based on the performance of segregated investment portfolios known as subaccounts, and return is not guaranteed. Id. The value of the subaccounts could go up or down, and thus the consumer could make or lose money, with no protection for principal. Id. Consequently, and in contrast to the

FIA, the consumer bears all investment risk attendant to the variable annuity and its subaccounts.

Thus, variable annuities are considered securities and have long been regulated as such under applicable securities laws.

C. Fixed Annuity Distribution

Fixed annuities are sold by licensed insurance agents who typically earn a commission paid by the insurance carrier. Fixed annuities can be and are sold through a number of different channels, including banks, wire houses, broker-dealers, captive agents, and independent agents.

However, roughly 60% of all sales of fixed annuities are made by independent agents who are free to represent one or more carriers and their products. Anderson Aff. ¶ 12. There are approximately 280,000 insurance agents in the United States authorized to sell life and annuity products, of which an estimated 80,000 sell fixed annuities, and of those nearly 50,000—or

60%—are independent agents. Id.; Marrion Aff. ¶ 47.

IMOs are specialized marketing organizations that distribute life insurance products, including fixed annuities, primarily through independent agents. Anderson Aff. ¶ 13. IMOs are licensed as insurance agencies wherever required by state insurance law, and the principals are 5 Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 20 of 102

typically licensed as individual insurance agents. Id. Insurance carriers work closely with IMOs as intermediaries to recruit agents to distribute their products, provide product information and support, and offer other services such as marketing support and coordinating submission of annuity applications and related forms to carriers. Id. IMOs are an integral part of the independent agent channel, upon which insurance companies rely, usually in lieu of setting up an internal sales or captive agent system. Id. There are at least 100 major IMOs in the United

States. Marrion Aff. ¶ 39.

Agents and IMOs earn commissions and override payments, respectively, typically in the form of an up-front percentage-of-premium payment, or an annual “trail” percentage of the account value, or a combination of both. Unlike other asset classes, like mutual funds, fixed annuities do not lend themselves to compensation based on assets under management or other non-commission forms of payment. The reason is that, while insurance agents continue to assist their annuity customers after the initial purchase is made, annuity purchases often involve large initial deposits, and the efforts of the agent are most significant up front at the point of purchase.

Marrion Aff. ¶ 24.

D. Existing State Regulation of Fixed Annuities

Fixed annuities are regulated closely by state insurance departments. Anderson Aff. ¶ 14.

Fixed annuity contracts must be filed with and approved by each state in which the contracts are sold. Id. State regulation is pervasive over the organization and licensing of insurance companies, content and approval of policies, ongoing financial condition of the insurer, licensing of the insurance agents, the manner in which policies are advertised and sold, and virtually all other facets of the insurance business. Id.

Insurance agents who sell fixed annuities are bound by common-law requirements of agency and must pass tests of both competency and character before being granted a state

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license. Anderson Aff. ¶ 16. In most states, the agent must also contract with and be appointed by an insurance carrier, prior to selling products on behalf of that insurer. Anderson Aff. ¶ 15.

Insurance carriers perform their own due diligence as part of the agent appointment process.

Anderson Aff. ¶ 17.

After being licensed and appointed but prior to selling annuities, agents in most states must complete mandatory product training provided by the carrier and a suitability training course approved by the state. Anderson Aff. ¶ 18. Once fully qualified, the agent is subject to comprehensive state regulations including but not limited to the following:

 Disclosure. States require a written disclosure statement be provided to the purchaser of a fixed annuity contract at point of sale to both protect consumers and foster consumer education. The majority of states have adopted the National Association of Insurance Commissioners (“NAIC”) Annuity Disclosure Model Regulation (http://www.naic.org/store/free/MDL-245.pdf).

 Suitability. The NAIC model suitability law (http://www.naic.org/store/free/MDL- 275.pdf) applies to virtually all fixed annuity transactions. It establishes a system for insurance companies to supervise recommendations to purchase annuities and sets forth standards and procedures for fixed annuity transactions so that the insurance needs and financial objectives of consumers are appropriately addressed during sales transactions.

 “Free Look” (or Right to Return) Requirements. Most states require that annuity contracts include a “free look” or “right to return” provision, allowing annuity contract purchasers the right to cancel their contract within a certain period (typically 10-30 days).

 Unfair Trade Practice Laws. Most states have adopted the NAIC’s Model Unfair Trade Practices Act (http://www.naic.org/store/free/MDL-880.pdf) (or similar regulations), or some version thereof, providing a framework to regulate trade practices in the business of insurance by defining and prohibiting a broad range of conduct and practices that constitute unfair methods of competition or unfair or deceptive practices.

 Market Conduct Exams. All state insurance departments have regulatory authority to investigate carriers and insurance agents to ensure compliance with applicable laws and regulations. Most states also perform regular market conduct examinations to monitor compliance with applicable state laws.

Anderson Aff. ¶ 19.

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E. Classification of FIAs Under Federal Securities Law

Congress has determined that fixed annuities, including FIAs, should be regulated by the states as insurance products, rather than under federal securities laws. Following an attempt in

2009 by the U.S. Securities and Exchange Commission (“SEC”) to regulate FIAs under the securities laws, Congress made its intentions clear in the Dodd-Frank Wall Street Reform and

Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The Dodd-Frank Act added a clarifying note to Section 77c of the 1933 Act declaring FIAs are exempt from regulation under federal securities laws. Pub. L. 111-203, Title IX, Subtitle I, § 989J (July 21, 2010).1

Consequently, FIAs are treated exclusively as insurance products under federal law, and unlike variable annuities, FIAs are not subject to securities regulation.

F. Federal Regulation of Plan Fiduciaries

1. ERISA

In 1974, Congress enacted ERISA. 29 U.S.C. § 1001 et seq. Among other reasons for the statute, Congress sought to protect beneficiaries of “employee benefit plans” by “establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans.”

ID. § 1001(b).

a. Definition of “Plan”

ERISA applies to “any employee benefit plan” that is “established or maintained” (1) “by an employer,” (2) “by an employee organization,” or (3) “by both.” 29 U.S.C. § 1003(a). The definitions of “employee benefit plan” and “plan” are limited to plans “established or maintained

1 FIAs are treated as exempt from the 1933 Act assuming three criteria are met: (1) the value of the annuity does not vary according to the performance of a separate account; (2) the annuity satisfies state non-forfeiture laws guaranteeing that the owner always has a minimum-protected cash value; and (3) the product is (a) sold in a state that has adopted the current NAIC model suitability law, (b) the insurer is domiciled in a state that has adopted the NAIC model suitability law, or (c) the insurer adopts the suitability standards on its own subject to state exam oversight. Id.

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by an employer or by an employee organization.” Id. § 1002(1)-(3). Herein these are referred to as “ERISA plans,” and they do not include IRAs. Regulations that the Department promulgated clarify IRAs do not fall within any of these statutory definitions except in limited circumstances not relevant here. Se e 29 C.F.R. § 2510.3-2(d). Notwithstanding the foregoing, traditional IRAs were created by the passage of ERISA, which enacted 26 U.S.C. § 408. Se e Pub. L. 93-406, title

II, § 2002(b). Yet Congress specifically chose not to characterize IRAs as ERISA plans.

b. Definition of “Fiduciary” and Fiduciary Duties

In ERISA Section 3(21), Congress defined three circumstances in which a person would qualify as a “fiduciary with respect to a plan”:

[A] person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A). ERISA imposes specific fiduciary duties on plan fiduciaries, including a “prudent man standard of care”:

(1) Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and –

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and

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(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III.

29 U.S.C. § 1104(a)(1). ERISA plan fiduciaries who violate these duties are personally liable for any losses to the plan and “subject to other equitable or remedial relief as the court may deem appropriate, including the removal of such fiduciary.” Id. § 1109. ERISA also contains limited civil enforcement remedies for the Department to challenge breaches of fiduciary duty. Id.

§ 1132.

ERISA also bars fiduciaries from engaging in “prohibited transactions” with an ERISA plan:

A fiduciary with respect to a plan shall not –

(1) deal with the assets of the plan in his own interest or for his own account,

(2) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or

(3) receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.

Id. § 1106(b). ERISA contains a number of exemptions that permit fiduciaries to engage in certain transactions that would otherwise be prohibited, and it authorizes the Department to establish additional prohibited transaction exemptions. Id. § 1108.

c. The Department’s Five-Part Test

In 1975, the year after Congress enacted ERISA, the Department adopted a “five-part test” to delineate who would be deemed a “fiduciary with respect to a plan” for “rendering investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan”:

(c) Investment advice. (1) A person shall be deemed to be rendering ‘‘investment advice’’ to an employee benefit plan, within the meaning of section 3(21)(A)(ii)

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of the Employee Retirement Income Security Act of 1974 (the Act) and this paragraph, only if:

(i) Such person renders advice to the plan as to the value of securities or other property, or makes recommendation as to the advisability of investing in, purchasing, or selling securities or other property; and

(ii) Such person either directly or indirectly (e.g., through or together with any affiliate) –

(A) Has discretionary authority or control, whether or not pursuant to agreement, arrangement or understanding, with respect to purchasing or selling securities or other property for the plan; or

(B) Renders any advice described in paragraph (c)(1)(i) of this section on a regular basis to the plan pursuant to a mutual agreement, arrangement or understanding, written or otherwise, between such person and the plan or a fiduciary with respect to the plan, that such services will serve as a primary basis for investment decisions with respect to plan assets, and that such person will render individualized investment advice to the plan based on the particular needs of the plan regarding such matters as, among other things, investment policies or strategy, overall portfolio composition, or diversification of plan investments.

29 C.F.R. § 2510.3-21.2

2. The Code

The Code, as found in 26 US Code subtitle D, chapter 43, contains various tax provisions covering ERISA plans, IRAs and other tax-qualified vehicles. Section 4975 provides for an excise tax to be paid as a penalty for engaging in certain “prohibited transactions.” 26 U.S.C. §

4975(a)-(b). The Code defines “prohibited transaction” as follows:

For purposes of this section, the term “prohibited transaction” means any direct or indirect –

(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;

(B) lending of money or other extension of credit between a plan and a disqualified person;

2 The elements of the five-part test are further described below at p. 28.

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(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or

(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

26 U.S.C. § 4975(c)(1). In addition, Section 4975 contains certain enumerated exemptions from these prohibited transaction rules, 26 U.S.C. § 4975(d), and it permits the Department of

Treasury to issue exemptions to these prohibited transaction rules, Id. § 4975(c)(2).

Unlike ERISA, Section 4975 includes IRAs as well as ERISA plans within its broader definition of “plan.” Id. § 4975(e)(1)(C) (“For purposes of this section, the term ‘plan’ means – .

. . (A) a trust described in section 401(a) . . . (B) an individual retirement account described in

Section 408(a).”); se e also 26 U.S.C. 408(a) (definition of “individual retirement account”).

Section 4975 also provides a definition of “fiduciary” that is the same as in ERISA. Indeed, in

1975, the Secretary of the Treasury promulgated a regulation that contained the same five-part test the Department promulgated to define circumstances under which providing “investment advice to a plan” could give rise to the imposition of an excise tax against fiduciaries who engage in a prohibited transaction. 26 C.F.R. § 54.4975-9. The Code does not, however, impose

ERISA-type fiduciary duties of prudent conduct on any fiduciary with respect to an IRA, nor does it impose the asset diversification and plan document compliance fiduciary duties that

Congress placed on ERISA plan fiduciaries. Com pare 26 U.S.C. § 4975 w ith 29 U.S.C.

§ 1104(a).

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3. The Reorganization Plan

The Reorganization Plan No. 4 of 1978 (“Reorganization Plan”) transferred to the

Secretary of Labor the authority of the Secretary of the Treasury to issue certain regulations under Code Section 4975, including as to the definition of “fiduciary” found in that section.

Reorganization Plan, 5 U.S.C. App. 1, 92 Stat. 3790; se e also 29 U.S.C. § 1203 (“The Secretary of the Treasury and the Secretary of Labor shall consult with each other from time to time with respect to the provisions of section 4975 of title 26 (relating to tax on [ERISA] prohibited transactions) . . . .”).3

G. The New Rule And Exemptions

On April 8, 2016, following a protracted rulemaking process dating back to 2010, the

Department published a new rule to define the circumstances under which providing “investment advice to a plan” gives rise to “fiduciary” status under ERISA and the Code (the “Rule”). In doing so, the Department scrapped the five-part test that had been in place since 1975, codified in 29 C.F.R. § 2510.3-21 (ERISA) and 26 C.F.R. § 54.4975-9 (the Code). The effective date of the Rule is June 7, 2016, but its initial “applicability date” is April 10, 2017, at which time the rule becomes operational. The Rule goes into full effect on January 1, 2018, at which time all technical requirements are phased in. 81 Fed. Reg. at 20,946. Subsequently, on May 24, 2016,

Congress passed a joint resolution pursuant to the Congressional Review Act (“CRA”), 5 U.S.C.

§ 801, disapproving of the Rule. That action temporarily stays the effective date of the Rule,

3 Reorganization Plans are creatures of statute. They are prepared by the President and sent to Congress together with “such further background or other information as the Congress may require for its consideration of the plan.” 5 U.S.C. § 903. The President’s Message is enacted as part of the Plan.

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pending the outcome of the CRA process.4 The Rule’s applicability dates, however, are not impacted by the CRA process.

The following explanation for the new Rule appears in the preface to the Department’s commentary, which spans more than 1,000 pages:

The Department created the five-part test in a very different context and investment advice marketplace. The 1975 regulation was adopted prior to the existence of participant-directed 401(k) plans, the widespread use of IRAs, and the now commonplace rollover of plan assets from ERISA-protected plans to IRAs. Today, as a result of the five-part test, many investment professionals, consultants, and advisers have no obligation to adhere to ERISA’s fiduciary standards or to the prohibited transaction rules, despite the critical role they play in guiding plan and IRA investments. Under ERISA and the Code, if these advisers are not fiduciaries, they may operate with conflicts of interest that they need not disclose and have limited liability under federal pension law for any harms resulting from the advice they provide. Non-fiduciaries may give imprudent and disloyal advice; steer plans and IRA owners to investments based on their own, rather than their customers’ financial interests; and act on conflicts of interest in ways that would be prohibited if the same persons were fiduciaries. In light of the breadth and intent of ERISA and the Code’s statutory definition, the growth of participant-directed investment arrangements and IRAs, and the need for plans and IRA owners to seek out and rely on sophisticated financial advisers to make critical investment decisions in an increasingly complex financial marketplace, the Department believes it is appropriate to revisit its 1975 regulatory definition as well as the Code’s virtually identical regulation.

Id. In short, the Department purports to adopt this new Rule principally to protect IRA owners by extending ERISA fiduciary duties to IRA transactions and substantially broadening the definition of who is an IRA adviser.5

4 It is expected that President Obama will veto the joint resolution. Se e Hazel Bradford, Se nate re jects fiduciary rule;Obam a vows to veto, Pensions & Investments (May 24, 2016), http://www.pionline.com/article/20160524/ONLINE/160529938/senate-rejects-fiduciary- rule-obama-vows-to-veto. Congress will then have 30 session days to override the veto. Given the voting on the joint resolution—largely along party lines—an override is not expected. Consequently, the effective date will be the earlier of 1) when either the House or Senate votes to override the veto and fails or 2) 30 session days after the President’s veto. 5 U.S.C. § 801(a)(3)(B). 5 For purposes of this brief, NAFA sets aside the public policy question of whether changes in the world of retirement investing over the last forty years justify revisiting established laws 14 Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 29 of 102

On the same day that it released its new Rule redefining “fiduciary,” the Department issued new prohibited transaction exemptions (“PTEs”). PTEs permit conduct that otherwise would violate the Rule, so long as the parameters of the PTE are followed. Most relevant here are the Department’s amendments to PTE 84-24, and its new Best Interest Contract Exemption

(“BICE”).

1. Definition of “Fiduciary”

In the new Rule, the Department abandoned the five-part test and advanced a new and far more expansive rule to determine when providing “investment advice to a plan” triggers fiduciary duties, i.e., who is a “fiduciary”:

(a) Investment advice. For purposes of section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (Act) and section 4975(e)(3)(B) of the Internal Revenue Code (Code), except as provided in paragraph (c) of this section, a person shall be deemed to be rendering investment advice with respect to moneys or other property of a plan or IRA described in paragraph (g)(6) of this section if –

(1) Such person provides to a plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner the following types of advice for a fee or other compensation, direct or indirect:

(i) A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA;

(ii) A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment

governing retirement plans and IRAs. This brief focuses on legalissues. NAFA does not share the Department’s view that the widespread use of IRAs today is somehow an adverse development requiring additional federal regulation. To the contrary, movement towards savings within IRAs and other participant-directed accounts in the last forty years has resulted in greater consumer choice, better access to information, greater control, and many other improvements that have been an overall boon to retirement savers far outweighing the supposed concerns used to justify the Rule.

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account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made; and

(2) With respect to the investment advice described in paragraph (a)(1) of this section, the recommendation is made either directly or indirectly (e.g., through or together with any Affiliate) by a person who:

(i) Represents or acknowledges that it is acting as a fiduciary within the meaning of the Act or the Code;

(ii) Renders the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the advice recipient; or

(iii) Directs the advice to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

(b)(1) For purposes of this section, ‘‘recommendation’’ means a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. The determination of whether a ‘‘recommendation’’ has been made is an objective rather than subjective inquiry.

81 Fed. Reg. at 20,997-21,001. This new definition will replace the five-part test on the April

10, 2017 applicability date. Id. at 21,001-21,002.

2. PTE 84-24

On the same day it released the new Rule, the Department published an amended version of PTE 84-24, which provides a PTE for transactions involving Fixed Rate Annuity Contracts.

The newly created term “Fixed Rate Annuity Contract” is defined as follows:

The term “Fixed Rate Annuity Contract” means a fixed annuity contract issued by an insurance company that is either an immediate annuity contract or a deferred annuity contract that (i) satisfies applicable state standard nonforfeiture laws at the time of issue, or (ii) in the case of a group fixed annuity, guarantees return of principal net of reasonable compensation and provides a guaranteed declared minimum interest rate in accordance with the rates specified in the standard nonforfeiture laws in that state that are applicable to individual annuities; in either case, the benefits of which do not vary, in part or in whole, based on the investment experience of a separate account or accounts maintained by the insurer

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or the investment experience of an index or investment model. A Fixed Rate Annuity Contract does not include a variable annuity or an indexed annuity or similar annuity.

81 Fed. Reg. 21,176-21,177. The exemption for Fixed Rate Annuity Contracts is set forth as follows:

(a) In general. ERISA and the Code prohibit fiduciary advisers to employee benefit plans and IRAs from self-dealing, including receiving compensation that varies based on their investment advice, and from receiving compensation from third parties in connection with their advice. ERISA and the Code also prohibit fiduciaries and other parties related to plans and IRAs from engaging in purchases and sales of products with the plans and IRAs. This exemption permits certain, specified persons, including specified persons who are fiduciaries due to their provision of investment advice to plans and IRAs, to receive these types of compensation in connection with transactions involving insurance contracts, specified annuity contracts, and investment company securities, as described below.

(b) Exemptions. The restrictions of ERISA section 406(a)(1)(A) through (D) and 406(b) and the taxes imposed by Code section 4975(a) and (b) by reason of Code section 4975(c)(1)(A) through (F), do not apply to any of the following transactions if the conditions set forth in Sections II, III, IV, and V, as applicable, are met:

(1) The receipt, directly or indirectly, by an insurance agent or broker or a pension consultant of an Insurance Commission and related employee benefits from an insurance company in connection with the purchase, with assets of a Plan or IRA, including through a rollover or distribution, of an insurance contract or a Fixed Rate Annuity Contract. . . .

81 Fed. Reg. at 21,174. By its terms, PTE 84-24 does not apply to FIAs or variable annuities.

To qualify for this exemption, insurance agents and carriers selling Fixed Rate Annuity

Contracts must abide by certain “Impartial Conduct Standards”:

If the insurance agent or broker, pension consultant, insurance company or investment company Principal Underwriter is a fiduciary within the meaning of ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B) with respect to the assets involved in the transaction, the following conditions must be satisfied with respect to the transaction to the extent they are applicable to the fiduciary’s actions:

(a) When exercising fiduciary authority described in ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B) with respect to the assets involved in the transaction, the insurance agent or broker, pension consultant, insurance company

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or investment company Principal Underwriter acts in the Best Interest of the Plan or IRA at the time of the transaction; and

(b) The statements by the insurance agent or broker, pension consultant, insurance company or investment company Principal Underwriter about recommended investments, fees, Material Conflicts of Interest, and any other matters relevant to a Plan’s or IRA owner’s investment decisions, are not materially misleading at the time they are made. For this purpose, the insurance agent’s or broker’s, pension consultant’s, insurance company’s or investment company Principal Underwriter’s failure to disclose a Material Conflict of Interest relevant to the services it is providing or other actions it is taking in relation to a Plan’s or IRA owner’s investment decisions is considered a misleading statement.

Id. In addition, a “reasonable compensation” requirement must be met to qualify for the exemption:

The combined total of all fees and compensation received by the insurance agent or broker, pension consultant, insurance company or investment company Principal Underwriter for their services does not exceed reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2).

Id. at 21,174-21,175. PTE 84-24 also requires specific disclosures in transactions involving the purchase of a Fixed Rate Annuity Contract with assets of ERISA plans or IRA including information about Affiliations and relationships between the agent and insurance carriers, information about commissions and other compensation paid to the agent or agencies expressed in various forms for the first year and renewal years, and a statement describing “any charges, fees, discounts, penalties or adjustments . . . in connection with the purchase, holding, exchange, termination, or sale of the” annuity policy. Id. at 21,175.

Prior to these amendments, the sale of all annuity products – variable, FIAs and fixed rate – fell within the purview of PTE 84-24 as applicable with respect to ERISA plans. In the NOPR, the

Department proposed that variable annuities be removed from PTE 84-24, keeping all fixed annuities, including FIAs, in PTE 84-24. However, in the final PTE 84-24, only “Fixed Rate

Annuity Contracts” remain in the exemption, i.e., both variable annuities and FIAs were removed from coverage under 84-24. In short, not only were the parameters of PTE 84-24 changed, so too

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were the insurance products covered by the exemption, with only newly defined “fixed rate annuities” being left in 84-24, and FIAs being moved from 84-24 to BICE.

3. The Best Interest Contact Exemption (BICE)

On the same day it released the Rule and the final PTE 84-24, the Department also promulgated the BICE. Id. at 21,002. The purpose of the BICE, according to the Department, is

“to facilitate continued provision of advice to . . . retail investors under conditions designed to safeguard the interest of these investors” by allowing insurance companies, broker-dealers, investment advisors, and their agents and representatives to receive “various forms of compensation that, in the absence of an exemption, would not be permitted under ERISA and the

Code.” Id.

Specifically, the BICE is designed to address the issue that the receipt of certain types of compensation by a Financial Institution or Adviser (such as commissions) or compensation received from third parties (such as 12b-1 fees, revenue sharing, and sales loads) would otherwise violate the prohibited transaction restrictions against self-dealing because the compensation is deemed a conflict of interest that might influence the advice provided by the

Adviser.

Financial Institutions and Advisers seeking to rely on the exemption are required to adhere to Impartial Conduct Standards similar to PTE 84-24 which also includes the “reasonable compensation” component; to adopt policies and procedures designed to ensure that their individual Advisers adhere to the Impartial Conduct Standards; to disclose information relating to fees, compensation and Material Conflicts of Interest; and to retain records demonstrating compliance with the exemption. Id. at 21,076.

The Impartial Conduct Standards require that the Financial Institution and Adviser give advice that is in the Retirement Investor’s Best Interest, i.e ., prudent advice that is based on the

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investment objectives, risk tolerance, financial circumstances, and needs of the Retirement

Investor, without regard to financial or other interests of the Adviser, Financial Institution, or their Affiliates, Related Entities or other parties. Financial Institutions must also refrain from giving or using incentives for Advisers to act contrary to the customer’s Best Interest. Id. at

21,007.

The Department mandates that Financial Institutions enter into a best interest contract

(“BIC”) with the retail customer. “Financial Institution” is defined to include only banks, insurance companies, broker-dealers and registered investment advisers (“RIA”). The BICE then endeavors to create a private cause of action permitting the Retirement Investor to sue the

Financial Institution for breach of the BIC by the Financial Institution or its Adviser (e.g., an insurance agent).6 Id. at 21,076. Because the BIC requirements do not apply to transactions involving ERISA plans, the BIC is applicable only when the Retirement Investor is an IRA owner. Id. at 21,079.

In the BIC, the Financial Institution must Affirmatively state that it and the Adviser act as fiduciaries under ERISA or the Code, or both, with respect to any investment advice that is provided. Id. The BIC must contain Affirmative warranties that (1) the Financial Institution has adopted and will comply with written policies and procedures reasonably and prudently designed to ensure that its Advisers adhere to the Impartial Conduct Standards; (2) in formulating its policies and procedures, the Financial Institution specifically identified and documented its

Material Conflicts of Interest; (3) the Financial Institution adopted measures reasonably and

6 The Department denies it has created a private cause of action to enforce the law because the cause of action is based on contract law. 81 Fed. Reg. at 21,060. NAFA disagrees for reasons explained below. However, given it is undisputed that the BICE creates private litigation rights where none currently exist, the term “private cause of action” will be used in this memorandum to describe the litigation rights created in the BICE.

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prudently designed to prevent Material Conflicts of Interest from causing violations of the

Impartial Conduct Standards; and (4) a designated person or persons, identified by name, title or function, will be responsible for addressing Material Conflicts of Interest and will be responsible to monitor the Advisers’ adherence to the Impartial Conduct Standards. Id.

The Financial Institution’s policies and procedures must require that neither the Financial

Institution nor (to the best of its knowledge) any Affiliate or Related Entity will use or rely upon quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended or would reasonably be expected to cause Advisers to make recommendations not in the Best Interest of the investor. Id.

4. The Department’s Decision To Include FIAs In The BICE

In the Department’s NOPR, both fixed declared rate annuities and FIAs were included in

PTE 84-24. 80 Fed. Reg. 21,960, 21,975 (Apr. 20, 2015). In the final Rule, however, the

Department moved FIAs out of PTE 84-24 and into the BICE. As explained above, all fixed annuities – including FIAs – have long been treated as fixed insurance products, exempt from federal securities laws and regulated under state insurance laws. In a sharp departure from existing regulatory practices, the Department lumped FIAs in with securities products like stocks and bonds, mutual funds, and variable annuities. FIAs are the only non-security product specifically covered under the BICE.7

The FIA industry was blindsided by this last minute switch, and the impact will be highly detrimental to the FIA industry and its clientele. Marrion Aff. ¶ 41-42. Insurance carriers will need to restructure their distribution systems, because they will not be able to guarantee in a BIC

7 The Rule, and thus BICE, applies to “securities and other investment property.” It is uncertain whether “other investment property” includes any other non-security products which would be subject to BICE based on a salesperson’s method of compensation.

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that independent agents selling insurance products for multiple carriers have acted in the Best

Interest of purchasers, given how Best Interest is defined and the nature of the independent agent business model. Marrion Aff. ¶ 30-31. To avoid this problem, insurers might be forced to change their distribution systems, with one alternative being to work only with agents registered as broker-dealers. Marrion Aff. ¶ 32. Another alternative will be for insurers to work only with

“captive” agents who represent a single insurance company, eliminating the independent agents’ ability to offer a variety of different insurers’ fixed annuity products to consumers. Marrion Aff.

¶ 33. Moreover, to adapt to the new requirements imposed on them, insurers will surely need to re-design and re-file their fixed annuity products for approval by state regulatory authorities – a costly and time-consuming process. Marrion Aff. ¶ 35.

The consequences for IMOs will be equally severe, if not worse. Two-thirds of FIA sales are conducted through IMOs, accounting for over $35 billion in annual FIA premiums. Marrion

Aff. ¶ 39. Under the BICE, IMOs are not recognized as Financial Institutions, thus their role in the distribution system is put very much in doubt, jeopardizing the compensation they receive for the sale of FIAs, which are their mainstay source of income. Marrion Aff. ¶ 41. If IMOs cannot receive such compensation for their critical role in the distribution of FIAs, their revenues are projected to fall by over 60 percent, resulting in massive layoffs and the closing of many firms.

Marrion Aff. ¶ 42. Those IMOs that are able to remain in the business will face substantial costs to restructure operations and build out new compliance systems. Marrion Aff. ¶ 43-44.

As for independent insurance agents, their world will be turned upside down, by the cascading effects of industry wide changes described above. Individual agents will also face substantial increases in their errors and omissions insurance premiums, because they will suddenly be classified as “fiduciaries.” Marrion Aff. ¶ 50; Engels Aff. ¶ 17; White Aff. ¶ 11;

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Rafferty Aff. ¶ 11; Foguth Aff. ¶ 14. Many individual agents will also be left with little choice but to register as investment advisers under securities laws, to the extent they wish to continue selling annuities in tax-qualified markets, i.e., IRAs. The net effect will be that many individual agents will exit the business. Marrion Aff. ¶ 49.

Finally, because of the Department’s decision to place FIAs in the BICE, and its consequences for the FIA industry, there will fewer independent agents and fixed annuity products available to serve the needs of retirement savers. Specifically, because of the burdens and risks imposed on FIA providers under the Rule, FIA providers will inevitably be forced to curtail or exit the IRA business, and this will hurt lower- and middle-income savers who tend to rely most on FIA products for their retirement needs. Engels Aff. ¶ 18; James Aff. ¶ 28.

III. Preliminary Injunctive Relief Is Needed To Avoid Irreparable Harm.

When evaluating applications for preliminary injunctive relief, this Court considers

(1) whether there is a substantial likelihood that plaintiff will succeed on the merits of its claim,

(2) whether plaintiff will suffer irreparable injury in the absence of an injunction, (3) the harm to defendants or other interested parties (i.e ., the balance of harms), and (4) whether an injunction would be in the public interest (or at least not be adverse to the public interest). Northe rn

M ariana Islands v.United States, 686 F. Supp.2d 7, 13 (D.D.C. 2009) (enjoining regulation).

As the Court has made clear, these factors are not to be viewed in isolation, but rather in combination depending on their relative weight:

Plaintiffs are not required to prevail on each of these factors. Rather, these factors must be viewed as a continuum, with more of one factor compensating for less of another. “If the arguments for one factor are particularly strong, an injunction may issue even if the arguments in other areas are rather weak.” An injunction may be justified “where there is a particularly strong likelihood of success on the merits even if there is a relatively slight showing of irreparable injury.” Conversely, when the other three factors strongly favor interim relief, a court may grant injunctive relief when the moving party has merely made out a “substantial”

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case on the merits. The necessary level or degree of likelihood of success that must be shown will vary according to the Court’s assessment of other factors.

Id. at 13-14 (citations omitted). “In this Circuit, the four factors have typically been evaluated on a ‘sliding scale,’ such that if ‘the movant makes an unusually strong showing on one of the factors, then it does not necessarily have to make as strong a showing on another factor.’” Texas

Ch ildre n’sH osp. v.Burw e ll, 76 F. Supp. 3d 224, 235 (D.D.C. 2014) (quoting Davis v.Pension

Be ne fit Guar. Corp., 571 F.3d 1288, 1291-92 (D.C. Cir. 2009)). For example, a preliminary injunction is warranted if plaintiff faces a high probability of success and some injury, or severe injury and a likelihood of success on the merits. Northe rn M ariana Islands, 686 F. Supp. 2d at

14.8

In this case, there is both a high probability that NAFA’s challenge to the Rule will succeed on the merits, and an enormous risk of irreparable harm to NAFA members without preliminary injunctive relief to stay the April 10, 2017 applicability date. The Department has vastly exceeded its statutory authority under ERISA and the Code, enacting a Rule that expands fiduciary duties far beyond that authorized by Congress; regulates IRAs without statutory authority; improperly creates private causes of action; and employs impermissibly vague terms that trap the industry in a litigation quagmire. Moreover, without adequate notice, reasoned analysis or any meaningful regulatory impact assessment – and failing to honor federal securities law and state insurance law – the Department arbitrarily treats FIAs as securities under the Rule,

8 Congress expressly authorized courts to stay the effective date of an agency action under the APA “on such conditions as may be required and to the extent necessary to prevent irreparable injury.” 5 U.S.C. § 705. The D.C. Circuit applies the same four-part test to preliminary injunctions and stays pending review under APA § 705. Sie rra Club v.Jack son, 833 F. Supp. 2d 11, 30 (D.D.C. 2012) (“The Court concludes that the standard for a stay at the agency level is the same as the standard for a stay at the judicial level: each is governed by the four-part preliminary injunction test applied in this Circuit.”).

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creating an impossible compliance burden for the FIA industry to meet in too little time to overhaul long-established business models.

Absent injunctive relief staying the applicability date of the Rule, NAFA members will be forced at once to restructure the FIA distribution system, causing crippling and unrecoverable economic losses. As explained below and in the attached declarations, injunctive relief is needed to preserve the status quo and prevent interim harm to an entire industry while the Court considers the merits of NAFA’s challenge to a fundamentally flawed Rule.

IV. NAFA Is Likely To Succeed On The Merits.

A. APA Standards

Under the APA, 5 U.S.C. § 551 et seq., agencies must adhere to certain basic concepts familiar to this Court. In “determin[ing] the meaning or applicability of the terms of an agency action,” the reviewing court shall “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or “in excess of statutory jurisdiction, authority, or limitations . . . .”

5 U.S.C. § 706(2). In reviewing an agency’s construction of its own governing statute, this court employs the “familiar” two-step analysis set out in Ch e vron, U.S.A., Inc. v. NaturalRe s. De f.

Council,Inc. , 467 U.S. 837 (1984). H e arth, Patio & Barbe cue Ass’nv. U.S. De p’tofEne rgy,

706 F.3d 499, 503 (D.C. Cir. 2013).

“Pursuant to Ch e vron Step One, if the intent of Congress is clear, the reviewing court must give effect to that unambiguously expressed intent. If Congress has not directly addressed the precise question at issue, the reviewing court proceeds to Ch e vron Step Two.” Id. (quoting

Petit v. U.S. De p’tof Educ., 675 F.3d 769, 778 (D.C. Cir. 2012) (internal quotation marks omitted)). Under Step Two, “[i]f ‘Congress has not directly addressed the precise question at issue,’ and the agency has acted pursuant to an express or implied delegation of authority, the

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agency’s statutory interpretation is entitled to deference, as long as it is reasonable.” Am e rican

Library Ass’nv. F.C.C., 406 F.3d 689, 698-99 (D.C. Cir. 2005) (quoting Ch e vron, 467 U.S. at

843-44) (“Ch e vron Step Two”).

Further, in “determin[ing] the meaning or applicability of the terms of an agency action,” the reviewing court shall “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or

“unsupported by substantial evidence.” 5 U.S.C. § 706(2)(A), (E). The test for challenging an agency action as “arbitrary and capricious” turns on whether the action is the product of

“reasoned decisionmaking.” M otor Veh icle M frs. Ass’nof U.S., Inc. v. State Farm M ut. Auto.

Ins. Co., 463 U.S. 29, 52 (1983) (National Highway Traffic Safety Administration’s change to auto seatbelt rule was arbitrary and capricious because the agency failed to explain its decisions even where it had authority to regulate).

B. The Department Exceeded Its Statutory Authority and Acted In An Arbitrary and Capricious Manner.

1. Under Chevron Step One, The Department Redefined “Investment Advice” and “Fiduciary” Beyond What Congress Authorized.

At the threshold, the Department’s new Rule fails because it expands the meaning of

“fiduciary” far beyond what ERISA and the Code authorize. The Department may believe it is pursuing a desirable goal here, but even the most noble of intentions is not a license to exceed statutory authority. That is just what the Department has done with respect to its new definition of investment advice that creates fiduciary status for people who plainly are not fiduciaries as understood under ERISA or as a matter of common sense.

Indeed, in its rulemaking, the Department candidly admits that fact. The Department concedes that its new Rule creates fiduciary obligations using a “broad test [that] could sweep in some relationships that are not appropriately regarded as fiduciary in nature and that the

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Department does not believe Congress intended to cover as fiduciary relationships.” 81 Fed.

Reg. at 20,948 (emphasis added). Se e also 80 Fed. Reg. at 21,929.9 The Department attempts to fix its admittedly improper definitions through a web of exceptions and exemptions. But the definition of “fiduciary” that serves as a foundation for the Rule is ultra vire s, and the D.C.

Circuit has made clear that it is not proper for an agency to “fix” an improper base definition with exemptions and exceptions. H e arth, Patio, 706 F.3d at 501-08.

a. The Department’s New Definition Of “Investment Advice” Improperly Expands The Universe Of “Fiduciaries.”

At issue here is the Department’s new and expanded interpretation of the second prong contained in the statutory definition of “fiduciary” under ERISA, i.e., when a person “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan.” 29 U.S.C. § 1002(21)(A)(ii). In other words, the sweeping new fiduciary duties that the Department seeks to impose on persons never thought to be fiduciaries, such as insurance agents, all turn on the meaning of “investment advice.”

“Investment advice” is not expressly defined under ERISA. However, only one year after Congress enacted ERISA, the Department adopted its five-part test to delineate who would be held to a fiduciary standard for giving “investment advice” to an ERISA plan. Se e 29 C.F.R.

§ 2510.3-21 (quoted above). This five-part test was designed by the Department with obvious precision to reflect and implement congressional intent under the newly passed ERISA, creating a standard of fiduciary status that comported with the common-law concept of fiduciary, from which ERISA is derived.

9 This statement, made by the Department both in the 2015 NOPR and the preamble to the Final Rule, is directed at activities and relationships other than fixed annuities and insurance agents, but it reveals the fundamental flaw in the Rule’s expanded definition of “fiduciary,” which is an overreach by the Department that cannot be corrected by a series of convoluted exceptions and exemptions.

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Under the five-part test, a person is deemed to render “investment advice to a plan” only if that person (1) renders advice as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property (2) on a regular basis (3) pursuant to a mutual agreement, arrangement, or understanding with the plan or a plan fiduciary that (4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that (5) the advice will be individualized based on the particular needs of the plan. 29 C.F.R. § 2510.3-21. These five elements distinguish a true fiduciary (e.g., a bona fide investment adviser) from one who is simply selling a product (e .g., an insurance agent).

This test has functioned for over 40 years to define when “investment advice to a plan” triggers fiduciary obligations under ERISA, faithfully serving congressional intent to impose fiduciary status only on those who truly serve in a fiduciary capacity with respect to an ERISA plan. Now, without any intervening change in the statute, the Department seeks to abandon the five-part test and adopt a definition of investment advice imposing a fiduciary standard the

Department admits is not faithful to congressional intent. Ignoring ERISA and Congress, not to mention trust law and common sense, the new Rule makes even a one-time product recommendation of a fixed annuity contract to an IRA-owner that has no connection whatsoever to an ERISA plan into a “fiduciary” act. 81 Fed. Reg. at 20,997. Under the new test, the average insurance agent is now an ERISA fiduciary if the agent recommends a single fixed annuity contract to an IRA owner. That makes no sense.

b. Under Chevron Step One, Congress Intended ERISA Fiduciary Duties To Apply Only To Those Who Participate In Ongoing Management Of A Plan Or Its Assets.

ERISA imposes fiduciary duties on investment advisers who participate in the ongoing management of an ERISA plan. While “rendering investment advice” occupies its own prong in

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the statutory definition of fiduciary, in context it is clear that refers to individuals vested with responsibilities to manage and control the plan.10 Setting aside for the moment that the

Department lacks authority to impose ERISA fiduciary duties on parties to IRA transactions (as explained below), it is plainly unreasonable to extend ERISA fiduciary obligations to those who merely sell commission-generating products.

In assessing the intent of Congress under Ch e vron Step One, the Court must “first examine the statute de novo, employing traditional tools of statutory construction.” H e arth,

Patio & Barbe cue Ass’n, 706 F.3d at 503 (quoting NationalAss’nofClean Air Age ncie s v.EPA,

489 F.3d 1221, 1228 (D.C. Cir. 2007)). The court is “free to consider ‘the text, structure, purpose, and history of an agency’s authorizing statute to determine whether a statutory provision admits of congressional intent on the precise question at issue.’” Id. (quoting Petit, 675

F.3d at 781).

To begin, in defining the fiduciary duties imposed by ERISA, Congress built on common-law fiduciary standards that had long governed retirement plans under the law of trusts.

Varity Corp. v.H ow e , 516 U.S. 489, 496 (1996) (citing Ce ntralStates, Se . & Sw . Are as Pension

Fund v.Ce ntralTransp., Inc. , 472 U.S. 559, 570 (1985)). “[R]ather than explicitly enumerating allof the powers and duties of trustees and other fiduciaries, Congress invoked the common law of trusts to define the general scope of their authority and responsibility.” Ce ntralStates, 472

U.S. at 570; se e also Fire stone Tire & Rubbe r Co. v.Bruch , 489 U.S. 101, 110 (1989) (“ERISA

10 The Department website, recognizing this concept under current law, states: “A plan’s fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee (if it has such a committee), and those who select committee officials. . . . The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan.” Dep’t of Labor, M e e ting Your Fiduciary Re sponsibilitie s, https://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html (last accessed June 1, 2016) (emphasis added).

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abounds with the language and terminology of trust law. ERISA’s legislative history confirms that the Act’s fiduciary responsibility provisions codif[y] and mak[e] applicable to [ERISA] fiduciaries certain principles developed in the evolution of the law of trusts.”) (alterations in original) (citations and internal quotations marks omitted).11

Under the common law of trusts, the concept of fiduciary has a plain meaning. For example, a dictionary definition of term the term “fiduciary” is:

1. Someone who is required to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith, trust, confidence and disclosure .

2. Someone who must exercise a high standard of care in managing another’s money or property .

Black’s Law Dictionary (emphasis added). Another law dictionary puts it more simply as “a person in whom another reposes special confidence and reliance.” The Wolters Kluwer Bouvier

Law Dictionary. Another on-line dictionary notes “[t]he term is derived from the Roman law, and means (as a noun) a person holding the character of a trustee, or a character analogous to that of a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires.” The Law Dictionary, featuring Black’s Law Dictionary Free

Online Legal Dictionary 2d Ed.

In light of the plain meaning of “fiduciary,” the common law does not impose fiduciary duties on insurers or agents merely for selling insurance products. Slovak v.Adam s, 753 N.E.2d

910, 916 (Ohio Ct. App. 2001) (“Ordinarily, the relationship between an insured and the agent

11 The D.C. Circuit interprets ERISA fiduciary duties in light of the common-law absent evidence that Congress “displaced” the common law principle, Clarkv.Fe de r Se m o & Bard, P.C., 739 F.3d 28, 31 (D.C. Cir. 2014) (“ERISA adopted much of what the common law had, over time, come to require of fiduciaries.”).

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that sells the insurance is, without proof of more, an ordinary business relationship, not a fiduciary one.”); Langston v. Bige low , 820 So. 2d 752, 756-57 (Miss. Ct. App. 2002)

(“Langston’s purchase of insurance was an arms’ length transaction, not giving rise to any special relationship. We find no error in the trial court’s granting summary judgment on the issue of breach of fiduciary duty.”)

Given its common-law roots, under ERISA “plan management and administration are the hallmarks of fiduciary status.” H artline v.Sh e e tM e talW ork e rs’Nat’lPension Fund, 134 F.

Supp.2d 1, 10 (D.D.C. 2000), aff’d, 286 F.3d 598 (D.C. Cir. 2002). Accordingly, persons engaged with ERISA plans in ongoing transactional relationships that exhibit the hallmark indicia of fiduciary status – e .g., plan management and administration – have been held to fiduciary standards. E.g., H artline v.Sh e e tM e talW ork e rs’Nat’lPension Fund, 286 F.3d 598,

599 (D.C. Cir. 2002) (labor union and ERISA plan trustees not fiduciaries when designing or amending an ERISA plan); Ch ao v. Day, 436 F.3d 234, 235-38 (D.C. Cir. 2006) (broker who

“accepted hundreds of thousands of dollars from twenty-nine ERISA-covered employee benefit plans for the purpose of purchasing insurance for the plans” but “kept the money and provided the plans with fake insurance policies” held to “exercis[e] sufficient ‘authority or control’ over the ‘disposition’ of the plans’ assets to qualify as a ‘fiduciary’” under ERISA).

When Congress enacted ERISA, the concept of “render[ing] investment advice for a fee or other compensation” was hardly novel. Rather, it was a concept well developed based on parallel language used in the Investment Advisers Act of 1940 (“Adviser’s Act”). Similar to

ERISA, the Adviser’s Act defined an investment adviser in essence as “any person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities . . . .” The Adviser’s Act

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recognized the dichotomy between persons engaged in rendering investment advice for compensation and those persons engaged merely in selling products, the latter being brokers paid on a transactional basis who were exempted to the extent any advice rendered was “solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.”12 15 U.S.C. § 80b-2(a)(11).

The history of the Adviser’s Act, distinguishing investment advisers compensated for rendering advisory services, and salespersons compensated only for their sales, was obviously known to Congress in 1974 when it incorporated those very concepts into ERISA. Thus, the language “renders investment advice for a fee or other compensation” was not adopted in a vacuum, but rather adopted purposely in order to isolate for regulatory purposes those advisers who perform the kinds of advisory services with which come higher expectations and levels of care that are fiduciary in nature.13

The five-part test defining “investment advice” properly captured the commonly understood concept of a fiduciary under the common law, the Adviser’s Act, and ERISA, distinguishing between a true fiduciary involved in plan management (e .g., a bona fide

12 This dichotomy between investment advisers, who are fiduciaries and specifically paid for their advisory services, and brokers, who are not fiduciaries and receive no compensation beyond commissions for their sales, is discussed in detail in FinancialPlanning Association v.SEC, 482 F.3d 481 (D.C. Cir. 2007). In that case, the court struck down a proposed rule that would have obscured that distinction. The court noted this dichotomy predated the Adviser’s Act, observing that “broker dealers and others who offered investment advice received two general forms of compensation,” with some charging “only traditional commissions (earning a certain amount for each securities transaction completed),” while others “charged a separate advice fee (often a certain percentage of the customer’s assets under advisement or supervision).” Id. at 485. From this, the Court observed further that the Adviser’s Act “Committee Reports recognized that the statutory exemption for broker- dealers reflected this distinction.” Id. 13 For more detail on the Adviser’s Act and its import relative to the meaning of “investment advice” as used in ERISA, see the insightful discussion of these issues in the comment letter submitted to the Department by Eugene Scalia of Gibson Dunn dated July 20, 2015.

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investment adviser) and one who is simply selling a product (e .g., an insurance agent). Indeed, the Department’s own press release, dated Monday, September 2, 1974, titled “Ne w Pension

Be ne fits Law Provide s M any Protections For W ork e rs Covere d By Private Industry Plans,” explained this point:

Funds set aside to provide benefits must be held in trust and used only to provide benefits and pay the necessary costs of running the plan. With very limited exceptions, the new law requires that both pension and welfare plans meet new strict standards governing plan administration by “fiduciaries.” A fiduciary is a person who holds or controls property for the benefit of another person. He is the man who handles the money. The law says plan fiduciaries must perform their duties solely in the interest of those covered by the plan . . . (emphasis added).

The Department’s position now that a fiduciary is somebody who merely sells insurance products, rather than “the person who holds or controls property” or “the man who handles the money,” is a complete distortion of the Department’s true understanding of congressional intent as explained in 1974.14

c. Congress Has Ratified and Thereby Adopted The Five-Part Test.

Congress has repeatedly ratified and thereby adopted the existing five-part test through legislative action. It is established law that in amending legislation, “Congress is presumed to have been aware of the prior interpretation of the same language by the Secretary and to have intended a continued consistent interpretation.” NationalSoftDrink Ass’nv. Block , 721 F.2d

14 In its 1000-plus pages of the final Rule and accompanying material, the Department does little if anything to analyze congressional intent. Instead of addressing this important inquiry, the Department deftly presupposes Congress intended the term “investment adviser” have the broadest meaning possible. 81 Fed. Reg. at 20,955. (“The narrowness of the 1975 regulation allows advisers, brokers, consultants, and valuation firms to play a central role in shaping plan and IRA investments, without ensuring the accountability that Congress intended for persons having such influence and responsibility.”) It builds on a fiction saying it was the Department that narrowed the term “investment advice” with its 1975 five-part test, which is sheer revisionism when the agency at the time clearly tried faithfully to develop a test true to congressional intent, defining investment advice in such a way that would be reasonable and fit statutory purposes.

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1348, 1353 (D.C. Cir. 1983) (reviewing regulations in place when Congress amended the statute and holding that Secretary of Agriculture exceeded APA rulemaking authority by promulgating new regulations inconsistent with congressional intent); se e also FDA v. Brow n & W illiam son

Tobacco Corp., 529 U.S. 120, 130-39 (2000) (finding that an FDA regulation resulting in a product ban would be contrary to congressional intent where Congress had generally regulated the subject matter through legislation on six occasions).

Since 1975, when the Department adopted its five-part test, Congress has reenacted the

Code and amended relevant provisions of ERISA, as well as making many other amendments within neighboring provisions of ERISA. Each time Congress ratified the five part test.

First, the Tax Reform Act of 1986 (“1986 Act”) reenacted the entire Code, with amendments to certain sections, including section 4975.15 Se e , e .g., Texas Apartme nt Ass’nv.

United States, 869 F.2d 884, 886 n.1 (5th Cir. 1989) (“Congress reenacted the relevant provisions of the Internal Revenue Code of 1954 (26 U.S.C.) in the Internal Revenue Code of

1986 under the same section numbers.”). Tellingly, however, Congress did not change or amend the definition of fiduciary subject to the existing five-part test. Se e Pub. L. 99-514, 100 Stat.

2882, § 1854(f)(3)(A) (1986) (amending 26 U.S.C. § 4975(e)(7)).

Second, the Pension Protection Act of 2006 (“2006 Act”) addressed the excise tax on prohibited transactions imposed by Section 4975. Congress did not change the definitions of

“investment advice to a plan” or “fiduciary.”16 Moreover, the 2006 Act added a new definition

15 For example, the 1986 Act amended the general definition of “employee stock ownership plan” relating to employee tax exemptions under ERISA’s prohibited transactions regime. Se e 26 U.S.C. § 4975(e)(7). 16 Indeed, the 2006 Act narrowed the scope of fiduciary status under Section 4975 by adding that the provision of investment advice under ERISA section 3(21)(A)(ii) (and the parallel Code section 4975(e)(3)(B)) is not a prohibited transaction under ERISA when certain requirements are met. Pub. L. 109-280, § 601, 120 Stat. 952-67 (2006).

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to ERISA for “fiduciary adviser” that referred expressly to “a person who is a fiduciary of the plan by reason of the provision of investment advice referred to in section 1002(21)(A)(ii).” 29

U.S.C. § 1108(g)(11)(A). The same language was added to the Code, with direct reference to the

Code’s definition of fiduciary in connection with “investment advice to a plan” in Section

4975(e)(3)(B). Se e 26 U.S.C. §§ 4975(f)(8)(J)(i) & 4975(d)(17). Again, Congress ratified the five-part test.

As with the 1986 Act, the overall definition of fiduciary under ERISA and the Code remained unchanged under the 2006 Act. These actions show that Congress was fully aware of definitions under ERISA and the Code relating to fiduciary status, and by reenacting those laws without any change to the investment adviser clause within the definition of “fiduciary,”

Congress ratified the existing five-part test in 1986 and again in 2006.17

In addition, Congress is presumed to be aware of judicial interpretations of a statute when reenacting the law, and such interpretations are incorporated as well. In re North , 50 F.3d 42, 45

(D.C. Cir. 1995) (“It is settled law that when a statute has an authoritative interpretation, and

Congress reenacts it without change, ‘Congress is presumed to be aware of [the] interpretation . . . and to adopt that interpretation . . . .’”) (quoting Lorillardv. Pons, 434 U.S.

575, 580 (1978)); Fore st Grove Sch . Dist. v. T.A., 557 U.S. 230, 239-40 (2009) (holding that

Congress adopted judicial interpretations of a statute absent “evidence that Congress intended to supersede” those decisions); Dartv.United States, 848 F.2d 217, 229 (D.C. Cir. 1988) (“We are

17 The Department contends in the Rule’s preamble that congressional ratification of the five- part test cannot be inferred from subsequent legislative acts based on Public Citize n v. De partme nt of H e alth and H um an Se rvice s, 332 F. 3d 654 (2003). The Department badly misreads that case, because there the D.C. Circuit found it unlikely Congress was aware of a “model letter and instructions buried deep within the PRO manual.” Id. at 669. Here, in contrast, Congress was obviously well aware of a published regulation that has been on the books for decades.

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entitled to assume that in amending [a statute], Congress legislated with care[,]” incorporating relevant judicial decisions) (quoting Palmore v.United States, 411 U.S. 389, 395 (1973)).

Courts interpreting ERISA have concluded, time and again, that merely recommending and selling an annuity or other insurance product to an ERISA plan does not trigger fiduciary duties under ERISA. E.g., Cotton v.M assach use tts M ut.Life Ins. Co., 402 F.3d 1267, 1278-79

(11th Cir. 2005) (“Mass Mutual has never exercised discretionary authority or control over plan management or the administration of plan assets because the decisions to purchase, amend, and borrow against the policies were made by the plaintiffs themselves. Cases holding that insurers like Mass Mutual are not ERISA fiduciaries are numerous.”); Fink v. Union Ce ntralLife Ins.

Co., 94 F.3d 489, 493 (8th Cir. 1996) (“Insurance agents can become fiduciaries by participating in the administration of a benefit plan, managing the plan’s assets, or providing investment advice for compensation about the plan’s money or property[,]” but not merely by

“recommend[ing]” that an ERISA plan purchase a policy); Flacch e v. Sun Life Assur. Co., 958

F.2d 730, 734 (6th Cir. 1992) (“[S]elling . . . an annuity contract does not constitute investment advice” sufficient to trigger fiduciary obligations under ERISA); Consolidated Be e fIndus., Inc. v.Ne w York Life Ins. Co., 949 F.2d 960, 965 (8th Cir. 1991) (“Billings was merely a salesperson earning commissions and not a fiduciary under ERISA.”); Am e rican Fed’nofUnions Local102

H e alth & W e lfare Fund v. Equitable Life Assur. Soc’y, 841 F.2d 658, 664 (5th Cir. 1988)

(“Simply urging the purchase of its products does not make an insurance company an ERISA fiduciary with respect to those products.”); Peoria Union Stock Yards Co. Re t. Planv. Penn

M ut. Life Ins. Co., 698 F.2d 320, 327 (7th Cir. 1983) (“Congress did not want to make an insurance company that sells a standard annuity contract . . . a fiduciary toward the purchaser of the contract. But that is not what Penn Mutual sold here. The pension trustees . . . turned over

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the assets of the pension plan to Penn Mutual to manage with full investment discretion, subject only to a modest income guaranty.”)

Here, the Rule seeks to define “investment advice” in a way contrary to established law under ERISA, ratified by Congress, and in a way that makes no sense. It creates fiduciary status for people that were not intended by Congress to have fiduciary status, departing from forty years of agency and judicial interpretation of the statute. It does not comport with the plain meaning of the term fiduciary, whether in a dictionary or under the common law. For all of these reasons, the Rule’s new definition of “investment advice” fails Ch e vron Step One.

2. Under Chevron Step Two The Department’s Expansion of ERISA Fiduciary Obligations Is Arbitrary, Capricious, and Unreasonable.

Even if the Rule could survive the Ch e vron Step One analysis – which it plainly does not

– it also fails Ch e vron Step Two. “When an agency adopts a materially changed interpretation of a statute, it must in addition provide a ‘reasoned analysis’ supporting its decision to revise its interpretation.” Alabam a Educ. Ass’nv. Ch ao, 455 F.3d 386, 392 (D.C. Cir. 2006) (quoting

M otor Veh icleM frs. Ass’n, 463 U.S. at 57). Assuming for purposes of argument only that the new Rule creates a possible definition of “investment advice” that applies fiduciary status to insurance agents, this does not mean that the changed definition is reasonable under Ch e vron

Step Two. “Rather, the question raised by the change is whether the Department has supported its new reading of [a statute] with a ‘reasoned analysis’ sufficient to command our deference under Ch e vron.” Ch ao, 455 F.3d at 396.

Largely, the Department indicates it is abandoning the five-part test because it sees a need to regulate IRAs, not because of any deficiencies in the five-part test but because the world has changed. 81 Fed. Reg. at 20,946 (“Today, as a result of the five-part test, many investment professionals, consultants, and advisers have no obligation to adhere to ERISA’s fiduciary

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standards or to the prohibited transaction rules, despite the critical role they play in guiding plan and IRA investments.”). And because the five-part test frustrates its desire to regulate IRAs, the

Department must get rid of the five-part test and adopt a definition of “investment advice” that does not comport with congressional intent. A perceived need to regulate, however, has never been thought a substitute for reasoned decision-making.18

To elaborate, the Department’s rationale for rulemaking here is of the same kind the D.C.

Circuit rejected in Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006). In Goldstein, the SEC attempted to regulate hedge fund advisers under the Investment Advisers Act of 1940 by issuing a rule that included “shareholders, limited partners, members, or beneficiaries” of a fund within the definition of “clients,” thereby pushing hedge funds within the ambit of the Advisers Act, which applied only to advisers with 15 or more “clients.” Id. at 876-77. In doing so, the SEC departed from its long-standing view that the hedge fund itself was the client, not the investors in the hedge fund. Id. The reason for the SEC’s departure was its belief that the world had changed: hedge funds had become more significant and now needed more regulation, even though Congress had not given the SEC additional authority to do so. Id. So instead, the SEC simply adopted a new method for “counting clients.” Id. Against this backdrop and after considering statutory context, the D.C. Circuit struck down the regulation:

18 The Department’s reliance on marketplace changes occurring during the 40-year plus period since adoption of the 1975 regulation is belied by the Department’s stated position as recently as 2005 that financial planners who were not otherwise acting as fiduciaries were not rendering investment advice when they advise a participant to take an employer plan distribution, even if that advice is coupled with a recommendation on how the distribution should be invested. Se e U.S. Department of Labor, Advisory Opinion 2005-23A (Dec. 7, 2005), available at https://www.dol.gov/ebsa/regs/aos/ao2005-23a.html. If the test under the new Rule is a functional approach, the Department fails to explain how the functions performed by insurance agents have changed since 2005 such that their activities now should be classified as fiduciary in nature.

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[E]ven if the Advisers Act does not foreclose the Commission’s interpretation, the interpretation falls outside the bounds of reasonableness. “An agency construction of a statute cannot survive judicial review if a contested regulation reflects an action that exceeds the agency’s authority. It does not matter whether the unlawful action arises because the disputed regulation defies the plain language of a statute or because the agency’s construction is utterly unreasonable and thus impermissible.”

“The ‘reasonableness’ of an agency’s construction depends,” in part, “on the construction’s ‘fit’ with the statutory language, as well as its conformity to statutory purposes.” As described above, the Commission’s interpretation of the word “client” comes close to violating the plain language of the statute. At best, it is counterintuitive to characterize the investors in a hedge fund as the “clients” of the adviser.

Id. at 880-81 (citations omitted) (emphasis added).

Here, the Department has adopted a new meaning of fiduciary that makes large swaths of people fiduciaries – people who always have been deemed non-fiduciaries – because it purportedly wants to give retirement investors more protection. Since 1975, however, consistent with the common law and ERISA, the Department’s five-part test applied fiduciary duties only to advisers who earned a fee for providing, tailored, ongoing investment advice integral to the management of ERISA plans. 29 C.F.R. Part 2510.3-21(c)(2). Yet now, without any action by

Congress, the Department has expanded the definition of “investment advice” to extend

“fiduciary” duties to all who sell fixed annuity products in the retail IRA marketplace. Goldstein teaches that an agency’s perceived need to regulate does not mean that it can distort statutory meaning simply to achieve regulatory ends. As in Goldstein, the new definition of “investment advice” here defines fiduciary in a way that is “outside the bounds of reasonableness” under

Ch e vron Step Two.

In fact, the Department here is even more audacious than the SEC was in Goldstein.

Remarkably, as mentioned above, the Department admits it has deliberately created fiduciary status for “relationships that are not appropriately regarded as fiduciary in nature and that the

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Department does not believe Congress intended to cover as fiduciary relationships.” 81 Fed.

Reg. 20,948. The Department then tries to pull back from its improper expansion of fiduciary duties through a series of exceptions and exemptions, including two exemptions to the prohibited transaction rules that apply to fixed rate annuities (PTE 84-24) and fixed indexed annuities

(BICE). But that approach to regulation has been flatly rejected in this Circuit.

In H e arth, Patio & Barbe cue Association v. U.S. De partme nt ofEne rgy, 706 F.3d 499

(D.C. Cir. 2013), the DOE included decorative fireplaces in a definition of “direct heating equipment” (“DHE”) subject to energy efficiency standards. 706 F.3d at 501-03. Decorative fireplaces do not, however, provide heat. To the contrary, they “are designed to stay cool and look pretty–not efficiently convert energy to heat.” Id. at 502. Consequently, it would have been difficult, if not impossible, for manufacturers of such products to comply with the energy- efficiency standards for DHE. Id. To address this issue, the DOE created a safe harbor exempting decorative fireplaces from the DHE energy conservation standards. Id. In other words, DOE initially over-defined what constituted a DHE and then exempted decorative fireplaces.

On review, the D.C. Circuit examined “the statute as a whole” and concluded that

Congress never intended to include decorative fireplaces within the definition of “direct heating equipment.” Id. at 503-06. Thus, the court struck down the regulation, despite the exemption:

More fundamentally, perhaps, we take issue with the dissent’s suggestion that the specter of “regulation” somehow disappears because DOE can, without formally bringing decorative products into the regulatory fold, indirectly define that class of products by gerrymandering its definition of DHE. The means may change, but the ultra vires end remains the same. Agencies don’t get a free pass simply because they’ve kept their definitional house in order.

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Id. at 508 (emphasis added). In short, decorative fireplaces should not have been subject to regulation as DHEs in the first place, even if they fell within an exemption.19

The Department adopts the same approach that was held impermissible in H e arth, Patio.

Congress did not authorize the Department to extend ERISA fiduciary obligations to those who merely sell insurance products like fixed annuities, and the Department cannot fix this problem through exemptions, let alone through exemptions that themselves create fiduciary duties and other onerous compliance obligations. Consequently, the Department’s action is arbitrary, capricious and unreasonable under Ch e vron Step Two.

C. The Department Has No Authority To Impose Fiduciary Duties On Parties To Transactions Involving IRAs As Provided In The Rule.

Even if the Department had not expanded the scope of ERISA fiduciary obligations beyond the bounds of reasonableness, it has no authority to impose ERISA fiduciary obligations on parties to transactions involving IRAs. “It is axiomatic that an administrative agency’s power to promulgate legislative regulations is limited to the authority delegated by Congress.” Bow e n v. Ge orge town Univ. H osp., 488 U.S. 204, 208 (1988). Here, the Department has vastly exceeded its statutory authority to regulate IRAs, by seeking to apply fiduciary standards created for ERISA plans to IRA related transactions, for which such standards were explicitly not created.

1. ERISA Does Not Authorize The Department To Impose Fiduciary Duties On Parties To Transactions Involving IRAs.

As explained above, ERISA applies only to “any employee benefit plan” that is

“established or maintained” (1) “by an employer,” (2) “by an employee organization,” or (3) “by

19 The court reached this conclusion under Ch e vron Step One but noted that “[f]or these very same reasons, we would also reject DOE’s interpretation at Ch e vron Step Two.” 706 F.3d at 507; se e also Am e rican Library Ass’nv.F.C.C., 406 F.3d at 699 (“Our judgment is the same whether we analyze the FCC’s action under the first or second step of Ch e vron.”).

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both.” 29 U.S.C. § 1003(a). As this language makes evident, IRAs do not fall within the scope of ERISA, and the Department has no authority under ERISA to impose fiduciary duties on parties involved in IRA transactions. Indeed, Congress created IRAs when it enacted ERISA (by enacting 26 U.S.C. § 408), yet it did not extend ERISA fiduciary duties to transactions involving

IRAs, nor establish such duties within corresponding provisions of the Code. Se e Pub. L. 93-

406, Title II, § 2002(b). In other rulemaking, the Department has acknowledged that IRAs do not fall within ERISA’s scope, except under limited circumstances in which IRAs are maintained by the employer and funded by employer contributions. 29 C.F.R. § 2510.3(d) (“For purposes of title I of the Act and this chapter, the terms ‘employee pension benefit plan’ and ‘pension plan’ shall not include an individual retirement account described in section 408(a) of the Code,” except when IRAs are maintained and funded by the employer).

Thus, with very limited exceptions not relevant here, IRAs are not covered by ERISA.

Ch arles Sch w ab & Co. v. De bick e ro, 593 F.3d 916, 919-22 (9th Cir. 2010) (“IRAs are specifically excluded from ERISA’s coverage,” and “ERISA’s applicability terminated once [] qualified pension funds were rolled over into an independently managed IRA”); Boggs v.Boggs,

89 F.3d 1169, 1173 n.11 (5th Cir. 1996) (“An IRA, of course, is not an ERISA-covered pension plan.”). Indeed, this Court has found that “funds rolled over from an employee benefit plan into an IRA are not covered by ERISA.” Johns v.Roze t, 826 F. Supp. 565, 567 (D.D.C. 1993).20

20 Se e also Board ofTrs. ofCe dar Rapids Pediatric Clinic, P.A., Pension Planv. Contine ntal Assur. Co., 690 F. Supp. 792, 796 (W.D. Ark. 1988) (“It is clear that since ERISA covers only those employee benefit plans established or maintained by employers, employee organizations, or both, se e 29 U.S.C. § 1003(a), and since IRAs are established and maintained by individuals, plaintiff Jackson IRA is not covered by ERISA.”); Burns v. De laware Ch arter Guarantee & Tr. Co., 805 F. Supp. 2d 12, 20-21 (S.D.N.Y. 2011) (same); M ande lbaum v.Fise rv,Inc., 787 F. Supp. 2d 1226, 1238 (D. Colo. 2011) (same); LaCh ape lle v.Fech tor,De twiler & Co., 901 F. Supp. 22, 24 (D. Me. 1995) (same); In re Buzza, 287 B.R. 417, 420-22 (Bankr. S.D. Ohio 2002) (same); In re Galvin, 121 B.R. 79, 81 (Bankr. D. Kan. 1990) (same). 42 Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 57 of 102

In the commentary accompanying the Rule, the Department concedes that “ERISA’s statutory fiduciary obligations of prudence and loyalty do not govern the fiduciaries of IRAs and other plans not covered by ERISA.” 81 Fed. Reg. at 20,953. Also, “unlike participants in plans covered by Title I of ERISA, IRA owners do not have a statutory right to bring suit against fiduciaries under ERISA for violation of prohibited transaction rules.” Id. at 20,953-20,954.

Similarly, in the preamble to the BICE, the Department acknowledges that IRAs are “not subject to the fiduciary responsibility and prohibited transaction rules in ERISA.” Id. at 21,003 n.1. In short, it is beyond dispute that ERISA does not permit the Department to impose ERISA fiduciary obligations on any fiduciaries involved in IRA transactions.

2. The Code Does Not Authorize The Department To Impose Fiduciary Standards On Parties To Transactions Involving IRAs.

Because the Department seemingly understands that ERISA does not cover IRAs, the

Department purports to rely on its limited authority under the Reorganization Plan to issue regulations related to Section 4975 of the Code. Se e 81 Fed. Reg. 20,991 & 20,189 (citing 5

U.S.C. App. 1, 92 Stat. 3790). As explained above, unlike ERISA, Section 4975 does include

IRAs within the definition of a “plan.” 26 U.S.C. § 4975(e)(1)(C). Section 4975 provides for an excise tax to be paid as a penalty for engaging in certain “prohibited transactions” as set for in 26

U.S.C. § 4975(a)-(b), defined as follows:

For purposes of this section, the term “prohibited transaction” means any direct or indirect –

(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;

(B) lending of money or other extension of credit between a plan and a disqualified person;

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(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or

26 U.S.C. § 4975(c)(1) (emphasis added).21

The term “disqualified person,” in turn, includes among others any person who is a

“fiduciary.” Id. § 4975(e)(2)(A). The term “fiduciary” is defined in the Code as follows:

For purposes of this section, the term “fiduciary” means any person who –

(A) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,

(B) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or

Such term includes any person designated under section 405(c)(1)(B) of the Employee Retirement Income Security Act of 1974.

Id. § 4975(e)(2)(3). Thus, the term “fiduciary” is defined in the same general way as it is in

ERISA. Nevertheless, the Code does not impose upon IRA fiduciaries the same duties of prudent conduct, asset diversification, and plan document compliance facing ERISA plan fiduciaries. Com pare 26 U.S.C. § 4975 w ith 29 U.S.C. § 1104(a).

21 In addition, Section 4975 contains certain enumerated exemptions from these prohibited transaction rules, 26 U.S.C. § 4975(d), and it permits the Department of Treasury to issue PTEs, Id. § 4975(c)(2). Under the Reorganization Plan, however, the Department is authorized to issue such exemptions. 5 U.S.C. App. 1, 92 Stat. 3790.

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To the contrary, the term “fiduciary” is defined under the Code for the sole purpose of determining whether or not a party is a “disqualified person” subject to an excise tax. 26 U.S.C.

§§ 4975(c)(1) and (e)(2). The Department’s limited authority does not extend beyond the ability to issue regulations clarifying the circumstances under which an excise tax may be imposed on such disqualified persons under Section 4975. It certainly does not give either the Department or

Treasury plenary authority to impose ERISA fiduciary obligations on parties to sales transactions involving IRAs, as the Department claims in enacting the Rule. The Department is ignoring the clear mandates of both ERISA and the Code – the law simply does not extend ERISA fiduciary obligations to parties involved in IRA transactions.22

3. The Department Has No Other Authority To Impose Fiduciary Standards On Parties To Transactions Involving IRAs.

In its rulemaking, the Department relies exclusively on its authority under Section 4975 and the Reorganization Plan to impose ERISA fiduciary duties on parties to IRA transactions:

Some commenters argued that the Department does not have the power to regulate IRAs, and the broker-dealers who offer them. The Department disagrees. The Reorganization Plan No. 4 of 1978 specifically gives the Department the authority to define ‘‘fiduciary’’ under both ERISA and the Code. 48 Section 102(a) of the Reorganization Plan gives the Department ‘‘all authority’’ for ‘‘regulations, rulings, opinions, and exemptions under section 4975 [of the Code]’’ subject to certain exemptions not relevant here. This includes the definition of ‘‘fiduciary’’ at Code section 4975(e)(3) which parallels ERISA section 3(21). In President Carter’s message to Congress regarding the Reorganization Plan, he made explicitly clear that as a result of the plan, ‘‘Labor will have statutory authority for fiduciary obligations. . . . Labor will be responsible for overseeing fiduciary conduct under these provisions.’’

22 One paradox created by the Department’s backdoor application of fiduciary duties to IRA transactions, which is effectuated only through BICE, is that any Adviser who avoids the BICE because the Adviser’s compensation is not considered conflicted (e.g., the Adviser is paid based on assets under management rather than commissions), would not be subject to ERISA’s fiduciary standards of care. That is, with respect to those Advisers involved in IRA transactions, Advisers avoiding the BICE are subject to no prudence standards at all. This is an absurd and irrational result, with some IRA fiduciaries being subject to ERISA fiduciary duties and others not.

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81 Fed. Reg. at 20,991. The Department’s reliance on such authority is misplaced.23

As just discussed, the excise-tax provision in Section 4975 of the Code does not give any agency authority – whether the Department or Treasury – to impose ERISA fiduciary obligations on parties involved in IRA transactions. Indeed, those who qualify as fiduciaries under Section

4975 have never been subject to the types of duties imposed by Congress on ERISA plan fiduciaries under 29 U.S.C. § 1104.

Consequently, while the Reorganization Plan gives “all authority” of the Treasury

Department over IRAs to the Department, it could not -- and did not -- confer to the Department authority over IRAs that Treasury does not have. Here, Treasury does not have authority under the Code to impose ERISA fiduciary duties on IRA transactions. The Reorganization Plan simply reallocates the administration of existing authority, it does not purport to create new authority to regulate IRAs. Because neither the Department under ERISA, nor Treasury under the Code, have authority to impose ERISA fiduciary duties on parties to IRA transactions, the

Rule is ultravire s as it applies to IRAs.24

23 Because the Department cites the Message of the President as authority, it is worth pointing out that President Carter’s 1978 message said nothing about IRAs and was focused completely on the need for coordination between the Treasury Department and Labor Department in order to streamline regulation of ERISA plans that “have been justifiably criticized by employers and unions alike.” Message of the President, 5 U.S.C. App. 1, 92 Stat. 3790. It is clear from context that this message was intended to clarify that the Labor Department was to have authority over fiduciary obligations relating to ERISA plans – not to give the Department carte blanch e to do whatever it likes with respect to IRAs as the Department now contends. 24 Should there be any remaining doubt that the Department lacks authority to regulate IRAs, ERISA preemption provisions frown upon interference by federal agencies with state insurance regulation. Collectively, the Rule and its Exemptions, purport to override state insurance law suitability standards and replace them with new fiduciary standards. That defies the preemption provisions of ERISA, which were crafted to preserve state regulatory authority in this area. States have historically regulated insurance agents—including FIA salespersons—and such persons have never been deemed investment advisers. ERISA respects such state authority through its preemption provisions, which broadly preempt state 46 Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 61 of 102

D. The BICE Creates An Impermissible Private Right Of Action Which Renders It Fatally Defective And Without It The Entire Rule Must Be Invalidated.

As discussed in Section II B, supra and as the Department has conceded, the base definition of fiduciary is unduly broad, and thus the Department found it necessary to promulgate numerous exceptions and exemptions to mollify the effects of its improper base definition. The

Department explains it adopted these various exceptions and exemptions in order to “preserve beneficial business models for delivery of investment advice. . . .” 81 Fed. Reg. at 20,946. In particular, the Rule relies heavily on the BICE as the exemption that makes the Rule function in a way that does not disrupt the markets to the detriment of people the Rule is designed to protect, i.e ., “Retirement Investors,” including ERISA plan participants and IRA owners. Without the exceptions and exemptions, the Rule would be a non-starter and wholly unworkable.

The BICE requires the Financial Institution to enter into a BIC with the IRA owner.

Among other things, the BIC requires the Financial Institution to acknowledge it is a fiduciary to the IRA owner and creates a private cause of action for that IRA owner against the Financial

Institution under state law for a breach of the duties delineated in the BIC. 29 C.F.R. § 2550; 81

Fed. Reg. 21,076-21,078.25 Indeed, the private cause of action is promoted by the Department as an essential element of the Rule:

laws, but specifically protect state insurance laws. 29 U.S.C. § 1144(b)(2)(A) (“nothing in [Section 514] shall be construed to exempt or relieve any person from any law of any State which regulates insurance . . .”). 25 The extensive duties contained in the BIC, together with its nebulous requirements such as “reasonable compensation,” will make insurance companies an inevitable target for litigation. It is noteworthy that the Department in the BICE commentary seeks to allay fears of “excessive litigation” pointing to two constraints that will not safeguard the insurance industry, i.e., securities arbitration and restrictions on punitive damages, but neither is available to insurers and thus this attempt by the Department to mollify the securities industry only amplifies concerns of the FIA industry that litigation will be rampant based on this newly created private cause of action. Se e 81 Fed. Reg. at 21,022.

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In the Department’s view, these contractual rights serve a critical function for IRA owners and participants and beneficiaries of non-ERISA plans. Unlike participants and beneficiaries in plans covered by Title I of ERISA, IRA owners and participants and beneficiaries do not have an independent statutory right to bring suit against fiduciaries for violations of the prohibited transaction rules. Nor can the Secretary bring suit to enforce the prohibited transaction rules on their behalf.

81 Fed. Reg. at 21,020. The Department further states that the private cause of action under a

BIC will provide “both the individual adviser and the financial institution a powerful incentive to ensure advice is provided in accordance with fiduciary norms, or risk litigation, including class litigation, and liability and associated reputational risk.” 81 Fed. Reg. at 20,947. The

Department, however, does not have the legal authority from Congress to create this private cause of action, which is integral to the BICE and the Rule itself.

Specifically, the BICE applies to IRA transactions, and the BIC must include provisions allowing the Retirement Investor to enforce the fiduciary obligations contained in the BIC against the Financial Institution through private litigation. The Supreme Court, however, has held that a private cause of action must be created by Congress, not an agency. Alexande r v.

Sandoval, 532 U.S. 275, 286 (2001). Here, Congress has never created a private cause of action for IRA owners for prohibited transaction violations.

In Sandoval, the Supreme Court held that a private right to sue must come, if at all, from the statute itself: “Like substantive federal law itself, private rights of action to enforce federal law must be created by Congress. The judicial task is to interpret the statute Congress has passed to determine whether it displays an intent to create not just a private right but also a private remedy. Statutory intent on this latter part is determinative. Without it a cause of action does not exist and courts may not create one, no matter how desirable that might be as a policy matter

. . . .” 532 U.S. at 286-87 (citations omitted). The Court further held that “[l]anguage in a regulation may invoke a private right of action that Congress through statutory text created, but it 48 Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 63 of 102

may not create a right that Congress has not.” Id. at 291. The Court concluded that “it is most certainly incorrect to say that language in a regulation can conjure up a private cause of action that has not been authorized by Congress.” Id.

Nothing in ERISA or the Code manifests Congressional intent to create a private remedy for violation of the prohibited transaction rules. To the contrary, it is crystal clear that neither

ERISA nor the Code authorizes a private right of action against “errant IRA fiduciaries.” Burns v. De laware Ch arter Guarantee & Tr. Co., 805 F. Supp. 2d 12, 19-21 (S.D.N.Y. 2011).

Perhaps for that reason, the Department offers no authority to support such a proposition. The fact of the matter is that enforcement authority over prohibited transactions under Section 4975 continues to rest solely with the Internal Revenue Service. The Internal Revenue Service assesses an excise tax on disqualified individuals who engage in a transaction prohibited under

Section 4975, but nothing in that section provides for any civil enforcement, and nothing in the statute suggests a private cause of action or remedy.

In promulgating the BICE, the Department acknowledges the lack of an independent statutory right on the part of IRA owners to bring suit against fiduciaries for self-dealing and violation of the prohibited transaction rules, as well as its own statutory inability to bring suits on their behalf. 81 Fed. Reg. at 21,021. The Department apparently understands the import of

Sandovaland its progeny that Congress did not create a cause of action here. Se e 81 Fed. Reg. at

21,059-21,061. In an act of legerdemain, however, the Department simply denies it is creating a new private cause of action: “[T]he exemption does not create a cause of action for plan fiduciaries, participants or IRA owners to directly enforce the prohibited transaction provisions of ERISA and the Code in a federal or state-law contract action.” Id. at 21,060. That is sophistry. Nothing in Sandovalturns on the precise nature of the private cause of action created.

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Rather, the question is whether Congress authorized the cause of action. Here, the Department created a private litigation right that Congress did not authorize.

Trying to obfuscate its impermissible creation of a private cause of action, the

Department contends in the BICE commentary that “there is nothing new about a prohibited transaction exemption requiring written documentation as between the parties.” Id. Again, this is nothing more than a shell game. The Department has the right to set conditions for its exemptions, but it does not have the right to create private causes of action that Congress did not authorize.

The Department further suggests that the BICE does not create a private cause of action, because a Financial Institution that does not wish to be subject to a contractual claim under a

BIC can simply restructure its compensation to avoid triggering a prohibited transaction, rely on another statutory exemption, or apply for an individual exemption. 81 Fed. Reg. at 21,061. That is disingenuous. Because of the Department’s improperly wide definition of “fiduciary,” the

BICE is the exemption that permits FIAs to be sold. Having made the BICE integral to the overall operation of the Rule, and making it the essential exemption needed to sell FIAs, the

Department cannot simply disown the BICE when it comes to private cause of action analysis.

In sum, the private cause of action contained in the BICE is unlawful. Without the BICE, the Rule itself must be struck down, because the BICE is critical to the entire framework of the

Rule as a result of the overly broad definition of fiduciary in the first instance. “Whether an administrative agency’s order or regulation is severable, permitting a court to Affirm it in part and reverse it in part, depends on the issuing agency’s intent.” North Carolina v. FERC, 730

F.2d 790, 795-96 (D.C. Cir. 1984). “Severance and Affirmance of a portion of an administrative regulation is improper if there is ‘substantial doubt’ that the agency would have adopted the

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severed portion on its own.” Davis Cnty. Solid W aste M gm t.v.EPA, 108 F.3d 1454, 1459 (D.C.

Cir. 1997).

Here, it is inconceivable that the Department would have adopted the Rule without the

BICE. The Department acknowledges it is central to the entire operation of the Rule and

“serve[s] a critical function for IRA owners and participants and beneficiaries of non-ERISA plans.” 81 Fed. Reg. at 21,021. Consequently, without this feature the entire Rule must be vacated and returned to the Department for withdrawal or substantial revision. Allie d-Signal,

Inc. v. U.S. Nuclear Re gulatory Com m ’n, 988 F.2d 146, 150-51 (D.C. Cir. 1993) (“whether to vacate depends on the ‘seriousness of the order’s deficiencies’”) (citation omitted).

E. The BICE Is Fatally Flawed Based on Void For Vagueness Grounds.

The BICE mandates that compensation paid to fiduciaries be “reasonable” with no meaningful guidance on what is considered reasonable. In so doing, the BICE violates fundamental tenets of constitutionally required fair notice, rendering it void for vagueness.

In certain respects, the BICE is a unique regulation, not only imposing requirements upon regulated parties, which in this case are the Financial Institution and Advisor, but also forcing the

Financial Institution to enter into a binding contract enforceable through a private right of action.

Thus, the use of a term like “reasonable compensation,” which perhaps might be acceptable in a different context, is so vague and elusive as to be without meaning, and here serves as nothing more than a trap.

Among the terms and conditions required in the BIC is the following:

The recommended transaction will not cause the Financial Institution, Adviser, or their Affiliates or Related Entities to receive, directly or indirectly, compensation for their services that is in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2).

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81 Fed. Reg. at 21,077. Looking to Code section 4975(d)(2), there is a prohibited transaction exclusion for contracts with service providers with the proviso that “no more than reasonable compensation is paid therefor.” The regulation ostensibly providing interpretative guidance for this Code section, 26 C.F.R. § 54.4975-6 (e), in relevant part merely states “whether compensation is ‘reasonable’ under sections 4975(d)(2) and (10) depends on the particular facts and circumstances of each case.” There is nothing else.

In the preamble of the BICE, the Department acknowledges many interested parties sought greater specificity as to what constitutes reasonable compensation. 81 Fed. Reg. at

21,030. But the Department offered nothing, and simply fell back on platitudes such as “the essential question is whether the charges are reasonable in relation to what the investor receives.”

Then, making things worse, the Department states that “ultimately, the ‘reasonable compensation’ standard is a market based standard,” but in the very next breath the Department states that it “is unwilling to condone all ‘customary’ compensation arrangements and declines to adopt a standard that turns on whether the agreement is ‘customary.’” With all due respect, this is contradictory and nothing more than pablum.

In Village of H offman Estates v. Flipside , H offman Estates, Inc. , the Supreme Court delineated the standards for evaluating vagueness:

Vague laws offend several important values. First, because we assume that man is free to steer between lawful and unlawful conduct, we insist that laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited, so that he may act accordingly. Vague laws may trap the innocent by not providing fair warning. Second, if arbitrary and discriminatory enforcement is to be prevented, law must provide explicit standards for those who apply them.

455 U.S. 489, 498 (1982) (quoting Grayne d v. City of Rock ford, 408 U.S. 104, 108 (1972)).

“[T]he concept of deference to agency rules and their interpretation should not shield rules from charges of incapacitating ambiguity and vagueness.” Adm inistrative Law and

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Practice , 1 Admin. L. & Prac. § 4:43 (3d ed.). Here, insurance companies, responsible for compliance with BICE, will be incapacitated, with no ability to clarify the meaning of the regulation by inquiry or resort to administrative process. That is because the Department offers no guidance now, and once the requirement of reasonable compensation is baked into millions of

BIC contracts, those contracts unto themselves will become the source of enforceable rights through private causes of action. Financial Institutions will be at an absolute loss on how to administer this reasonable compensation requirement across their entire distribution networks even though deviance from the unknowable parameters would have dire consequences for their businesses.26

Perhaps in other contexts, the term “reasonable” is appropriate, in particular where the term has limited application or is the basis for rate making. As used here, however, the term reasonable is too integral to the regulation and too nebulous in meaning to be regarded as anything other than the kind of elaborate trap that is found repugnant under the doctrine of void for vagueness.

F. The Department’s Placement Of FIAs In The BICE As Opposed To PTE 84-24 Was Arbitrary, Capricious And Contrary To Law.

In “determin[ing] the meaning or applicability of the terms of an agency action,” the reviewing court shall “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or

26 Village of H offman Estates observes that economic regulation is subject to a less strict vagueness test but that is because businesses “can be expected to consult relevant legislation in advance of action” and “may have the ability to clarify the meaning of the regulation by its own inquiry, or by resort to administrative process.” 455 U.S. at 498. In this instance, such resources are not available, and insurers will be left with a totally amorphous requirement. While economic regulation may be more forgiving than criminal laws or laws affecting protected rights, that cannot mean anything goes with no limits on vagueness, and here the requirement could not be any vaguer and the stakes any higher for affected businesses.

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“unsupported by substantial evidence.” 5 U.S.C. § 706(2)(A) & (E). An agency action is

“arbitrary and capricious” if it is not the product of “reasoned decisionmaking.” M otor Veh icle

M frs. Ass’n, 463 U.S. at 52 (change to seatbelt rule was arbitrary and capricious because agency failed to explain its decisions, even where it had authority to regulate). The Court has explained:

Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise. The reviewing court should not attempt itself to make up for such deficiencies: “We may not supply a reasoned basis for the agency’s action that the agency itself has not given.”

Id. at 43 (citing SEC v.Ch e ne ry Corp., 332 U.S. 194, 196 (1947)). While judicial review under this standard is deferential to the agency, courts still require that the agency “examine the relevant data and articulate a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made.’” Id. (quoting BurlingtonTruck Line s,

Inc. v.United States, 371 U.S. 156, 168 (1962)).

The Department’s last minute decision to switch FIAs from PTE 84-24 to the BICE is violative of these APA principles for two reasons. First, the switch itself is contrary to federal law, and the reason for doing so failed to address critical concerns raised in the rulemaking process, so the Department’s reasoning was deficient and arbitrary. Second, the benefits of the switch are minimal to non-existent, while the impact on the FIA industry will be enormous.

1. The Department Treats FIAs As Securities, Contrary To Federal Law.

The Department’s decision to remove FIAs from PTE 84-24 and place them under the

BICE is contrary to the federal securities laws, most notably the Harkin Amendment (section

989J) of the Dodd-Frank Act, in which Congress Affirmed that FIAs are to be regulated as insurance and not securities. Pub. L. 111-203, Title 9, Subtitle 1, § 989J. Thus, the

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Department’s treatment of FIAs as securities is arbitrary and capricious because it conflicts with another federal law. E.g., Ne xtWave PersonalCom m c’nsInc. v.F.C.C., 254 F.3d 130, 149 (D.C.

Cir. 2001) (finding FCC rule arbitrary and capricious because it conflicted with the Bankruptcy

Code), Aff’d, 537 U.S. 293 (2003); Sch e duled Airline s Traffic Office s, Inc. v.De partme ntofDe f.,

87 F.3d 1356, 1361 (D.C. Cir. 1996) (declaring Department of Defense policy not “in accordance with law” under APA because agency had no authority to interpret Miscellaneous

Receipts statute); se e also Cousins v.Se cre tary ofU.S. De p’tofTransp., 880 F.2d 603, 608 (1st

Cir. 1989) (stating that the provisions of APA section 706 are “general in their meaning” and “do not restrict the courts to consideration of the agency’s own enabling statute”).

To elaborate, since their introduction several decades ago, FIAs have been treated as insurance products and not securities, regulated under state insurance laws and not subject to federal securities laws. In 2009, the SEC issued a rule attempting to regulate FIAs as securities, but the rule was vacated by the D.C. Circuit in Am e rican Equity Investme ntLife Insurance Co. v.

SEC, 613 F.3d 166 (D.C. Cir. 2010) and rebuffed by the Harkin Amendment. The Harkin

Amendment created a safe harbor for FIAs, exempting them from federal securities laws.

The Department offers no explanation as to why it effectively classified FIAs as securities for purposes of the Rule, contrary to congressional intent in enacting the Harkin

Amendment.27 The agency cannot escape the “clear command” of another statute “simply because it acted for a regulatory purpose.” Ne xtWave , 254 F.3d at 155-56. On that basis alone, moving FIAs from PTE 84-24 to the BICE is arbitrary, capricious and contrary to law.

27 It appears the Department purposely deviated from the Harkin Amendment to birth its own term “Fixed Rate Annuity Contract” by using two elements of the Harkin Amendment (compliance with state nonforfeiture laws and values that do not vary based on separate accounts) but then manipulating the definition to separate FIAs from other fixed annuities.

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2. The Department Failed to Provide A Meaningful Explanation For How The BICE Can Work With Respect To FIAs.

In its 2015 NOPR for amending PTE 84-24, the Department proposed that insurance and annuity contracts thatare notse curitie s should be placed under PTE 84-24, while insurance and annuity contracts thatare se curitie s should be placed under the BICE:

The Department believes that annuity contracts that are securities and mutual fund shares are distributed through the same channels as many other investments covered by the [BICE], and such investment products all have similar disclosure requirements under existing regulations. In that respect, the conditions of the proposed [BICE] are appropriately tailored for such transactions. The Department is not certain that the conditions of the [BICE], including some of the disclosure requirements, would be readily applicable to insurance and annuity contracts that are not securities, or that the distribution methods and channels of insurance products that are not securities would fit within the exemption’s framework.

80 Fed. Reg. at 22,015 (Apr. 20, 2015).

In other words, the Department correctly recognized in the NOPR that those annuities that are securities, i.e., variable annuities, were an appropriate “fit” with other securities investments covered by the BICE, such as mutual funds and stocks and bonds, because variable annuities are largely sold through the same distribution channels (e.g., broker-dealer representatives), subject to similar disclosure requirements (e.g., securities prospectuses), and subject to the same compliance rules and regulations (e.g., supervisory oversight mandated by the Financial Industry Regulatory Authority, or FINRA). Id. By the same token, it was recognized that other types of annuities that are “not securities” – including fixed declared rate annuities and fixed indexed annuities – would be a poor fit for the BICE, because they fall outside the scope of securities laws, are sold through a different distribution system, and are subject to different disclosure requirements, compliance rules, and regulations. Id.

In the NOPR for PTE 84-24, the Department requested comment on this approach, giving industry and interested parties an opportunity to address whether this dividing line “strikes the

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appropriate balance.” 80 Fed. Reg. 22,010, 22,015. In the BICE NOPR, the Department set forth a parallel discussion, asking whether “we have drawn the correct lines between insurance and annuity products that are securities and those that are not, in terms of our decision to continue to allow IRA transactions involving non-security insurance and annuity contracts to continue to occur under the conditions of PTE 84-24 while requiring IRA transactions involving securities to occur under the conditions of this proposed [BICE].” 80 Fed. Reg. at 21,975.

In these requests for comment, the Department gave no inkling whatsoever that it was contemplating moving FIAs from PTE 84-24 to the BICE. The true point of the Department’s request for comment was whether variable annuities, previously covered by PTE 84-24, should be removed from PTE 84-24 and placed under the BICE, because that change represented a departure from historical inclusion of all insurance and annuity products under PTE 84-24.

Despite this obvious deficiency in the Department’s notice, giving no forewarning it might move

FIAs to BICE, NAFA reinforced in its comments that non-security products would not fit within the BICE, stating:

[T]he conditions of the BIC Exemption (the BICE) are completely inapplicable to the sale of fixed annuities and would impose onerous and, frankly, unworkable conditions on the sale of these insurance products.

(NAFA Comment Letter at 21 n.15 (July 21, 2015).) Other trade associations also cautioned the

Department that unique characteristics of the insurance distribution system warranted careful attention.28

28 American Council of Life Insurers Comment Letter at 24 (July 21, 2015) (“[I]t is important to note that annuities are offered through a broad spectrum of distribution channels. These include agents (via insurance agencies or by insurer’s own employees), affiliated or independent broker-dealers, wirehouses, financial planners, and financial institutions such as banks. . . . Some annuity carriers contract with independent ‘marketing organizations’ that act as an intermediary between independent insurance agents and the annuity carrier. These marketing organizations may perform services such as agent recruiting, contracting, licensing, continuing education, and sales support.”); Indexed Annuity Leadership Council 57 Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 72 of 102

Nonetheless, in the final Rule, the Department abruptly changed course and decreed that

FIAs would be treated like securities and covered by the BICE, rather than PTE 84-24. Despite the obvious significance of this change, the Department provided no further opportunity for comment by interested persons. The Department merely states that FIAs should be moved to the

BICE “based upon its significant concerns about the complexity, risk, and conflicts of interest” associated with indexed annuity contracts, even though the commentary is devoid of any specifics to support these notions relative to FIAs. 81 Fed Reg. at 21,157.29

What is most striking about the Department’s determination that FIAs should be covered by the BICE, rather than PTE 84-24, is that the Department failed to address the concerns it raised on its own in the 2015 NOPRs about how FIAs were a poor fit for the BICE, and then was further confirmed by multiple commenters. There is no analysis of how the distribution methods and channels relating to FIAs would fit within the BICE framework and no discussion of how inclusion of FIAs in the BICE would impact the FIA industry. These are critical considerations

Comment Letter at 7 (July 20, 2015) (“[T]he distribution channels for fixed annuities are significantly different than those that apply to securities products, including variable annuities. The BICE approach assumes that there is a financial institution that oversees a host of potential financial products, one or more of which may be appropriate for purchase by a particular customer. The insurance company frequently does not offer a variety of different financial and securities products. Similarly, an Independent Marketing Organization (IMO) does not typically offer a host of different financial products that would be appropriate for the BICE framework.”); Committee of Annuity Insurers Comment Letter at 21 (July 21, 2015) (“Annuities that are securities under the federal securities laws (such as variable annuities) and those that are not, all have advantages and disadvantages; none is inherently better than the other. In contrast, the BICE, by design, entails significantly more conditions and thus significantly more cost. If certain kinds of annuities must be sold only through the BICE, there will be an incentive for one kind of annuity.”). 29 In supposed defense of its determination, the Department quotes statements from the SEC, FINRA, and North American Securities Administration Association or NASAA (which represents state securities commissioners) to the effect that FIA products have complex features. But the fact of the matter is that FIAs are not regulated by these federal or state securities regulators and more closely match the profile of fixed declared rate annuities than securities. That is how they are treated by law, notwithstanding any incidental statements by those organizations.

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that go to the rationality of the Rule as it applies to FIAs and their distributors, in view of the significant differences between securities and non-securities with respect to distribution channels, disclosure requirements, and compliance infrastructure. Yet the Department completely ignores such considerations, by treating FIAs as securities with no further analysis.

The Department’s determination to place FIAs under the BICE is the epitome of an unreasoned decision by a federal agency. The Department raised important questions in the

NOPR about how non-securities annuities (including FIAs) could not properly fit into the BICE, had those concerns confirmed in comments, yet provided no analysis about those very concerns when it placed FIAs into the BICE at the last minute. 81 Fed Reg. at 21,018. Without that analysis, the decision to switch FIAs from PTE 84-24 to the BICE exemption is utterly arbitrary and capricious. M otorVeh icleM frs. Ass’n, 463 U.S. at 52.

3. The Department’s Determination That FIAs Are Covered By The BICE Is Irrational and Unworkable, Leading To Devastating Industry Effects.

Putting FIAs under the BICE is like trying to fit a square peg into a round hole. It does not work, and the effects will be traumatic for the FIA industry, including for the insurance carriers that produce FIAs, the IMOs that wholesale and distribute the products, and the insurance agents who sell FIAs but not securities.

The BICE creates significant problems for the FIA industry. First, insurance companies as Financial Institutions cannot meet the supervisory obligations required under the BICE, because they lack necessary authority and span of control over independent agents representing multiple competing insurance companies. Marrion Aff. ¶ 30-31. Further, carriers will face significant regulatory issues when seeking approval of BICs with state insurance departments.

Second, insurance agents will not be able to comply with the BICE without radically changing the way they do business, which among other things, will mean having to become investment

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advisers under applicable securities laws. Marrion Aff. ¶ 32. These obstacles render the BICE unworkable as to FIAs.

In Am e rican Equity Investme nt, the D.C. Circuit vacated a rule promulgated by the SEC

(“Rule 151A”) that would have subjected FIAs “to the full panoply of requirements” imposed by the Securities Act of 1933 (the “1933 Act”). 613 F.3d at 167-68. There too, the agency failed to fulfill its obligation to analyze the impact of the rule on the FIA industry. Because the SEC failed to do so, the D.C. Circuit held “that the Commission’s consideration of the effect of Rule

151A on efficiency, competition, and capital formation was arbitrary and capricious.” Id. at 177-

79. Thus, the rule was vacated. The BICE fails for similar reasons because a federal agency again seeks to impose a panoply of securities industry requirements upon FIAs without performing proper impact analysis.

a. Inability Of Carriers To Comply With BICE Requirements.

i. It Is Impossible For Insurance Carriers To Comply With The BICE Requirements With Respect To Independent Agents.

The BICE is based on a construct that assumes the supervisory entity (i.e., Financial

Institution) has control over the sellers of its product (i.e., Advisers). This is true in the securities industry, where individual representatives are registered through a broker-dealer firm that supervises the individual representatives in the sale of any products offered through that broker- dealer firm. This is not the case with independent insurance-only agents, who are licensed by state regulators and typically represent multiple competing insurance companies. Marrion Aff.

¶ 31.

Under the BICE, the Financial Institution – here, an insurance carrier – must enter into a

BIC with each IRA owner stating that the Financial Institution and its Adviser act as fiduciaries.

81 Fed. Reg. at 21,076. Further, the Financial Institution must Affirmatively state that it and its

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Adviser will adhere to Impartial Conduct Standards, which include satisfying the requirement to provide advice “without regard to the financial or other interests of the Adviser.” Id. at 21,083.

Beyond that, the Financial Institution must warrant it has procedures “prudently designed to ensure that its Advisers adhere to the Impartial Conduct Standards . . . .” Id. at 21,077. In cases where the Financial Institution is an insurance company, and the Adviser is an independent insurance agent, these duties are impossible to fulfill. Independent insurance agents account for roughly 60% of all FIA sales, the balance being sold through a combination of direct sales, banks, broker-dealers, and other channels. Anderson Aff. ¶ 12.

Many or most of these independent insurance agents are insurance-only licensed and sell insurance and annuity products for multiple competing insurance companies. These agents are subject to strict state insurance laws and in general must comply with suitability requirements when selling products on behalf of each respective insurance company. Marrion Aff. ¶ 51. But they are not directly supervised by any one insurance company, and thus no one insurance company could ever ensure that the agent satisfied the Best Interest standard, nor could that insurance company ever ensure that the agent who sold that insurer’s products did so without regard to the agent’s financial interest. Marrion Aff. ¶ 30.

To illustrate, suppose XYZ insurance company sells through an independent agent representing five competing insurance companies. Presume in a given year that 20% of the agent’s sales are products issued by XYZ insurance company. The agent might sell 5 products for each insurance company and thus in total can choose among 25 products with varying compensation schedules ranging hypothetically from 3-6% in front end commission, or alternatively with trailing commissions up to 1% for some but not all products, and with various other possible incentives through allowable cash and non-cash compensation programs.

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In this scenario, XYZ insurance company would certainly know about its own products and its own compensation schedules, but it would have no practical way to evaluate whether its competitor’s products might pose a better value for customers of the agent or whether the agent’s advice was influenced by compensation differentials among products of five insurance companies. It is not reasonable for XYZ insurance company to know every product and all compensation arrangements for all those products offered across hundreds or thousands of independent agents, yet the BICE would require XYZ insurance company to take on liability for guaranteeing that every agent making every sale involving IRA assets has acted in the “best interest” of the client, as that concept is defined in the BICE.

It appears that the Department never even considered these kinds of issues, which render the BICE unworkable as applied to FIAs. Perhaps the intention of the Department was that insurance companies only sell FIAs through captive agents; that insurance companies only sell

FIAs through licensed securities agents; or that insurance-only agents would become licensed securities agents. But these are not practical solutions. And whatever the intent, the Department neglected to account for the fundamental differences between the securities industry and insurance industry, and thus failed to account for the impossibility of complying with the BICE requirements for FIA products sold through independent agents.

ii. It Is Impossible For Insurance Carriers To Comply With The BICE Without Filing BICs With State Insurance Departments for Approval.

As devised by the Department, the BICE mandates the Financial Institution enter into the

BIC with the Retirement Investor, which in the case of FIAs means an insurance company entering into a contract with a policyholder. The BICE preamble states “the terms of the contract may appear in a standalone document or they may be incorporated into an investment advisory agreement,

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investment program agreement, account opening agreement, insurance or annuity contract or application, or similar document, or amendment thereto (emphasis added).”

The problem with this approach as it applies to insurance companies is that enforceable contracts between insurance companies and their policyholders ordinarily require prior approval from the insurance department in each state where the annuity is sold.30 Given the BICE requirements, it is indisputable the BIC is a contract between an insurance company and policyholder, and as such, the BIC necessarily becomes part of the annuity policy, even if it appears as a standalone document, for in the domain of insurance regulation there is no place for side agreements between the parties outside the policy itself. 31 Beyond that, to be enforceable, the BIC must be issued as part of the annuity if it is to satisfy requirements for consideration, since the BIC unto itself lacks consideration if not integrated with the underlying transaction.

The net result is that BICs used in connection with FIAs must be filed for approval with state insurance departments. That, in turn, raises a significant state regulatory issue. While in the securities industry, it is the distributor that serves as the Financial Institution (i.e., a broker dealer or registered investment advisor)—which is true even in the case of variable annuities—in the insurance industry it is the insurance company that serves as Financial Institution as to fixed annuities. Also,

30 While state laws vary, a prime example of state filing requirements is New York, where the State Department of Financial Services has a 68 page outline specifying filing procedures and requirements for individual annuities. Se e http://www.dfs.ny.gov/insurance/lifeindx.htm 31 In the analogous context of workers’ compensation insurance, it has been held a side agreement between an insurer and employer is subject to state form filing and approval requirements where the agreement governs important facets of the insurance relationship. Se e Am . Z urich Ins. Co. v.Country VillaSe rv.Corp., No. 2:14-cv-03779-RSWL-AS, 2015 WL 4163008, at *15 (C.D. Cal. July 9, 2015) (concluding “side agreement” between insurer and employer was properly characterized as an “endorsement” under California Insurance Code, and failure to file the agreement with the California Insurance Commissioner—and obtain the Commissioner’s approval before use—rendered the agreement void as a matter of law); se e also Ce radyne , Inc. v.ArgonautIns. Co., No. G039873, 2009 WL 1526071, at *10 (CaL. Ct. App. 4th Dist. June 2, 2009) (holding side agreement was subject to state filing and approval requirements where agreement “look[ed] very much like part of an insurance contract,” which resulted in invalidation of arbitration provision contained in the agreement).

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while the BIC appears to be largely favorable for consumers, there is at least one significant exception concerning remedies available to the policyholder. Appearing in the final release of the

BICE in section II (f) (2) is the following language:

. . . the parties may knowingly agree to waive the Retirement Investor’s right to obtain punitive damages or rescission of recommended transactions to the extent such a waiver is permissible under applicable state or federal law.

81 Fed. Reg at 21,041. This remarkable provision was introduced into the final BICE without additional notice or opportunity for comment. It was apparently added in response to various comments that the Department received from the securities industry in response to its 2015 BICE

Notice.32 As a result, the thrust of section II (f) is to permit securities firms to enter into pre-dispute arbitration agreements with consumers provided those agreements do not stand in the way of class actions.

But this does not translate with respect to the annuity industry business model. Insurance companies generally are restricted by state insurance departments from including arbitration provisions in fixed annuity contracts, so parts of section II (f) have little or no immediate applicability to insurance companies. To include such a provision in an annuity contract would certainly need to be filed for approval with state insurance departments, and such a provision would likely be controversial insofar as it limits policyholder rights.33

The BICE preamble makes clear that the Department believes, as a matter of public policy, that there is a need to match the proper remedy to a breach of a BIC:

In the Department’s view, it is sufficient to the exemption’s protective purposes to permit recovery of actual losses . . . . Accordingly, the exemption does not permit the

32 The Securities Industry and Financial Markets Association in its July 15, 2015 comments asked the Department to confirm the final rule would permit exclusion of liability for punitive damages and FINRA it is July 17, 2015 comments suggested allowing for wavier of the right to rescind. 33 It should be further noted that many states do not allow a punitive damage waiver as authorized in the BICE.

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contract to include liquidated damages provisions, which could limit Retirement Investors’ ability to obtain make-whole relief. On the other hand, the exemption permits wavier of punitive damages to the extent permissible under governing law. In cases where an advice fiduciary breaches its obligations, but there was no injury to the participant, a rescission remedy can effectively make the fiduciary liable for losses caused by market changes, rather than its misconduct.

81 Fed. Reg. at 21,045. In other words, the litigation limitations that the Department provided for in the BICE are designed to make the newly-minted private cause of action less onerous on industry, and therefore reasonable in nature.

Whether and how any of these putative beneficial limitations apply to insurance companies is left completely unclear. On this subject, the Department gave no opportunity for comment, and the Department wrote these provisions plainly with the securities industry in mind with no consideration given to the fact that insurance companies would need state approval of any such provisions. In the end, this kind of arbitrary rulemaking could greatly benefit the securities industry and be very costly to the insurance industry, as it could ultimately result in an unlevel playing field relative to remedies permitted under the Rule. That, in turn, will likely place fixed annuity products at a competitive disadvantage versus securities products.

In light of these significant problems, the Department was obligated to explain why it switched FIAs from PTE 84-24 to BICE notwithstanding these facts. “Reason giving is central to U.S. administrative law and practice.” Jodi L. Short, The PoliticalTurn in Am e rican

Adm inistrative Law: Pow e r, Rationality, and Re asons, 61 Duke L.J. 1811 (2012). “[T]he orderly functioning of the process of review requires that the grounds upon which the administrative agency acted be clearly disclosed and adequately sustained.” SEC v. Ch e ne ry

Corp., 318 U.S. 80, 94 (1943) (stating the hallmark administrative law principle underlying the

APA’s “arbitrary and capricious” standard). “The grounds upon which an administrative order must be judged are those upon which the record discloses that its action was based.” Id. at 87.

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Courts in this jurisdiction have not hesitated to reject agency actions based on unclear or inadequate reasoning. For example, in Association ofPrivate Se ctor College s & Universitie s v.

Duncan, the D.C. Circuit held that certain compensation regulations promulgated by the

Secretary of Education under the Higher Education Act were “lacking for want of adequate explanations” where the Secretary offered only a “brief explanation” and a “fleeting reference” to the issue at stake. 681 F.3d 427, 448 (D.C. Cir. 2012). In particular, the Department of

Education “failed to address the concern, identified by at least two commenters, that the

Compensation Regulations could have an adverse effect on minority enrollment.” Id.

The Department’s decision to move FIAs from PTE 84-24 to the BICE suffers from precisely this type of inadequate reasoning. Indeed, nothing in the rulemaking indicates the

Department even considered the impact of that decision on the fixed annuity industry at all in the final Rule. The decision to place FIAs in the BICE was not the product of reasoned analysis, and it is therefore arbitrary and capricious.

b. It Will Be Impossible For Independent Agents And Insurers To Comply With The BICE Without Becoming Investment Advisers Under Securities Laws.

A core feature of the BICE is the requirement that a Financial Institution, on behalf of itself and its Adviser, enter into a contract with an IRA owner stipulating that the Financial

Institution and Adviser are fiduciaries under the Code with respect to any investment advice provided by the Financial Institution or Adviser that is subject to the contract. The Department provides no analysis of how this requirement Affects insurance companies and independent insurance-only agents who are not also licensed to sell securities.

Notably, the nomenclature used in the Rule and accompanying prohibited transaction exemptions is loaded with terms and concepts with established meanings in the realm of securities law. The Rule sets forth a definition of “fiduciary” based on the “rendering of

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investment advice,” including recommendations as to “how securities or other investment property should be invested.” The BICE applies a “Best Interest” standard, i.e ., that any investment advice reflects the “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate,

Related Entity, or other party.” 81 Fed. Reg. at 21,083.

According to the Department, this “is intended to effectively incorporate the objective standards of care and individual loyalty that have been applied under ERISA for more than forty years.” 81 Fed. Reg. at 20,128. The Department explains that the standard “incorporates two fundamental and well-established fiduciary obligations: the duties of prudence and loyalty.” Id. at 20,129.

While these may be standards applied under ERISA for over forty years, in the past such standards were applied to investment advisers to ERISA plans, not insurance agents selling annuities to retail IRA consumers. An important question arises whether these new obligations being imposed upon insurance agents will force insurance-only agents, and perhaps the companies for which they market insurance products, to comply with investment adviser laws, i.e., the Investment Advisers Act of 1940 or comparable state laws. Insurance-only agents who are not otherwise licensed to sell securities or provide investment advice would ordinarily refrain from providing any advice beyond the limits of authority under their insurance licenses, but that appears no longer possible for agents who make recommendations and sell products to IRA owners under the BICE. Marrion Aff. ¶ 55. The Department provides no analysis on this point.

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Insurance-only agents are careful to avoid crossing into the realm of investment advice.

ID. To assist in this regard, state insurance regulators issue guidance that delineates the line between permissible insurance related advice and impermissible investment advice requiring securities licensure. Marrion Aff. ¶ 57; Susan E. Voss, State of Iowa Commissioner of

Insurance, Securities Bulletin 11-S-1 (June 24, 2011), available at http://www.iid.state.ia.us/sites/default/files/commissioners_bulletins/2011/06/24/bulletin_11_s_1

_re_securities_licensed_persons_jun_13615.pdf.) Iowa Securities Bulletin 11-S-1 is a representative state guideline that clarifies the distinction between insurance and securities. This

Bulletin sets forth what an insurance-only without a securities license may and may not do.

Among other things, the bulletin says an insurance-only agent may discuss the following with a client: (i) financial objectives including whether the consumer needs to earn a guaranteed rate of interest or other minimum guarantees, (ii) the need to balance and diversify risk including the need for product or issuer diversification, (iii) existing assets including annuity, investment, and life insurance holdings, and (iv) financial resources generally available for the funding of the annuity or life insurance. Id. at 2-3. The bulletin also says what an insurance-only agent may notdiscuss with a client, including (i) comparing the consumer’s specific securities or securities investment performance with other financial products, including annuity contracts or life insurance, (ii) recommending specific allocations, in dollar or percentages, between insurance and securities products, and (iii) using the terms “investment adviser”, “securities agent” or

“investment adviser representative.” Id. at 4.

A recent DOL Interpretative Bulletin relating to fiduciary standards for considering economically-targeted investments, spelled out the Department’s expectations of an investment manager under these longstanding fiduciary concepts:

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With regard to investing plan assets, the Department has issued a regulation, at 29 CFR 2550.404a-1, interpreting the prudence requirements of ERISA as they apply to the investment duties of fiduciaries of employee benefit plans. The regulation provides that the prudence requirements of section 404(a)(1)(B) are satisfied if (1) the fiduciary making an investment or engaging in an investment course of action has given appropriate consideration to those facts and circumstances that, given the scope of the fiduciary’s investment duties, the fiduciary knows or should know are relevant, and (2) the fiduciary acts accordingly. This includes giving appropriate consideration to the role that the investment or investment course of action plays (in terms of such factors as diversification, liquidity, and risk/return characteristics) with respect to that portion of the plan’s investment portfolio within the scope of the fiduciary’s responsibility.

Other facts and circumstances relevant to an investment or investment course of action would, in the view of the Department, include consideration of the expected return on alternative investments with similar risks available to the plan. It follows that, because every investment necessarily causes a plan to forgo other investment opportunities, an investment will not be prudent if it would be expected to provide a plan with a lower rate of return than available alternative investments with commensurate degrees of risk or is riskier than alternative available investments with commensurate rates of return.

29 C.F.R. § 2509.2015-01 (eff. Oct. 26, 2015).

It is evident that the duties imposed upon an investment manager of an ERISA plan impose duties that go well beyond the discreet parameters contained in the Iowa Bulletin. While the Iowa Bulletin says insurance agents may not compare specific investment performance as between securities and insurance products, that seems to be a central requirement under the

ERISA prudence standard as described in the foregoing DOL Interpretative Bulletin. While the

Iowa Bulletin says an agent may not make asset allocation recommendations, such advice seems integrally embedded in the ERISA prudence standard, where it says appropriate consideration must be given to the role of the annuity in the investor’s portfolio. The high standards imposed upon a fiduciary are clearly at odds with the circumscribed role an insurance agent would

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normally play in evaluating how an annuity benefits an IRA owner interested in guarantees provided by an annuity for retirement planning.34

In adopting the BICE, the Department considered none of this. That again constitutes a failure to engage in “reasoned decisionmaking,” rendering BICE arbitrary and capricious. M otor

Veh icleM frs. Ass’n, 463 U.S. at 52.

4. ERISA Requires That The Department Adequately Consider Costs And Benefits When It Promulgates A Rule.

ERISA permits the Department of Labor to issue regulations “as [the Secretary] finds necessary or appropriate to carry out the provisions of [ERISA].” 29 U.S.C. § 1135. In

M ich igan v. E.P.A., 135 S. Ct. 2699, 2707 (2015), the Supreme Court analyzed the concept of

“necessary and appropriate” in an organic agency statute as it applied to EPA regulations. The

Court held that “necessary and appropriate” typically requires a weighing of the costs and benefits of any regulation. Id. The Court held: “No regulation is ‘appropriate’ if it does significantly more harm than good.” Id.

Here, there is little doubt the Rule will have a profoundly adverse impact on the fixed annuity industry. Yet the Department ignored that impact. The Department offered no analysis.

Perhaps the Department failed to do so because of the deficiency of its notice and last-minute decision to move FIAs into the BICE, combined with its haste to issue the Rule. Whatever the reason, the Department utterly failed to compare the costs of this eleventh hour change in the

Rule to any ostensible benefits.

34 As to insurance agents, the same issue arises under PTE 84-24 because of the duties required to meet the conditions of the exemption. Because the Department does not adequately analyze the impact on independent agents under PTE 84-24, or IMOs derivatively, that exemption also fails because it is not the product of reasoned decision-making under the APA.

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The Department explains it placed FIAs in the BICE because they are purportedly

“complex products” and thus need the same protections Afforded to variable annuities. 81 Fed.

Reg. at 21,018. But the Department fails to articulate the marginal benefit of placing FIAs in the

BICE, as opposed to PTE 84-24. Since the substantive requirements under BICE and PTE 84-24 are largely the same, arguably the only tangible benefit of the switch from PTE 84-24 to BICE is the private cause of action contained in BICE that is not present in PTE 84-24. Even assuming that private cause of action were lawful – which as discussed above it is not – its benefits pale in comparison to the adverse impact that the BICE imposes upon the FIA industry. The decision to place FIAs into BICE – as opposed to PTE 84-24 – causes more harm than good, and cannot constitute “appropriate” decision making under ERISA and the APA. M ich igan, 135 S. Ct. at

2707.

5. The Department’s Final Regulatory Impact Analysis Failed To Adequately Consider The Impact On Small Businesses, Especially Insurance Agents And IMOs Within The FIA Industry.

The Regulatory Flexibility Act (“RFA”), 5 U.S.C. § 601 et seq., requires an agency to do an economic impact analysis when rulemaking Affects “small entities,” including entities defined as “small businesses” under the Small Business Act. Se e 5 U.S.C. § 601; 15 U.S.C. §

632. NAFA’s membership includes numerous entities that fall within this definition, including

IMOs and independent agents. Anderson Aff. ¶ 2, 22. The RFA requires an agency to “file a

FRFA demonstrating a ‘reasonable, good-faith effort to carry out [RFA’s] mandate.’” U.S.

Ce llularCorp. v. F.C.C., 254 F.3d 78, 88 (D.C. Cir. 2001) (quoting Alenco Com m c’ns, Inc. v.

F.C.C., 201 F.3d 608, 625 (5th Cir. 2000)). The RFA provides the agency’s conduct is to be reviewed “in accordance with the APA,” 5 U.S.C. §§ 611(a)(2) & 706(2), and the Court has authority to vacate and remand the Rule for non-compliance with its requirements,

Id.§ 611(a)(4). Se e Am e rican Equity Inv., 613 F.3d at 177-79 (vacating Rule 151A because

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SEC’s “consideration of the effect of Rule 151A on efficiency, competition, and capital formation was arbitrary and capricious”); Ch ao, 455 F.3d at 397 (DOL’s failure to support revised reading of a statute with reasoned analysis warranted remand for further explanation of changed position).

Here, the Department acknowledged that the Rule requires RFA analysis because it is

“likely to have a significant economic impact on a substantial number of small entities.” Se e

Dept. of Labor, Re gulating Advice M ark e ts, De finition of the Term “Fiduciary” Conflicts of

Intere st - Re tire m e nt Investme nt Advice , Re gulatory Im pact Analysis for Final Rule and

Exe m ptions (the “Regulatory Impact Analysis”), at 254 (Apr. 2016)

(https://www.dol.gov/ebsa/pdf/conflict-of-interest-ria.pdf). The Department readily admits its

Rule will impact small businesses including thousands of insurance agents and agencies.

Nevertheless, the Department offers no “statement of the assessment of the agency of such issues.” 5 U.S.C. § 604(a)(2). Nor did the Department advance any “description of the projected . . . compliance requirements of the rule” for agents and IMOs that sell FIAs. Id.

§ 604(a)(5). The Department also failed to describe “the steps the agency has taken to minimize the significant economic impact on” such entities, and there is no “statement of the factual, policy, and legal reasons for selecting the alternative adopted in the final rule.” Id. § 604(a)(6).

Indeed, the Department’s nearly 400-page Regulatory Impact Analysis dedicates only seven pages to RFA compliance. Id. at 254-60. In that section, the Department acknowledges that “[s]mall service providers Affected by this rule include broker-dealers (BDs), registered investment advisers (RIAs), insurance companies and agents, pension consultants, and others providing investment advice to plan and IRA investors.” Id. at 254. Aside from a passing

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reference to “agents,” the Department’s RFA contains no commentary concerning the impact on insurance agents who sell annuities, and there is no mention of IMOs at all.35

As in Am e rican Equity Investme nt, the Department failed to adequately consider the impact of a Rule that would effectively subject independent agents who sell FIAs “to the full panoply of requirements” imposed by the securities laws. 613 F.3d at 167-68. Here, the

Department was aware of significant issues impacting small entities but did not see fit to respond in any reasoned manner. That it cannot do. The Department’s complete failure to fulfill its obligations under the RFA to analyze the impact on small businesses within the insurance industry is not reasoned decision-making. Accordingly, the Rule should be vacated and remanded for further consideration of these issues, under the RFA.

V. Without A Preliminary Injunction, NAFA’s Members Will Suffer Immediate and Irreparable Harm.

A. Legal Standards

Irreparable harm requires that the claimed injury must be “certain and great; it must be actual and not theoretical.” Sm ok ing Everyw h e re , Inc. v.FDA, 680 F. Supp. 2d 62, 76 (D.D.C.),

Aff’dsub nom . Sottera, Inc. v.FDA, 627 F.3d 891 (D.C. Cir. 2010) (quoting W isconsin Gas Co. v. FERC, 758 F.2d 669, 674 (D.C. Cir. 1985)). Where the plaintiff shows actual “economic” harm, the question is “whether the claimed injury . . . is likely to be irreparable absent a preliminary injunction.” Id. (granting preliminary injunction in APA case where FDA’s

35 At best, the Department dismisses any impact with conclusory assertions that it “does not believe that this outcome will be widespread,” and “anecdotal evidence indicates that small entities do not have as many business arrangements that give rise to conflicts of interest.” The Department also refers to Chapter 5 of its Regulatory Impact Analysis, which contains a “discussion of costs.” Id. at 259. Yet this chapter focuses on the costs to broker-dealers and RIAs, as well as the generalized costs of complying with the BICE and other PTEs. Id. at 219-52. There is no indication that the Department actually considered the impact on IMOs or independent agents who sell fixed annuities.

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regulation interpreting “tobacco product” under the Tobacco Act would deprive plaintiffs of needed revenue and thus threaten the continued viability of their businesses).

“The loss of business opportunities, market share, and customer goodwill are typically considered to be economic harms.” Air Transp. Ass’nof Am ., Inc. v. Export-Im port Bank of

United States, 840 F. Supp. 2d 327, 335 (D.D.C. 2012). In general, an “economic harm may qualify as irreparable where a plaintiff establishes that the harm ‘is so severe as to cause extreme hardship to the business or threaten its very existence.’” Sterling Com m e rcialCre dit–Mich igan,

LLC v. Ph oe nix Indus. I, LLC, 762 F. Supp. 2d 8, 15 (D.D.C. 2011) (quoting Coalition for

Com m on Se nse in Gov’tProcure m e ntv.United States, 576 F. Supp. 2d 162, 168 (D.D.C. 2008)).

Lesser economic loss is typically not deemed irreparable based on “the presumption that

‘adequate compensatory or other corrective relief will be available at a later date, in the ordinary course of litigation.’” Robe rtson v. Cartinh our, 429 F. App’x 1, 3 (D.C. Cir. 2011) (quoting

Virginia Petroleum Jobbe rs Ass’nv. Fede ralPow e r Com m ’n, 259 F.2d 921, 925 (D.C. Cir.

1958)).

On the other hand, where a plaintiff’s damages are “unrecoverable,” this court has granted preliminary injunctive relief to prevent “economic loss.” Se e , e .g., Sm ok ing Everyw h e re ,

680 F. Supp. 2d at 77 n.19; Clarke v.Office ofFed. H ous. Enter. Oversigh t, 355 F. Supp. 2d 56,

65 (D.D.C. 2004); Am e rican Fed’nofGov’tEm ps., AFL-CIO v.United States, 104 F. Supp. 2d

58, 76 (D.D.C. 2000); Bracco Diagnostics, Inc. v.Sh alala, 963 F. Supp. 20, 29 (D.D.C. 1997);

NationalTr. for H istoric Prese rvation v. FDIC, No. 93-0904-HHG, 1993 WL 328134, at *3

(D.D.C. May 7, 1993). To be sure, the mere “fact that economic losses may be unrecoverable does not, in and of itself, compel a finding of irreparable harm.” CardinalH e alth, Inc. v.H olde r,

846 F. Supp. 2d 203, 211 (D.D.C. 2012) (quoting NationalM ining Ass’nv. Jack son, 768 F.

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Supp. 2d 34, 53 (D.D.C. 2011)). But where there is “no adequate compensatory or other corrective relief”, this Court will “tip[ ] the balance in favor of injunctive relief.” Bracco

Diagnostics, 963 F. Supp.at 29 (quoting H offmann-Laroch e , Inc. v.Califano, 453 F. Supp. 900,

903 (D.D.C. 1978)).

B. NAFA Members Face Immediate And Irreparable Harm.

Here, the Department set an “effective” date of June 7, 2016 – just sixty days after the publication of the Rule – in order to ensure that the Rule would “become effective on the earliest possible date.” 81 Fed. Reg. 20,947.36 The Department states that it chose a sixty-day effective date “to provide certainty to plans, plan fiduciaries, plan participants and beneficiaries, IRAs, and IRA owners that the new protections Afforded by the final rule and new and amended PTEs are now officially part of the law and regulations governing their investment advice providers.”

Regulatory Impact Analysis at 292 (emphasis added).

The Department offered no substantive rationale for this extraordinarily short and arbitrary period, other than to state that the rule is not “applicable” until April 10, 2017: “The

Department believes that an applicability date that is 12 months after the date of publication, provides adequate time for plans and their Affected financial services and other service providers to adjust to the basic change from non-fiduciary to fiduciary status.” Regulatory Impact

Analysis at 292. Thus, the Department views the applicability date as the true “effective” date, and expects Affected persons to undertake immediate efforts to comply to meet the April 10,

2017 deadline.

36 Sixty days is the minimum period in which a “major rule” such as this may become effective. Congressional Review Act, 5 U.S.C. § 801 et seq. As discussed above, Congress passed a joint resolution under the CRA disapproving the Rule, which has temporarily stayed the effective date. The Joint Resolution will assuredly be vetoed, and it does not in any event stay the more important April 10, 2017 applicability date which looms over the fixed annuity industry.

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The Affidavits submitted in support of this application, which are attached hereto as

Exhibits 1 - 9, demonstrate that the fixed annuity industry cannot meet the Department’s April

10, 2017 deadline. While NAFA can venture no opinion on whether that period of lead time is sufficient for the securities industry, it is evident, as with so many other parts of this regulation, that no consideration was given to the unique challenges that such a short lead time visits upon the fixed annuity industry. As explained above and set forth in detail in the affidavit of NAFA’s

Director of Research, Dr. Jack Marrion (Ex. 2), the fixed annuity industry will be forced to change its products and distribution system immediately because of this Rule, and it will be impossible to do so in just 10 months between the original “effective date” and “applicability date.” And, hectic efforts to meet this looming deadline will cause immediate and irreparable harm to all industry participants, including insurance carriers, IMOs, and independent agents.

1. Irreparable Harm To Insurance Carriers

Insurance carriers that produce fixed annuities will take immediate steps to comply with the Rule. Marrion Aff. ¶ 34. First, carriers will need to restructure their entire distribution systems and determine whether and how they will continue to do business through IMOs and independent agents. Marrion Aff. ¶ 30-34. Because of the impossibility of complying with the

BICE requirements for independent agents, carriers may begin exiting the independent agent channel altogether, relying instead on captive agents or agents registered to sell securities under the supervision of a broker dealer. Marrion Aff. ¶ 32-33. Additionally, because IMOs are not included within the definition of Financial Institution, insurance carriers may need to restructure or eliminate parts of their distribution channel that rely on IMOs. Marrion Aff. ¶ 40. No matter what decisions are made, the costs of compliance prior to the April 10, 2017 applicability date

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will be enormous and unrecoverable if the Rule is later vacated. Marrion Aff. ¶ 3, 39, 42, 59,

74.37

Moreover, because of the Rule, carriers will need to change their sales approach in the

IRA marketplace, which will require them to re-design FIA products. This process will take years in no small part because the fixed annuity industry is regulated by the states and therefore cannot unilaterally or quickly reform its business. Among many other steps, carriers must design new products, price them, develop systems technology, revise agent agreements and commission structures, file these new products with state regulators, and wait for approval from each of the states. It can easily take up to two years to develop products and obtain approval for them in all

50 states. Carriers will not be able to complete this process by April 10, 2017, and thus will not be able to offer their competitive FIA products in the marketplace, causing interruption in business and enormous irreparable harm, on top of compliance costs described in the preceding paragraph. Marrion Aff. ¶ 58.

2. Irreparable Harm To IMOs

Even if carriers are able to continue to rely on distribution through IMOs, the uncertainty resulting from Department’s treatment of FIAs will irreparably harm such organizations. Under

37 The fixed annuity industry faces other daunting challenges directly resulting from the Department’s misapprehension of insurance products, practices, and regulation. One of the Department’s requirements in the BICE is that the insurance carrier be “domiciled in a state whose law requires that actuarial review of reserves be conducted annually by an Independent firm of actuaries and reported to the appropriate regulatory authority.” 81 Fed. Reg. 21,083. But no state requires independent actuarial review of reserves so few if any insurers would satisfy this criterion. Marrion Aff. ¶ 38. Separately, in its definition of “fixed rate annuity contract”, which determines the scope of PTE 84-24, the Department inadvertently excludes from its newly created definition all traditional declared rate annuities because benefits of such annuities are based on the investment experience of an “investment model,” i.e., the investment model of the insurance company itself (referred to in the industry as the insurer’s “general account”). These fundamental errors involving technical terms call into question the competence of the Department to exercise any kind of regulatory authority over the insurance industry.

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the BICE, IMOs are not specified as a Financial Institution eligible to receive commissions or other payments, nor are IMOs recognized in any other way, despite their vital role in the distribution of fixed annuities especially through independent agents. There are currently more than 100 larger IMOs offering fixed annuities. Two-thirds of FIAs are sold through IMOs, accounting for more than $35 billion in annual revenue. Marrion Aff. ¶ 39. On average, FIA sales generate approximately 85 percent of an IMO’s overall revenue. Marrion Aff. ¶ 41.

Indeed, one NAFA member IMO draws 90% of its annual sales from annuities, 70% of which are qualified funds transactions using tax-deferred IRAs. Wong Aff. ¶ 4-5. If IMOs cannot receive compensation under the BICE, there will be massive layoffs and the closing of many

IMOs. Marrion Aff. ¶ 41. Some IMOs will likely suffer a 50% drop in annuity sales resulting in enormous profit losses used to sustain their business. Wong Aff. ¶ 9.

Any IMO that does not obtain an individual exemption from the DOL in advance of the

April 10, 2017 applicability date will no longer be able to receive compensation from insurers in connection with the sale of FIAs in the IRA marketplace. Marrion Aff. ¶ 42. The Department has provided no guidance or guarantee concerning such individually granted exemptions.

Even if IMOs remain in business, they face the same impossible requirement to supervise independent agents that represent multiple competing carriers in the sale of fixed annuity products. Marrion Aff. ¶ 45. Any solution would require a drastic reconfiguration of the manner in which IMOs now do business, which today focuses on recruitment and training, but under the

Rule would require taking on extensive compliance supervisory responsibilities, along with attendant liability and dramatic increases in insurance premiums, all of which will cost hundreds of millions of dollars. Marrion Aff. ¶ 46.

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In the absence of a stay of the applicability date, IMOs cannot afford to stand still and will immediately move to adjust their businesses in search of a viable business model. These changes must begin immediately and will be expensive to undertake as well as irreversible, all of which would be for naught should the Rule be invalidated.

3. Irreparable Harm To Independent Agents

There are approximately 80,000 insurance agents who sell FIAs. As a result of the Rule, many of those agents will no longer be able to offer FIAs and will likely have to exit the industry. Marrion Aff. ¶ 49. This is because insurance carriers will withdraw from the independent agent distribution channel or require those agents to forego their independence and become affiliated with a broker-dealer, advisory firm, or captive agency. Marrion Aff. ¶ 48.

Many independent agents who sell insurance are not registered to sell securities, and unless an insurance company allows for those agents to affiliate through a captive agency, those insurance- only agents will need to become registered to sell securities in order to comply with the requirements of the BICE. Marrion Aff. ¶ 54. Agents will also face sharp increases in potential professional liability and commensurate increases in insurance premiums as a result of their new

“fiduciary” status. Marrion Aff. ¶ 50. As a result, an estimated 20,000 annuity agents will leave the business. Marrion Aff. ¶ 49.

Indeed, one large insurance carrier has already publicly stated that the Rule will adversely

Affect its ability to sell FIAs through independent agents. Cyril Tuohy, Am e rican Equity: DOL

Thre atens Inde pe nde nt Annuity Age nts, InsuranceNewsNet.com (Apr. 29, 2016) (available at http://insurancenewsnet.com/innarticle/carrier-exec-dol-rule-pivot-fias-away-independent- channel); se e also Perkins Aff. ¶ 19; White Aff. ¶ 10.

Many NAFA members are also small-business agents or agencies that have been in business for years and sell almost exclusively FIAs. Perkins Aff. ¶ 7 (over 90% annual revenue 79 Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 94 of 102

from FIA sales); Foguth Aff. ¶ 8 (over 80% annual revenue from FIA sales); White Aff. ¶ 6

(over 99% annual revenue from FIA sales); James Aff. ¶ 21 (90% annual revenue from FIA sales); Rafferty Aff. ¶ 6 (85% annual revenue from FIA sales); Engels Aff. ¶ 5 (over 50% annual revenue from annuity sales). FIAs are popular funding vehicles for IRAs and other qualified- funds transactions, because they are geared to the needs of retirement-oriented consumers, and in particular because they provide guaranteed lifetime income features and protection against downside market risk. Perkins Aff. ¶ 4; Foguth Aff. ¶ 10; Engels Aff. ¶ 24. For this reason, many of NAFA’s agent and agency members sell a significant percentage of FIAs to consumers using qualified funds, i.e., IRAs. Perkins Aff. ¶ 7 (90% of all FIAs sold purchased with qualified funds); Foguth Aff. ¶ 10 (70% of all FIAs sold purchased with qualified funds); White Aff. ¶ 7

(98% of all FIAs sold purchased with qualified funds); Rafferty Aff. ¶ 10 (92% of all FIAs sold purchased with qualified funds); Engels Aff. ¶ 10-11 (75% of all qualified-funds transactions from FIA purchases); James Aff. ¶ 19, 22 (65% of all FIAs sold purchased with qualified funds).

Many of NAFA’s member agents are “insurance-only” licensed, Perkins Aff. ¶ 8; Foguth

Aff. ¶ 5; White Aff. ¶ 4; James Aff. ¶ 7; Rafferty Aff. ¶ 3, meaning they are not subject to securities oversight and could not sell securities without significant additional training, licensing, and compliance costs – even if they wanted to. Indeed, when independent, insurance-only agents do encounter clients who want to purchase risk-based securities investments, they refer them to securities-licensed professionals. Perkins Aff. ¶ 8; Foguth Aff. ¶ 5; White Aff. ¶ 4; Rafferty Aff.

¶ 9.

Under the Rule, whether operating under the BICE or PTE 84-24, insurance-only agents will be placed at a competitive disadvantage as to their securities-licensed counterparts because those competitors belong to firms that are recognized as “Financial Institutions” under the Rule.

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That will make compliance for them much easier. Moreover, even agents who might eventually be able to comply with the Rule will lose FIA market share in the interim. The lost market share and business opportunities will be unrecoverable and will likely drive many small businesses out of the market, to the detriment of both independent agents and the consumers they serve. Perkins

Aff. ¶ 16, 23, 26-27; Foguth Aff. ¶ 13, 15; White Aff. ¶ 9, 13; James Aff. ¶ 23-28; Rafferty Aff.

¶ 12-15.38

Because of the Rule, insurance-only agents and small agencies that deal heavily in qualified-funds transactions will take an immediate and, in many cases, unsustainable loss of business that will jeopardize their existence. Perkins Aff. ¶ 23; Foguth Aff. ¶ 13; White Aff. ¶ 9;

James Aff. ¶ 26; Rafferty Aff. ¶ 12; Engels Aff. ¶ 15, 21.

4. Harm to Consumers

As the Rule’s impact flows through the insurance industry, consumers will also be harmed. Many of the clients served by NAFA members are low or middle income retirement savers who generally cannot Afford fee-only providers but still seek out assistance usually provided today by commissioned agents. Indeed, these are often consumers who choose not to invest in risk-based products, preferring to put their hard earned funds into “safe” insurance products like annuities that offer guaranteed income and downside protection against market losses. Engels Aff. ¶ 8, 18; Marrion Aff. ¶ 15; Perkins Aff. ¶ 28; Rafferty Aff. ¶ 7. Given the impact of the Rule on independent insurance agents, those consumers will lose the important products and services that independent agents provide.

38 The Department glibly acknowledged that “some small service providers may find that the increased costs associated with ERISA fiduciary status outweigh the benefit of continuing to service the ERISA plan market or the IRA market.” 81 Fed. Reg. 20,994.

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C. Irreparable Harm Legal Analysis In Light Of The Injuries That The Rule Inflicts On The Fixed Annuity Industry

NAFA recognizes that the D.C. Circuit has set a high standard for irreparable injury.

Ch aplaincy of FullGospe lCh urch e s v. England, 454 F.3d 290, 297 (D.C. Cir. 2006). A high standard, however, is not an insurmountable one. “‘The key word in this consideration is irre parable.’” Id. (citation omitted). Economic harm—the type of harm identified here—can constitute irreparable harm in at least two circumstances. First, Judge Friedman has stated that

“economic harm may qualify as irreparable where a plaintiff establishes that the harm is so severe as to cause extreme hardship to the business or threaten its very existence.” Sterling

Com m e rcialCre dit, 762 F. Supp. 2d at 15 (citation and internal quotation marks omitted).

Second, “economic harm may qualify as irreparable where a plaintiff’s alleged damages are unrecoverable.” Id. at 16 (citation and internal quotation marks omitted). The affidavits that

NAFA has submitted and discussed above show that NAFA’s members will suffer both these types of irreparable harm without a preliminary injunction.

As to the first prong—catastrophic economic impact on a business—the affidavits of Jack

Marrion and the independent insurance agents demonstrate the devastation the Rule will have on

IMOs and small independent agents. These are not mere business losses, these are the loss of businesses. NAFA estimates that roughly 20,000 annuity agents will exit the business, and many businesses will see their revenues reduced to a small fraction of their current levels. When economic loss threatens “the continued viability” of a business in this way, that is irreparable harm. Sm ok ing Everyw h e re , 680 F. Supp. 2d at 76.

Second, it is clear that the economic losses here will not be recoverable. To elaborate, if the April 10, 2017 applicability date is not stayed, the harm to NAFA members will begin during the implementation period. Hundreds of millions of dollars will be spent to create the new

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distribution system for FIAs that the Rule mandates. And while the current distribution system is destroyed and replaced, IMOs and independent agents suffer the consequences. Moreover, given this is an industry that cannot turn on a dime, there will almost certainly be an interruption in the sale of FIAs beginning on April 10, 2017, causing inestimable harm to the fixed annuity industry. As is plain, there is absolutely zero possibility that any of these serious losses will be recoverable. That also constitutes irreparable harm. Sterling Com m e rcialCre dit, 762 F. Supp.

2d at 16.

Further, the discriminatory competitive harm that the Rule inflicts on insurance-only agents, as compared to their securities-licensed counterparts, is precisely the type of irreparable harm that Judge Friedman found in Bracco Diagnostics. In Bracco Diagnostics, the plaintiffs

(SONUS and Bracco) were required by the Food and Drug Administration “to undertake more difficult, time-consuming and expensive testing regarding the safety and effectiveness of their products” than their competitors. 963 F. Supp. at 28. In light of this fact, this Court found that

“because SONUS and Bracco are small companies, the time and person power spent, as well as the millions of dollars in costs, are indeed significant and irreparable losses.” Id.

Here, just as in Bracco Diagnostics, insurance-only agents in small businesses are placed at a serious competitive disadvantage in trying to comply with the Rule as compared to their securities-licensed counterparts, who can comply with the Rule without “difficult, time- consuming and expensive” additional costs of compliance. Id. Insurance-only agents will be required to expend enormous time and money to attempt to overcome this competitive disadvantage that the Rule imposes. Bracco Diagnostics compels the conclusion that these injuries are also “significant and irreparable.”

In sum, without a preliminary injunction to stay the April 10, 2017 applicability date, an

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entire industry will be re-shaped during the pendency of this litigation. This will cause the failure of many businesses at an enormous cost that will never be recovered if the Rule is ultimately vacated. In light of these facts, NAFA respectfully submits it has met the high standard for demonstrating irreparable harm as that concept is understood in this Circuit.

VI. The Balance of Harms Favors Granting an Injunction.

The balance of harms tips decidedly in favor of granting preliminary injunctive relief.

On one hand, as described above, the harms to the fixed annuity industry will be enormous and irreparable. On the other hand, there is no reason that the Rule needs to become effective or applicable on such a short time-frame to accomplish its stated purpose.

The existing five-part test has been on the books for over forty years, and the Department has been working on its fiduciary rule since at least 2010. There will be absolutely no harm to the Department if applicability of the Rule is stayed while its validity is challenged.

Nor will there be harm to consumers. State insurance commissioners will continue to regulate insurance products, including fixed annuities. Indeed, the DOL acknowledged that annuities are already widely regulated. Se e 81 Fed. Reg. at 20,949 & 20,959. NAFA members already comply with the robust state regulatory and compliance schemes described above, including disclosure requirements, suitability standards, right-to-return requirements, unfair trade practice laws, market conduct exams, and licensing requirements. In other words, annuities will continue to be subject to substantial regulation even without the Rule becoming applicable.

Thus, consumers are and will remain protected. Se e , e .g., Am e rican Equity Inv., 613 F.3d at 179.

Accordingly, the balance of harms weighs heavily in favor of granting an injunction pending judicial review.

84 Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 99 of 102

VII. An Injunction Will Further The Public Interest.

“The purpose of a preliminary injunction is merely to preserve the relative positions of the parties until a trial on the merits can be held.” Ch aplaincy of FullGospe lCh urch e s, 454

F.3d at 297 (quoting University of Tex. v. Cam e nisch , 451 U.S. 390, 395 (1981)). “Such a preliminary injunction preserves the trial court’s power to adjudicate the underlying dispute by maintaining the status quo ante [.]” Se lectM ilkProduce rs, Inc. v. Johanns, 400 F.3d 939, 954

(D.C. Cir. 2005) (citing Cam e nisch , 451 U.S. at 395). Cf. Sugar Cane Grow e rs Coop. v.

Vene m an, 289 F.3d 89, 97 (D.C. Cir. 2002) (“The egg has been scrambled and there is no apparent way to restore the status quo ante” where injunctive relief was denied and crops were destroyed.). Here, failure to issue a preliminary injunction will result in immediate on-going harm to an entire industry, as it engages in herculean efforts to meet the impossible task of complying by the April 10, 2017 applicability date. In turn, lower- and middle-class retirement investors will be denied access to beneficial retirement services and products. And, if the Rule is ultimately invalidated, all the adverse consequences need not have occurred. Given these facts, preserving the status quo is particularly critical, and it should be maintained until this infirm Rule is judicially vetted.

VIII. Scope Of The Requested Equitable Relief

In the NOPR, the Department indicated the Rule would become “effective” 60 days after publication in the Federal Register, and “applicable” after eight months. Commenters stated that significantly more time was needed “following publication of the final rule to allow service providers sufficient time to make changes necessary to comply with the new rule and exemptions” 81 Fed. Reg. at 20,992. As much as a five-year implementation period was suggested. Id.

85 Case 1:16-cv-01035-RDM Document 5-1 Filed 06/02/16 Page 100 of 102

In the final Rule, the Department settled on a 10-month implementation period – from the

June 7, 2016 effective date through the April 10, 2017 applicability date – without any analysis as to why that amount of time was feasible from a compliance perspective. In other words, the applicability date itself is arbitrary, and it simply appears to reflect a general sense of a need for time to comply, balanced against a desire to have the Rule be effective. Id.

The relief requested here is designed to achieve two goals: (1) to prevent the irreparable injury that will begin to occur immediately throughout the fixed annuity distribution chain if the industry is forced to meet the April 10, 2017 applicability date, and (2) to ensure that the fixed annuity industry has adequate time to comply with the Rule in the unlikely event that the Rule is upheld in toto.

To that end, NAFA requests that the applicability dates of the Rule be stayed pending this litigation. Further, if the Court ultimately upholds the Rule, the fixed annuity industry should be given a reasonable period – from the date of a final court decision – to come into compliance with the Rule and its exemptions. This request is similar to the approach that the SEC and D.C.

Circuit took with respect to the SEC’s failed effort to regulate FIAs as securities.

As explained above, in Am e rican Equity, the SEC in Rule 151A attempted to regulate

FIAs as securities, in some ways similar to the situation here. The SEC understood the impact that its regulation would have on the FIA industry’s distribution system, and it adopted a delayed two-year effective date to give the FIA industry adequate time to comply (without setting a separate “effective date” and “applicability date”). 74 Fed. Reg., 3,137, 3,175 (Jan. 16, 2009), withdrawn at 75 Fed. Reg. 64,642-43 (Oct. 20, 2010). The Department’s Rule and exemptions here will have an even greater disruptive impact on the distribution system for FIAs, yet the industry is being given substantially less time to comply.

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After reviewing the SEC’s rule treating FIAs as securities, the D.C. Circuit initially remanded Rule 151A to the SEC after finding that its analysis of Rule 151A’s impact on industry was “arbitrary and capricious.” The remand order, however, did not change the effective date of the Rule, and the compliance deadline was fast approaching. Unless the Rule was vacated – or the effective date stayed – the industry would have to spend up to $230 million in the first year alone on compliance costs for a rule that could be modified or rescinded on remand.

Subsequently, a petition for rehearing was filed with the D.C. Circuit, illuminating these concerns for the Court, and seeking to ensure that the entire two-year compliance window remained intact during the remand. The D.C. Court granted the petition and ultimately vacated

Rule 151A to ensure the FIA industry had adequate time to comply with Rule 151A, if it ever became effective following reissuance and subsequent judicial review. Am e rican Equity Inv.,

613 F.3d at 179.

The request here follows the approach in Am e rican Equity. While the Rule is under review, NAFA’s members should not suffer the harm that will occur if the industry tries to meet the April 10, 2017 applicability date. If preliminary relief is granted and the Rule is ultimately invalidated, all of those injuries will have been avoided. If the Rule is ultimately upheld, a reasonable compliance window should still be available to the industry, as in Am e rican Equity.39

Accordingly, NAFA respectfully asks that the Court take the approach adopted by the D.C.

Circuit the last time a federal agency attempted to change the regulation of fixed annuities.

39 The SEC, which is far more experienced in financial services regulation than the Department, adopted a two-year implementation period for Rule 151A. That is a more reasonable timetable for the fixed annuity industry to come into compliance with the Rule (to the extent possible). The 10-month compliance window here is simply not realistic. The amount of time needed for the fixed annuity industry to come into compliance with the Rule could be addressed by the Court at the conclusion of this litigation, if necessary.

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IX. Conclusion

For all the foregoing reasons, NAFA respectfully requests that the Court issue a preliminary injunction staying applicability of the Rule until this litigation is concluded. If

NAFA prevails on the merits, all the harms the Rule imposes will have been avoided. If the

Department prevails in toto on the merits, then a new applicability date can be set that provides

NAFA and its members adequate time to come into compliance with the Rule.

Respectfully submitted,

BRYAN CAVE LLP

/s/ Philip D. Bartz Philip D. Bartz (D.C. Bar No. 379603) Jacob A. Kramer (D.C. Bar No. 494050) 1155 F Street, N.W., Suite 700 Washington, D.C. 20004 (202) 508-6000

Of Counsel:

Sheldon H. Smith, Esq. 1700 Lincoln Street, Suite 4100, Denver, CO 80203-4541

Adam L. Shaw, Esq. 1155 F Street, N.W., Suite 700 Washington, D.C. 20004

Counse lforNAFA

Dated: June 2, 2016

88 Case 1:16-cv-01035-RDM Document 5-2 Filed 06/02/16 Page 1 of 10 Case 1:16-cv-01035-RDM Document 5-2 Filed 06/02/16 Page 2 of 10

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

The National Association for Fixed Annuities,

Plaintiff,

vs.

Thomas E. Perez, in his official capacity as Secretary of the United State Department of Labor Civil Action No. ______

and

United States Department of Labor,

Defendants.

AFFIDAVIT OF NAFA EXECUTIVE DIRECTOR CHARLES R. ANDERSON

I, Charles R. Anderson, declare as follows:

1. I am over the age of 18 and have personal knowledge of the facts contained in this affidavit. If called to do so, I am competent to testify as to the matters contained herein.

2. Founded in 1998, NAFA is a trade association dedicated to educating and informing state and federal regulators, legislators, industry personnel, media, and consumers about the value of fixed annuities and their benefits to Americans in financial and retirement planning. NAFA’s membership includes insurance companies (or “carriers”), independent marketing organizations (“IMOs”), and individual producers (or “insurance agents”),

Case 1:16-cv-01035-RDM Document 5-2 Filed 06/02/16 Page 3 of 10

representing every aspect of the fixed annuity marketplace and covering 85 percent of fixed annuities sold in the marketplace.

3. Prior to becoming NAFA’s Executive Director in April 2015, I had a six-year tenure on the NAFA Board of Directors, serving as Treasurer, Secretary, Vice Chairman and

Chairman. I first began working in the insurance and annuity industry in 1980 when I became a

Licensed Agent/Registered Representative at Midwestern Financial Group. I later held roles at

Jackson National Life as a Brokerage Manager; Personalized Brokerage Services as Director of

Sales and; CreativeOne as Senior Vice President for Annuity Sales.

4. Fixed annuities are a form of insurance. They are contracts offering guarantees of

(1) a predictable income stream the owner cannot outlive, (2) protection from market risk to principal and credited interest, and (3) minimum account value accumulation as required under state standard non-forfeiture laws.

5. There are two basic types of deferred fixed annuities: (1) fixed declared rate annuities and (2) fixed indexed annuities (“FIAs”). The difference between these two products is the manner in which the interest rate is calculated.

6. A fixed declared rate annuity guarantees a minimum interest rate set by the insurance company. The contract may provide a guaranteed interest rate for the life of the annuity or may allow the insurance company to reset the interest rate periodically but no more than once every twelve months, protecting the annuity owner against loss due to investment or market risk. Thus, the annuity owner has a guaranteed level of return that will always provide a guaranteed and predictable level of income.

Case 1:16-cv-01035-RDM Document 5-2 Filed 06/02/16 Page 4 of 10

7. In contrast, an FIA bases its interest rate on an external market index, such as the

S&P 500, with a guaranty that the rate will never fall below zero. The policyholder does not directly participate in any security investment. Rather, the insurance carrier assumes the investment risk, guaranteeing the FIA can never lose value based on performance of the equity markets. The advantage of an FIA over a declared rate annuity is the opportunity to earn higher interest from potentially favorable changes in the applicable market index. Aside from the manner in which interest is determined and credited, FIAs function in all other respects the same as fixed declared rate annuities including the predictable stream of lifetime income that is contractually guaranteed by the insurance company.

8. The sales transaction for a fixed annuity contract is made between the consumer and the insurance company. Payments made for the purchase of the fixed annuity contract are paid to the insurance company, not the agent or advisor. The agent does not retain any type of control over the funds. Insurance products like fixed annuities have no downside market risk and provide state-mandated guarantees to the consumer that investment products cannot provide due to their inherent risk factors.

9. In contrast, with investment advice the consumer pays the investment advisor to manage his or her money. The consumer gives the money to the investment advisor who then places it in different investment instruments, moving the money around, reallocating it, buying and selling different assets such as stocks and bonds, all in accordance with an investment plan that the advisor has developed. For this service, typically there are ongoing fees that an investor pays to the advisor.

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10. Fixed insurance products – both fixed declared rate annuities and fixed indexed annuities – are meant to be long-term retirement savings vehicles. Thus, they are not investments and they are not securities. For reasons explained below, they have always been regulated by state insurance laws and are exempted from the federal securities laws.

11. Fixed annuities, including both declared rate annuities and FIAs, are distinguishable from variable annuities. Variable annuities earn investment returns based on the performance of segregated investment portfolios known as subaccounts, and return is not guaranteed. The value of the subaccounts could go up or down, and thus the consumer could make or lose money, with no protection for principal. Consequently, and in contrast to the FIA, the consumer bears all investment risk attendant to the variable annuity and its subaccounts.

Thus, variable annuities are considered securities and have long been regulated as such under applicable securities laws.

12. Fixed annuities are distributed and marketed in a wide variety of different distribution models. There are many different types of salespersons who distribute fixed annuities. Some of these insurance agents operate as “career agents” of carriers, “captive agents” of a carrier, “independent agents” for one or several carriers, employees of carriers or distribution firms, and the like. Some of these agents work directly with carriers, while others may be required by contract or practice to sell only certain types of fixed annuities. Independent insurance agents account for approximately 60% of all FIA sales. The remaining 40% of fixed annuities are distributed through bank, wire house, broker-dealer, captive, independent, or other sales channels. In some cases, the consumer may contract directly with the insurance carrier without working with an insurance agent.

Case 1:16-cv-01035-RDM Document 5-2 Filed 06/02/16 Page 6 of 10

13. IMOs are specialized marketing organizations that distribute life insurance products, including fixed annuities, primarily through independent agents. IMOs are licensed as insurance agencies wherever required by state insurance law, and the principals are typically licensed as individual insurance agents. Insurance carriers work closely with IMOs as intermediaries to recruit agents to distribute their products, provide product information and support, and offer other services such as marketing support and coordinating submission of annuity applications and related forms to carriers. IMOs are an integral part of the independent agent channel, upon which insurance companies rely, usually in lieu of setting up an internal sales or captive agent system.

14. Fixed annuities are regulated closely by state insurance departments. Fixed annuity contracts must be filed with and approved by each state in which the contracts are sold.

State regulation is pervasive over the organization and licensing of insurance companies, content and approval of policies, ongoing financial condition of the insurer, licensing of the insurance agents, the manner in which policies are advertised and sold, and virtually all other facets of the insurance business.

15. While there is a wide array of distribution methods for fixed annuities, every salesperson selling fixed annuities must comply with all applicable state insurance regulatory requirements. All states have comprehensive rules and regulations that govern the sales practices, disclosure, training, conduct, and consumer protection standards that ensure fixed annuities are marketed, sold, and distributed to consumers with fairness, transparency, and recourse in mind. This robust state-based insurance regulatory system has been developed over the past hundred years and has proven to work very effectively. Moreover, in most states, the

Case 1:16-cv-01035-RDM Document 5-2 Filed 06/02/16 Page 7 of 10

agent must also contract with and be appointed by an insurance carrier, prior to selling products on behalf of that insurer.

16. Insurance agents who sell fixed annuities are bound by common-law requirements of agency and must pass tests of both competency and character before being granted a state license. Insurance agents need to be licensed in each state in which they operate. Only state- licensed life insurance agents may sell fixed annuity contracts.

17. After an agent has secured a license from the state, he or she must also contract with and be appointed by an insurance carrier, prior to selling products on behalf of that insurer.

Insurance carriers perform their own due diligence as part of the agent appointment process, and it is not unusual for an agent to be denied the opportunity to contract with that carrier. This review process occurs each time the agent applies for appointment with a new or additional insurance company.

18. After being licensed and appointed but prior to selling annuities, agents in most states must complete mandatory product training provided by the carrier and a suitability training course approved by the state. The suitability training course includes information regarding the types and various classifications of annuities; the uses of annuities; appropriate sales practices, replacement, and disclosure requirements; how product-specific annuity contract provisions affect consumers; the identification of parties to an annuity; and the application of income taxation of qualified and non-qualified annuities.

19. Once fully qualified, the agent is subject to comprehensive state regulations including but not limited to the following:

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Disclosure. States require a written disclosure statement be provided to the purchaser of a fixed annuity contract at point of sale to both protect consumers and foster consumer education. The majority of states have adopted the National Association of Insurance Commissioners (“NAIC”) Annuity Disclosure Model Regulation (http://www.naic.org/store/free/MDL-245.pdf).

Suitability. The NAIC model suitability law (http://www.naic.org/store/free/MDL-275.pdf) applies to virtually all fixed annuity transactions. It establishes a system for insurance companies to supervise recommendations to purchase annuities and sets forth standards and procedures for fixed annuity transactions so that the insurance needs and financial objectives of consumers are appropriately addressed during sales transactions.

“Free Look” (or Right to Return) Requirements. Most states require that annuity contracts include a “free look” or “right to return” provision, allowing annuity contract purchasers the right to cancel their contract within a certain period (typically 10-30 days).

Unfair Trade Practice Laws. Most states have adopted the NAIC’s Model Unfair Trade Practices Act (http://www.naic.org/store/free/MDL-880.pdf) (or similar regulations), or some version thereof, providing a framework to regulate trade practices in the business of insurance by defining and prohibiting a broad range of conduct and practices that constitute unfair methods of competition or unfair or deceptive practices.

Market Conduct Exams. All state insurance departments have regulatory authority to investigate carriers and insurance agents to ensure compliance with applicable laws and regulations. Most states also perform regular market conduct examinations to monitor compliance with applicable state laws.

20. Accordingly, state insurance departments oversee all aspects of the transaction: from the development and approval of each fixed annuity product sold in the state, to the licensure and sales activities of the individual agents, to the operations and compliance protocols of the insurance companies. In each instance, the objective is to protect the financial interests of the fixed annuity purchaser and, as a practical matter, to serve the best interest of the consumer.

21. The state-based regulatory structure governing the manufacture, distribution, and sale of fixed annuity products is effective – as demonstrated by the minimal number of consumer complaints. In 2014, for example, consumer complaints involving securities and advisors

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represented over 97% of combined annuity and securities complaints – but only .03% of total complaints were lodged by owners of fixed annuities.

22. NAFA has more than 330 members—carriers, IMOs, and agents—whose right to sell fixed annuities and FIAs under state and federal insurance and securities laws will be adversely affected by the Department of Labor’s “Conflict of Interest” Rule. By extension, employees and contracted agents are also NAFA members. The affidavits of NAFA members

Fritz Engels, Mike Foguth, Richard James, Jack Marrion, Mark Perkins, Mike Rafferty, Dan

White, and James Wong demonstrate the direct and concrete injury that these NAFA members will suffer if the Rule goes into effect.

23. These injuries will plainly adversely impact the fixed annuity industry. As stated above, the purpose of NAFA as a trade association is to promote the sale and benefits of fixed annuities throughout the marketplace. Consequently, protecting the fixed annuity industry from the Rule’s harm is directly germane to the purposes of NAFA.

24. Because the relief NAFA seeks in this litigation is relevant to the entire fixed annuity industry, it is not necessary for any individual NAFA member to be a party to the NAFA litigation.

25. In short, the Rule not only imposes enormous and unrecoverable compliance costs on the fixed annuity industry, but it will also discourage the sale of fixed annuities and cause harm throughout the fixed annuity distribution system. Because NAFA has members throughout the distribution system, NAFA is uniquely situated to bring legal claims challenging the Rule.

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Pursuant to 28 U.S.C. §1746, I declare under penalty of perjury that the foregoing is true and correct.

Executed on: __June 2__, 2016

______

Case 1:16-cv-01035-RDM Document 5-3 Filed 06/02/16 Page 1 of 22 Case 1:16-cv-01035-RDM Document 5-3 Filed 06/02/16 Page 2 of 22

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

The National Association for Fixed Annuities,

Plaintiff,

vs.

Thomas E. Perez, in his official capacity as Secretary of the United States Department of Civil Action No. ______Labor and

United States Department of Labor,

Defendants.

AFFIDAVIT OF JACK MARRION

I, Jack Marrion, declare as follows:

1. I am over the age of 18 and have personal knowledge of the facts contained in this affidavit. If called to do so, I am competent to testify as to the matters contained herein.

I. BACKGROUND

2. I serve as the Director of Research for the National Association for Fixed

Annuities (“NAFA”). I have held that position since July 2011.

3. In addition, I am a Webster University post-doctoral Research Fellow. I have held that position since January 2013.

4. I am also the President of Advantage Compendium, Ltd., a research consultancy firm. Since 1996 Advantage Compendium has provided annuity market intelligence and sales

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reporting, conducted a broad range of research ranging from agent demographics to annual studies of industry complaints to annuity decision-making. This research has been shared with, presented to, and relied upon by courts, insurance and securities regulators, insurance carriers and other business entities.

5. From 1989 to 1996, I served as the President of Affiliated Financial Services, an

NASD broker dealer with offices in eight states.

6. From 1986 to 1989, I was a Regional Vice President of United Pacific Life.

United Pacific Life created and sold fixed annuities.

7. From 1982 to 1986, I was a Vice President of Stifel, Nicolaus & Company, Inc.

This was an NYSE investment banking firm.

8. I hold a BBA from the University of Iowa, an MBA from the University of

Missouri, and a Doctorate from Webster University.

9. I am the author of six books on financial topics and two peer-reviewed papers on fixed annuity performance and annuity agents.

10. As a result of my work with NAFA and my other professional experience, I am familiar with fixed annuity products and the fixed annuity industry, as well as the financial services industry as a whole.

II. NAFA MEMBERS

11. NAFA’s members include insurance companies (“carriers”); independent marketing organizations, which are specialized insurance agencies (“IMOs”); and independent insurance agents.

12. Insurance carriers produce different types of fixed annuity products, which are described below. NAFA’s membership includes 22 carriers that create and distribute fixed annuity products (“annuity carriers”).

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13. IMOs work with annuity carriers to recruit agents to distribute their annuities and support the agents in selling and servicing annuities. NAFA’s membership includes approximately 70 IMOs that distribute life insurance products, including fixed annuities.

14. Independent insurance agents are individuals who work as independent contractors for the annuity carriers. These agents must pass tests of both competence and character before they are granted a state insurance license. Some independent insurance agents are individual members of NAFA. In addition, tens of thousands of independent insurance agents are connected to NAFA through their annuity carriers and IMOs.

III. FIXED ANNUITY PRODUCTS

15. Fixed deferred annuities are classified as insurance products based on their guarantees and mortality features. Fixed deferred annuities offer guarantees of (1) a predictable income stream the owner cannot outlive, (2) protection from market risk to principal and credited interest, and (3) minimum account value accumulation as required under state standard nonforfeiture laws (“SNFL”). Surrender penalties may apply if the annuity is not held to maturity.

16. In addition to fixed deferred annuities there are single premium immediate annuities where the guaranteed income stream commences upon issuance of the policy and thus there is no accumulation period as in the case of deferred annuities.

17. Fixed deferred annuities fall into two broad categories: (1) fixed declared rate annuities and (2) fixed indexed annuities (“FIAs”). Fixed deferred annuities are often purchased as a funding vehicle for Individual Retirement Accounts (“IRAs”).

18. All fixed annuities have minimum guaranteed nonforfeiture values mandated by state SNFL requirements. This is a critical difference between fixed annuities and variable annuities. Variable annuities are not subject to state SNFL requirements. In addition to the

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minimum guaranteed non-forfeiture values mandated by law, fixed annuities typically are designed to earn additional interest based on the terms of the annuity contract.

19. With many declared rate fixed annuities, the amount of additional interest to be paid is declared on each anniversary by the carrier for payment the following year on the policy anniversary. In some cases, the rate is declared for periods of more than one year, in which case the annuity is called a Multi-Year Guaranteed Annuity (“MYGA”). In other cases, the declared rate is effective for the term of the annuity.

20. With an FIA, the amount of additional interest paid is determined by a pre-set formula based on an external index, which is calculated at the end of the policy year (or other stated period of time) based on performance of the index, in order to determine the amount of interest credited to the policy. However, the policyholder does not participate directly or indirectly in any security investment, and no principal can be lost based on index performance.

The crediting formula is approved by the applicable state insurance department as part of the annuity form filing process.

21. The principal difference between fixed declared rate annuities and FIAs is the manner in which the additional interest is calculated. Aside from how the interest rate is determined and credited for purposes of accumulation, FIAs function in all other ways like other fixed annuities, including providing upon maturity for a stream of lifetime income guaranteed by the insurance company.

22. The advantage of FIAs over fixed declared rate annuities is the opportunity to earn more interest growth from favorable changes in the applicable market index, while at the same time ensuring that the annuity owner’s contract value will not decrease due to unfavorable changes in the index.

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23. The purchase of a fixed annuity contract is a transaction between the consumer and the insurance carrier, and thus all premium payments made for purchase of the annuity are paid directly to the insurance company. Compensation is paid to the agent by the carrier and not the consumer.

24. Annuities are sold by insurance agents who receive commissions in the form of an up-front percentage-of-premium payment, an annual or “trail” percentage of the account value, or a combination of both. To my knowledge, almost all annuities today are sold based on commission compensation. Unlike other asset classes such as mutual funds and other kinds of securities, fixed annuities do not lend themselves to compensation based on assets under management or other non-commission forms of payment. The reason for this is that, while insurance agents usually continue to assist their annuity customers after the initial purchase is made, annuity purchases often involve large initial deposits, the efforts of the agent are most significant in the beginning at the point of purchase, and servicing of the policy is performed mostly by the insurance carrier rather than the agent over the life of the policy.

IV. THE DEPARTMENT OF LABOR FIDUCIARY RULE

25. As part of my work for NAFA, I have reviewed the Department of Labor’s

(“DOL”) new “fiduciary” rule and the accompanying materials issued by the DOL, including the materials related to Prohibited Transaction Exemption (“PTE”) 84-24 and the Best Interest

Contract (“BIC”) exemption. I am also generally familiar with the rulemaking process and related materials published by the DOL prior to issuing the final rule.

26. DOL’s initial proposed fiduciary rule released in 2015 provided that fixed indexed annuity products would be covered under PTE 84-24. Under the final DOL fiduciary rule, fixed indexed annuities are instead made subject to the more onerous regulations under the

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BIC exemption. PTE 84-24 was modified to cover only “fixed rate annuities,” which is defined in a way intended to cover certain fixed declared rate annuities but not fixed indexed annuities.

27. By placing fixed indexed annuities under the BIC exemption, DOL is treating fixed indexed annuities the same as if they were securities products, lumping them in with mutual funds and variable annuities as well as even riskier investments such as options or non- traded REITs where 100% of principal invested is at risk of loss. Fixed indexed annuities are very different from securities products, because they are guaranteed by the issuer (i.e., the insurance company) and protected against market loss (i.e., minimum guaranteed nonforfeiture values per SNFL requirements). To my knowledge, fixed indexed annuities are the only widely marketed non-securities product covered by the BIC exemption.

28. The DOL attempts to differentiate fixed indexed annuities by saying that the benefits of such contracts vary “based on . . . the investment experience of an index or investment model” [81 Federal Register 21817]. This is technically wrong. Fixed indexed annuity contract values do not vary “based on the investment experience of an index” because the annuity does not invest in the index and the annuity value can never vary after interest is credited. Likewise, technically speaking, the DOL mistakenly defines “fixed rate annuity” in a manner that excludes many declared rate annuities which credit interest based on an “investment model,” which is the investment model of the insurer’s general account used in determining crediting rates on most declared rate annuities. Various terms and definitions used by DOL are not taken from established terms and definitions commonly understood within the insurance industry. This will engender uncertainty in the insurance industry as it attempts to understand and comply with the Rule.

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29. The DOL says fixed rate annuities are included in PTE 84-24 based on predictability of interest payments, but this too is a mistaken premise, to the extent used to justify putting fixed indexed annuities under BIC exemption. For many fixed declared rate annuities, interest is declared at the start of each policy year, but rates will vary from year to year based on the returns of the insurer’s general account investment model. Thus, future earnings on fixed rate annuities are no more predictable than interest rate earnings on fixed indexed annuities, and arguably are less predictable, since the fixed indexed annuity earnings are based on a known indexed-based formula.

V. INSURANCE CARRIERS

30. Compliance requirements imposed upon annuity carriers under the BIC exemption will be impossible to perform with respect to independent agents. Under the BIC exemption, the insurance carrier must determine whether the specific fixed indexed annuity recommended by an independent insurance agent is in the “best interest” of the consumer, which cannot be done without taking into account annuities not even offered by the insurer. The average independent insurance agent who sells fixed annuities represents multiple insurance carriers. The BIC exemption unrealistically requires the insurer to police all of the agents’ activities, including presentation of competitors’ products, and compensation paid to the agent by competitors, to ensure that the “best interests” of the consumer are being met, without regard to the “financial or other interests” of the agent or all the other insurers represented by that agent.

This is simply not possible. Because independent agents almost always sell for more than one carrier, there is no practical way to establish a set commission across all sales. The end result will be many insurers exiting the independent agent channel, creating enormous compliance costs for insurers, and reducing the number of independent agents.

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31. Insurance compliance systems are very different from securities compliance systems. In the case of securities compliance, each agent (known as a registered representative) is affiliated with a single broker dealer. That broker dealer is responsible for monitoring and controlling all aspects of that agent’s business, including the agent’s compensation and all compliance practices, all in a manner that is not the custom in the insurance industry and ultimately cannot be replicated because independent agents by definition represent several competing carriers.

32. One alternative is for annuity carriers to work only with agents affiliated with a broker dealer or investment advisory firm. However, based on a survey I performed, over 40% of independent agents are not securities registered as either investment advisors or registered representatives. If the carriers are forced to take this approach, insurance-only agents would need to spend the time and money to pass multiple securities examinations, none of which address fixed annuities, and then find a broker dealer or investment advisory firm to affiliate with, in order to remain in the business of selling the fixed indexed annuities, which are not regulated as securities under the federal securities laws. Even those independent agents who are securities registered may not be affiliated with a broker dealer or investment advisor and will need to find a firm to affiliate with for purposes of meeting the requirements of the BIC exemption, a process that takes time and typically involves added compliance burdens.

33. Another alternative to the independent agent channel would be for annuity carriers to create a captive agent distribution system, wherein agents would sell fixed annuities of only one carrier. This would eliminate “independent” agents selling fixed annuities because agents could sell products issued by only one insurer. In addition, I believe it would require insurers to create layers of supervisory personnel and to incur the additional cost of treating these

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agents as employees and not independent contractors for tax purposes. This final point alone could result in over $160 million of additional annual cost to the insurers.

34. No matter how the insurance carriers choose to handle distribution as a result of the fiduciary rule, the costs of compliance under the BIC exemption will be enormous and independent insurance agents offering fixed indexed annuities will substantially decrease in number. Compliance cost estimates in the DOL’s own cost-benefit analysis show these costs are front-loaded and would need to be expended as soon as the fiduciary rule takes effect, given the lead time needed to build elaborate compliance infrastructure.

35. In addition, to come into compliance with the fiduciary rule and the BIC exemption, insurance carriers will need to change their sales approach in the IRA marketplace.

Among other things, this means insurance carriers will need to change their fixed indexed annuity product offerings to such an extent that products will need to be re-filed with state insurance regulators for approval. For example, it is already reported in the trade press that some carriers plan to stop the sale of fixed indexed annuities in the tax-qualified marketplace and instead will try to create fixed rate annuities with enhanced benefit features as commonly found today in fixed indexed annuities. Other carriers may need to change their products to compete more effectively in the broker dealer channel. Yet other carriers may need to introduce new fixed indexed annuity products with possibly more levelized compensation structures, which will require updating the benefit design of their annuities to optimize the products for consumers and agents.

36. The need for annuity carriers to update products to remain competitive in the IRA marketplace will take time. This overall process for creating and introducing new products is likely to take years, and at a minimum will take approximately 18 months. As a result, the April

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2017 deadline the DOL imposed will be impossible for most carriers to meet, since carriers were unprepared by the turn the DOL took in denying fixed indexed annuities classification under

PTE 84-24 and have not started to prepare alternative products. Launching new products is a time consuming process which involves product conception, product design, pricing, agent contracting, filing of forms with state regulators, systems development, preparation of product materials and advertisements, and many other steps. Filing of product forms in fifty states, and getting approval in all states, can take up to two years.

37. A major complication is that no insurance company will be able to qualify as a

“financial institution” as that term is defined under the BIC exemption. To qualify for the BIC exemption, an insurance company must meet the following definition: “An insurance company qualified to do business under the laws of a state, provided that such insurance company: (i) Has obtained a Certificate of Authority from the insurance commissioner of its domiciliary state which has neither been revoked nor suspended, (ii) Has undergone and shall continue to undergo an examination by an Independent certified public accountant for its last completed taxable year or has undergone a financial examination (within the meaning of the law of its domiciliary state) by the state’s insurance commissioner within the preceding 5 years, and (iii) Is domiciled in a state whose law requires that actuarial review of reserves be conducted annually by an

Independent firm of actuaries and reported to the appropriate regulatory authority” [81 Federal

38. To my knowledge, there is no state that “requires that actuarial review of reserves be conducted annually by an Independent firm of actuaries and reported to the appropriate regulatory authority.” Thus, as written, no insurance company qualifies for a BIC exemption as

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a financial institution, and thus all annuity business would have to be written through broker- dealers, investment advisors, or banks.

VI. INDEPENDENT MARKETING ORGANIZATIONS

39. There are over 100 IMOs offering fixed annuities. Two thirds of fixed indexed annuity sales are conducted through IMOs, and IMOs account for over $35 billion of annual fixed indexed annuity purchases.

40. Under the BIC exemption IMOs are not specified as being a financial institution that is eligible to receive commissions. Thus, it appears insurers cannot continue to pay any fixed indexed annuity compensation to IMOs.

41. Based on a survey I conducted in February 2016, the median IMO reported that fixed indexed annuities represent 85% of their total sales. If IMOs cannot receive fixed indexed annuity compensation, there will be massive layoffs and the closing of a majority of the firms.

42. I estimate that the DOL rule revision will eventually reduce the annual revenues to the annuity IMOs from the current approximate level of $1,050,000,000 to $360,000,000.

This reduction in revenue will result in massive layoffs and the closing of many firms.

43. Each of the IMOs can apply to the DOL for an individual exemption and, if granted, then receive compensation. However, the DOL has not provided any guidance as to how it would evaluate such requests, and there is no guidance or guarantee as to how an IMO would qualify. Further, it is not clear what type of standards DOL would require, or whether it would in effect require the IMO to adopt the same types of standards as a broker dealer, which would be very expensive and time consuming, if not entirely impracticable.

44. If IMOs are able to secure from DOL an exemption to receive compensation under the BIC exemption, it remains unclear what their role will be and what additional costs they would incur in that role. Existing functions of agent recruitment and sales support would

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presumably continue, but it is highly probable the DOL or carriers will require IMOs to assume all or part of the legal liability of supervision over agents in satisfying the impartial conduct standards of the BIC exemption.

45. For reasons explained above, it is inconceivable under the BIC exemption that an insurer will be able to take on the supervisory responsibility and liability for an agent that also works with competing insurers. It is therefore likely that IMOs that are able to qualify for the

BIC exemption with respect to sales of FIAs would be forced by carriers to supervise independent insurance agents on behalf of competing carriers in order to satisfy the BIC exemption impartial conduct standards. Should that happen, IMOs would need to require agents to only do business with one IMO, which is contrary to current practice and would present IMOs with many of the same challenges as apply to insurers discussed above (e.g., independent contractor status). Also, should that happen, IMOs would experience a profound shift in overhead and liability, because IMOs would then be directly supervising agent activity and taking on responsibilities and liability that today do not exist, all of which would represent a dramatic paradigm shift in the IMO business model that would be extremely challenging and costly.

46. It is difficult to project new compliance costs for IMOs under this scenario, but they will be substantial. Errors and Omissions (“E&O”) insurance premiums would increase sharply. Also, IMOs would need to employ compliance supervisors, which I estimate will cost a minimum of ten million dollars starting immediately over the next ten months in advance of the

Rule’s “applicability date,” given such positions will likely have a minimum salary benefit and overhead cost of $120,000 per year and there are at least 100 IMOs. I further estimate this

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requirement will cost hundreds of millions of dollars over the next ten years across all insurance agencies as well as major IMOs.

VII. IMPACT ON INDEPENDENT AGENTS

47. The Bureau of Labor Statistics reports there are 281,290 licensed life insurance agents. I estimate that a minimum of 80,000 sell fixed indexed annuities.

48. As a result of the DOL Rule, many independent agents will no longer offer fixed indexed annuities. This is because insurers will withdraw from the independent agent distribution channel and/or insurers will require these independent agents to forgo their independence and become affiliated with a broker dealer, advisory firm or captive agency.

49. This will result in many agents exiting the business. I estimate that the implementation of the DOL rules will cause 20,000 annuity agents to leave the business.

50. I estimate that the DOL fiduciary rule will increase the cost to agents of E&O insurance by a minimum of 160%, because they will be classified as fiduciaries with higher potential liability in a regulatory structure not designed for fiduciary status. As a result, I estimate that the additional cost to agents for this insurance alone will be $59 million to $120 million a year.

51. Under the current regulatory system, and one that remains in place even if the

DOL fiduciary rule were to become effective, the agent and annuity company are bound to act in accordance with state insurance laws and regulations. Established suitability standards require that each and every consumer annuity application is reviewed for each of 12 criteria to determine that the sale is suitable for the consumer and to determine the consumer will benefit from the annuity.

52. Under the DOL final rule, an agent offering fixed annuities will be operating under three different regulatory and liability environments, possibly when working with the same

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annuity buyer, depending on the type of fixed annuity products being offered (i.e., fixed declared rate or fixed indexed annuities) and the source of funds to purchase the product (i.e., “qualified” funds from an ERISA Plan or IRA versus other “nonqualified” funds):

a. Fixed Rate or Fixed Indexed (nonqualified funds) – The agent is governed by

state insurance laws and suitability requirements imposed on annuity sales.

b. Fixed Rate (qualified funds) – The agent is governed by state insurance laws and

suitability requirements imposed on annuity sales. In addition, agent is acting as a

fiduciary and to receive a commission must act under the tenets of PTE 84-24, which

imposes impartial conduct standards requiring the agent to ensure the terms of the

annuity are at least as favorable to the Plan or IRA as an arm’s length transaction with an

unrelated party would be.

c. Fixed Indexed (qualified funds) – The agent is governed by state insurance laws

and suitability requirements imposed on annuity sales. In addition, the agent is acting as

a fiduciary and to receive a commission must act under the tenets of the BIC exemption

which, in addition to several other points, requires the agent’s financial institution to

enter into a contract requiring the agent to make a recommendation that reflects the care,

skill, prudence, and diligence under the circumstances that a prudent person acting in a

like capacity and familiar with such matters would use in the conduct of an enterprise of a

like character and with like aims.

53. As a practical matter, agents (as well as carriers and IMOs) will be unable to work under three different systems of supervision and liability in connection with the sale of fixed annuities. The most likely options will be the two extremes; i.e., either carriers will force all annuity sales to be processed as if they were under the BIC exemption or they will do away with

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products that fall under the BIC exemption. In either event, fixed annuity options available to consumers will drop dramatically as carriers retool their product menu.

54. Independent insurance agents who are not currently dually licensed under securities laws will be forced to register as investment advisers in order to provide the kind of investment advice required under the BIC exemption to satisfy impartial conduct standards. This applies to any insurance-only agent who sells fixed indexed annuities to IRA owners, even if the agent does not sell any securities products.

55. Insurance-only agents must be careful to avoid giving “investment advice” so as to avoid triggering investment advice registration requirements under state and federal securities law. However, the best interest standard under the BIC exemption specifically requires an agent to consider the “investment objectives” of the client.

56. The BIC exemption preamble clearly states the Department imposes a duty of prudence upon agents equivalent to the duty of prudence imposed upon ERISA plan advisors, which entails a degree of analysis and scope of review that goes well beyond the kind of advice currently provided by agents, who otherwise conduct themselves to avoid triggering investment adviser licensure requirements under federal and state securities laws.

57. The BIC contract also forces agents to hold out as investment advisers in a manner that is generally not permitted for insurance-only agents. The leading guidance in this area is a bulletin promulgated by the Iowa Insurance Division which specifies “do’s and don’ts” for insurance-only agents to avoid providing impermissible investment advice

(http://www.iid.state.ia.us/sites/default/files/commissioners_bulletins/2011/06/24/bulletin_11_s_

1_re_securities_licensed_persons_jun_13615.pdf). That bulletin is irreconcilable with the BIC exemption requirements.

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VIII. APRIL 2017 APPLICABILITY DATE

58. The DOL’s April 2017 deadline is unworkable. Fixed indexed annuity providers and distributors were blindsided by the 2016 final rule after being told in 2015 that their mainstay product would fall under PTE 84-24. I do not believe that NAFA members will be able to achieve compliance by April 10, 2017. The result will be a competitive disadvantage for

NAFA members as compared to other parts of the financial services industry, and thus NAFA members will suffer significant marketplace setbacks and financial losses.

59. Compliance obstacles for the FIA industry are daunting compared to the rest of the financial services industry.

60. As explained above, to even begin to comply, insurance companies must be assured they can operate as financial institutions under the BIC exemption, since the qualification requirements for insurers under the current regulation are impossible to meet.

61. Also as explained above, insurers will not be able to supervise independent insurance agents in the manner required by BIC exemption, forcing insurers to consider other distribution models which all have inherent limitations and costs because they are at odds with the historical business methods of this industry.

62. Insurance companies will face further obstacles because of the need to create and launch new products, which requires individual state-by-state approval, and require months to introduce into the marketplace. The re-filing process can only begin after the carriers have decided how they may continue to sell fixed annuities, and it is not known how long that will take. As a result, many carriers are likely to stop offering fixed indexed annuities to qualified accounts on April 10, 2017, at least until they are able to create new annuities for qualified accounts. On top of the already-enormous compliance costs, the costs and delays of an interruption in the sale of these annuity products cannot be imagined.

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63. Additionally, as explained above, there is uncertainty whether IMOs can even collect compensation, because they are not classified as financial institutions under the BIC exemption, putting their viability in doubt under the fiduciary rule. This is a $35 billion dollar business, and annuity products account for the lion’s share of IMO revenue. It is not clear whether IMOs will even be able to remain in the fixed annuity business at all after the insurer carriers determine how they will react to the DOL rule.

64. Beyond that, insurance-only agents will need to become registered as investment advisers to avoid risking their livelihoods by potentially violating securities laws. E&O premiums alone will increase dramatically when agents are classified as “fiduciaries.” And as explained above, agents will leave the business, because it will be too cumbersome and costly for them to continue to sell fixed annuities.

65. All of these issues, and more, must be resolved by April 10, 2017. I believe it will be impossible for the FIA industry to meet this deadline, causing serious damage if the applicability date is not postponed.

IX. DOL’S ANALYSIS OF THE IMPACT OF THE RULE

66. The DOL prepared a report entitled “Regulating Advice Markets – Definition of the Term “Fiduciary” Conflicts of Interest – Investment Retirement Advice – Regulatory Impact

Analysis for Final Rule and Exemptions” (Regulatory Impact Analysis)

(https://www.dol.gov/ebsa/pdf/conflict-of-interest-ria.pdf).

67. In its Regulatory Impact Analysis, the DOL says that TIAA and Northwestern

Mutual submitted estimates of the cost of compliance and then states that insurers could have even lower compliance costs than broker dealers, “particularly to the extent insurers rely on broker dealer firms that are selling their products for implementation of the Best Interest

Contract Exemption” [5.3.3, page 237]. This analysis may apply to variable annuities, but it is

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not applicable to fixed annuities. In particular, the DOL does not account for the fact that two- thirds of fixed indexed annuity sales are from independent agents – a distinct non-broker dealer channel that neither TIAA or Northwestern Mutual sells through.

68. The DOL appears to have done little or no research on how moving fixed indexed annuities from PTE 84-24 to the BIC exemption would affect insurers. With little insight into how they derived their numbers, the DOL projects in its Regulatory Impact Analysis that complying with BIC will cost fixed indexed annuity insurers, in total, $14.1 million the first year and $3 million thereafter [7.10, page 286]. I believe the costs will be much greater, and most of the insurers I have contacted are presently unable to even estimate their compliance costs.

69. Although some marketing organizations are described by the DOL in its

Regulatory Impact Analysis [3.1.2.3, pages 102-103], its analysis does not include IMOs offering fixed indexed annuities as one of the affected small entities [6.2, page 254].

70. The DOL’s Regulatory Impact Analysis [Section 3.2.3.4.1, page 147] says “In

Chile, when consumers received advice from an insurance agent whose commissions depend on the sales of annuity products, only 20% of those consumers chose the most appropriate annuity offered.” However, the study they cite actually concludes that consumers do not always get the top-paying annuity because the agent is a captive agent of one insurer; it has absolutely nothing to do with commissions [R. Rocha & H. Rudolph. 2010. A summary and update of developing annuities markets: The experience of Chile. Policy Research Working Paper 5325. The World

Bank]. As explained above, the DOL’s new rule is likely to reduce the number of independent agents and increase the number of captive agents.

71. In another part of its Regulatory Impact Analysis [Section 3.2.1, page 132], the

DOL states that fixed indexed annuity sales reached $48.2 billion in 2014, and “increased sales

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of fixed-indexed annuities have been followed by complaints that the products were being sold to customers who did not need them.” However, records maintained by the National Association for Insurance Commissioners show that, in 2014, actual complaints were 50% lower than they were five years previously, even though fixed indexed annuity sales were 50% higher, and there were very few complaints about fixed indexed annuity sales compared to other products:

2014 Consumer Complaints

Total Securities 17509

NASAA 9693

SEC (top 10) 5014

FINRA 2802

NAIC All Annuities 508

NAIC Other Annuities 431

NAIC FIAs 77

[NAIC Consumer Information Source (https://eapps.naic.org/cis/); Beacon Research Fixed

Annuity Premium Study.]

72. A recurring theme of the DOL is that a fiduciary standard is justified because conflicts of interest cost consumers. The DOL describes a number of academic studies that purport to show that mutual fund customers of commission-paid stockbrokers earn less on their investments than no-load mutual fund customers [Section 3.2.2.2, pages 149-155]. However, the

19 Case 1:16-cv-01035-RDM Document 5-3 Filed 06/02/16 Page 21 of 22

DOL does not analyze and makes no effort to quantify any savings to consumers that may result from a fiduciary model as it applies to the fixed annuity industry.

73. The DOL does cite one study relating to insurance commissions in stating that high and variable commissions can encourage agents and brokers to recommend products that are not suitable for their customers and/or favor one suitable product over others that would better serve their customers’ interests (Schwarcz 2009)” [Section 3.2.3.1, page 131]. However, the DOL neglects to mention that the study did not involve insurance intermediaries (i.e., agents) in the United States, and even the study’s authors describe evidence of bad behavior of foreign agents as “scant.” [Schwarcz, Daniel & Peter Siegelman. 2015. “Insurance agents in the 21st century: The problem of biased advice.” Research Handbook in the Law and Economics of

Insurance.]

74. The DOL says their new rules will increase the annual premium for E&O insurance by 10% [5.4.1, page 239-40]. I estimate that the DOL final rule will increase the cost to agents of E&O insurance for agents by a minimum of 160%, because they will be classified as fiduciaries. Consequently, I estimate that the additional cost to agents for this insurance alone will be $59 million to $120 million a year.

75. The DOL ignores the time and money that insurers face in deciding on how to meet the new distribution challenges related to agents and IMOs, the time and money to be spent in implementing the new distribution systems, the cost to carriers of redesigning their products, the additional months it will take in refiling existing annuities and creating and filing new products, as well as the high likelihood that some carriers will need to suspend sales of fixed annuities after April 2017 because they will be unable to comply with the rule by the applicability date.

20 Case 1:16-cv-01035-RDM Document 5-3 Filed 06/02/16 Page 22 of 22

76. The DOL also ignores that the annual cost in lost revenue alone to IMOs could be

$700 million, resulting in massive layoffs and many IMOs leaving the business.

77. The DOL also ignores that changes in the employee status of independent agents could result in tens of thousands of independent agents existing the business.

78. In short, I find the DOL analysis to be based largely on extrapolations from the securities industry or segments of the insurance industry involved in the sale of securities products (i.e., variable annuities), and it fails to capture the true costs that would be incurred by the fixed annuity industry and in particular the FIA industry.

Pursuant to 28 U.S.C. §1746,1 declare under penalty of perjury that the foregoing is true and correct.

Executed on: May ^,2016

21 Case 1:16-cv-01035-RDM Document 5-4 Filed 06/02/16 Page 1 of 8 Case 1:16-cv-01035-RDM Document 5-4 Filed 06/02/16 Page 2 of 8

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

The National Association for Fixed Annuities,

Plaintiff,

vs.

Thomas E.Percz, in his official capacity as Secretary of the United State Department of Labor Civil Action No. and

United States Department of Labor,

Defendants.

AFFIDAVIT OF FRITZ ENGELS

I,Fritz G. Engels, declare as follows:

L I am over the age of l8 and have personal knowledge of the facts contained in this affidavit. If called to do so, I am competent to testify as to the matters contained herein.

2. I am the President of the Engels Financial Group in Kennesaw, Georgia. I have been in the financial services business for over 30 years. I started my practice in 1986 and am authorized to sell insurance products in the states of Georgia and Florida.

3. I am a member of the National Association for Fixed Annuities. Case 1:16-cv-01035-RDM Document 5-4 Filed 06/02/16 Page 3 of 8

4. In addition to me, the Engels Financial Group consists of my wife, who manages

the company, one lawyer, and one certified public accountant who partner with me on planning as

needed based on the complexity of the client's retirement planning needs.

5. I sell approximately $12 million per year in different products. Fixed annuities

make up about 50% of that total, or $6 million. I offer these insurance products from six different

insurance carriers. In addition to annuities, Engels Financial Group offers life insurance, long-

term care insurance, and Medicare supplement insurance.

6. We also sell non-insurance products. For example, through my partner (who holds

a FINRA "Series 7" general securities license) and through a partnership with a trust bank and

several other organizations, Engels Financial Group is able to offer private equity, certificates of

deposit, diamonds, gold and silver, and several types of trusts.

7. Of the $6 million in fixed annuity sales annually, I sell approximately $300,000 in

fixed declared rate annuities and $5,700,000 in fixed indexed annuities ("FIAs") per year. In other words, FIAs make up about 95o/o of all annuities sold by Engels Financial Group annually.

On an average commission of about 7%6 percent, we net approximately 4oh after expenses and taxes. Most securities-licensed advisors charge L.5%o to 3o/o per year, every year. Their clients pay those fees directly from their principal, even if the account balance is declining in value. At a presumed fee of I .5Yo per year over 10 years, the securities advisor earns I 5%o, and over 20 years he earns 30olo. By comparison, the 7%FIA commission presumed above is a one-time amount paid up front by the insurance carrier when the client purchases an FIA. Over 10 years the insurance agent earns only 0.7o/o per year, or over 20 years he eams .035%. Even a 100% one-time fee is just 0.5Yo per year over a 2}-year relationship with a client. Thus, in the long run, fixed declared rate annuities and FIAs already pay far less than securities. Case 1:16-cv-01035-RDM Document 5-4 Filed 06/02/16 Page 4 of 8

8. Among other problems, the Department of Labor's (DOL) new "conflict of

interest" regulation did not account for this important difference between insurance and securities

products. The 7o/o compensation paid in connection with an FIA purchase is never again charged,

and the client does not have that amount taken from their principal. The client's principal is also

unaffected by market declines. So, a securities advisor actually gets paid a lot more to put a

client's money at risk, while a "safe money" agent gets paid a lot less to protect the client. The

new regulation will result in a dramatic shift of consumers to securities-licensed advisors with

higher fees and riskier transactions that put principal balances at risk and leave no marketplace for

retirement savers with less than $500,000 who cannot afford those fees or accept those risks.

9. FIAs are great products for small retirement savers because they are safe and they

protect consumers from losses and the fees of higher risk securities products. They guarantee the

principal balance, and they provide a guaranteed income for life of the annuitant. Although

insurance agents are paid less than our securities counterparts, we remain very loyal to our clients.

We care about our clients and want to protect them.

10. 75%o of my total business is in qualified money at present, which means that the product purchase is made with tax-deferred retirement funds. The remaining25o/o of purchases come from non-qualified funds, like cash accounts, for example.

I l. 75%o of my qualified money business is in fixed annuities or FIAs alone.

12. At present, my legal costs run approximately $10,000 per year. I spend $4,000 per year on my own continuing education and compliance and $3,000 per year on licensing and registration renewals. In addition to these costs, Engels Financial Group spends $150,000 per year on marketing. Case 1:16-cv-01035-RDM Document 5-4 Filed 06/02/16 Page 5 of 8

13. Based on past and current business volume, I project that Engels Financial Group will reach $10,000,000 in FIA sales in 2017, but if commissions are reduced as a result of the

DOL's regulation, I will not be able to afford the $150,000 per year in marketing that it takes to reach potential clients. For instance, if the paid commission dropped to 5Yo, then the net commission drops to 2.85o/o. This will limit my ability to afford the marketing and education costs to find and help new clients. To illustrate, on $6 million in premium sales today at a net commission of 4o/o, this equals $240,000; if the net is 2.85Yo, our eamings will drop to $171,000.

This alone amounts to a loss of $69,000, which is nearly half of my advertising and marketing costs for one year. Thus, my market share will be cut in half-and potentially more-and my ability to conduct client outreach and education will shrink to half the size it is today.

14. As in the example above, I project that the $150,000 that I can afford today for marketing may be cut in half--or even more. Thus, should commissions be reduced dramatically, it is very unlikely that Engels Financial Group will be able to spend the marketing money necessary to be able to reach customers looking for a safe and guaranteed retirement product such as FIAs. The end result is serious harm to my business and serious harm to the client who can no longer find me due to a smaller business model reaching fewer clients.

15. On top of this, I am considering whether I must leave the annuity business altogether or deal with only non-qualified funds as a result of the DOL's new regulation. As mentioned above, cutting transactions with retirement savers using qualified funds will result in a

75% loss to my annuity business and a37.5% loss to my total business - approximately $4.5 million in a year's time. I cannot sustain such a loss as a financial planner. To remain viable, I will have to find other sources of income, go into another line of business, or maintain a very small part-time business for non-qualified funds transactions only. As stated above, I could make Case 1:16-cv-01035-RDM Document 5-4 Filed 06/02/16 Page 6 of 8

more money by putting clients' savings at risk. Thus, I am afraid the new DOL regulation will turn "safe money" agents like me into high-risk, high-fee advisors. But the result should be to make things better and safer for consumers-not riskier and more expensive.

16. At present, I pay about $600 per year for Errors and Omissions ("E&O") insurance, which insures against basic professional negligence claims.

17. Based on recent conversations with others in my industry, I also anticipate that my E&O costs will soar from $600 to as much $10,000 per year on average under the new regulation, and I do not know whether it would cover claims for breach of contract and/or breach of fiduciary duty related to an annuity transaction. As a result, one lawsuit could put me out of business.

18. As a Certified Estate Planner, I know to diversify my clients' assets and teach them about risks, fees, "safe" versus "risk" money, and probate and non-probate issues. Many of my clients cannot afford an expensive planner. Many of the clients who will be hurt by this regulation have less than $500,000 in assets-many in the relatively low range of $100,000 to

$400,000-and most agents will not even talk with a client with less than $500,000 because a greatly reduced commission rate or a fee-based rate model will make it economically infeasible to conduct the kind of business outreach and ongoing client service necessary to support clients with lower asset levels.

19. For more than 30 years I have been proud to tell my clients that my services involving FIA transactions using IRA qualified funds were at no cost to them. These clients are comfortable with knowing that the insurance company pays my commission and that their funds are I00oh protected from the market. But under the DOL's new regulation, these clients will be forced out of the market for the very reason that they cannot afford higher-cost, fee-based advice. Case 1:16-cv-01035-RDM Document 5-4 Filed 06/02/16 Page 7 of 8

20. Many of my clients came to me because they were tired of losing money on

variable annuities and broker fees and stock market losses. They turned to me for a safe and

guaranteed retirement product and are very happy with the results I am able to provide.

2I. I am sad to say that if my fixed annuity business is reduced by 75% and I am

forced under the circumstances to leave the business, many of my clients will have no one they

can turn to for honest and free advice. These clients were counting on me to be here for them, and

the young and talented agents entering the business were looking forward to my coaching and

education.

22. As more experienced and educated planners leave the business due to unworkable

regulations like the new DOL regulation, the market will lose the expertise and education that

gets passed on to the next generation ofplanners.

23. I have spent many years becoming a Certified Estate Planner, and I want to

continue to help the "middle America clients" whom I so proudly serve. But I am deeply

concerned that the impact on my business and the industry as a whole will harm the very people who need the help of agents like me.

24. As a direct result of this new regulation, consumers who would normally benefit from the low risk of an FIA-IRA transaction will have to take unnecessary risks and to pay extra fees charged by high-risk advisers-without the downside market protection they currently enjoy by purchasing insurance-guaranteed annuities. Retirement savers will lose money and will not have guaranteed income for life to reinforce their Social Security benefits and to replace vanishing pensions of the past. Moreover, consumers will not be able to find qualified and experienced advisors, and younger advisors will not be able to afford the upfront costs or bear the risks of litigation to enter the business. Case 1:16-cv-01035-RDM Document 5-4 Filed 06/02/16 Page 8 of 8

25. As a direct result of this new regulatory regime, I estimate that the FIA industry as a whole will shrink 70 to 90 percent over the next 5 to 10 years, and consumers will ultimately be poorer and take unnecessary risks with the limited funds they have available for retirement.

Pursuant to 28 U.S.C. 5I746,I declare under penalty of perjury that the foregoing is true

and correct. Executed on: May 4!,20rc (/' \ vl/il Case 1:16-cv-01035-RDM Document 5-5 Filed 06/02/16 Page 1 of 10 Case 1:16-cv-01035-RDM Document 5-5 Filed 06/02/16 Page 2 of 10 Case 1:16-cv-01035-RDM Document 5-5 Filed 06/02/16 Page 3 of 10 Case 1:16-cv-01035-RDM Document 5-5 Filed 06/02/16 Page 4 of 10 Case 1:16-cv-01035-RDM Document 5-5 Filed 06/02/16 Page 5 of 10 Case 1:16-cv-01035-RDM Document 5-5 Filed 06/02/16 Page 6 of 10 Case 1:16-cv-01035-RDM Document 5-5 Filed 06/02/16 Page 7 of 10 Case 1:16-cv-01035-RDM Document 5-5 Filed 06/02/16 Page 8 of 10 Case 1:16-cv-01035-RDM Document 5-5 Filed 06/02/16 Page 9 of 10 Case 1:16-cv-01035-RDM Document 5-5 Filed 06/02/16 Page 10 of 10 Case 1:16-cv-01035-RDM Document 5-6 Filed 06/02/16 Page 1 of 4 Case 1:16-cv-01035-RDM Document 5-6 Filed 06/02/16 Page 2 of 4 Case 1:16-cv-01035-RDM Document 5-6 Filed 06/02/16 Page 3 of 4 Case 1:16-cv-01035-RDM Document 5-6 Filed 06/02/16 Page 4 of 4 Case 1:16-cv-01035-RDM Document 5-7 Filed 06/02/16 Page 1 of 5

Exhibit 6 Case 1:16-cv-01035-RDM Document 5-7 Filed 06/02/16 Page 2 of 5

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

The National Association for Fixed Annuities,

Plaintiff,

VS.

Thomas E. Perez, in his official capacity as Secretary of the United State Department of Labor Civil Action No.

and

United States Department Of Labor,

Defendants.

AFFIDAVIT OF MIKE RAFFERTY

Mike Rafferty, declare as follows:

1. I am over the age of 18 and have personal knowledge of the facts contained in this affidavit. If called to do so, I am competent to testify as to the matters contained herein.

2. I have been an insurance-licensed annuity professional in the states of

Perms)lvania, New Jersey and Delaware for the past 28 years.

3. My business) is called Compass Financial Solutions, which consists of three

insurarce licensed annuity agents including myself, along with three non-licensed employees

who provide sales and office management assistance. None of our agents are licensed to sell

securites; we are "insurance-only" agents.

4. I am a member of the National Association for Fixed Annuities (NAFA).

L•d L179888901.9 `sipues bupeis e8£:01, 91, 1,£ Aetill Case 1:16-cv-01035-RDM Document 5-7 Filed 06/02/16 Page 3 of 5

Compass Financial Solutions sells insurance products including fixed rate and

fixed ndexed annuities (FIAs), but we primarily sell "qualified" PIA products, which means that

our a nuities are sold into individual retirement accounts ("IRA") using retirement funds that

quali for tax-deferment.

6. FIAs currently make up 85% of our total business.

7. We specialize in pre- and post-retirement planning and only recommend

"guar• nteed" fixed annuities, which means that the interest earned on the annuity will never drop

below zero. This "downside market protection" ensures that the annuitant will have guaranteed

into for life, with the potential to make "upside" gains in interest above what would be earned

in a t3., ical savings account.

8. We meet individually with our clients, and, after discussing our client's financial

goals nd needs as required by both state insurance regulations and by the insurance companies whos products we represent, we research the annuity market and recommend the best guara teed fixed annuity plan available to meet each client's objectives. Compass Financial

Soluti ns recommends fixed annuity products manufactured and sold by approximately 20 differ: t insurance carriers

9. We deal only in non-securities transactions; we do not provide investment advice.

If our • lients want "market risk" products, i.e., variable annuities or other securities, we tell them we ca of help them and refer them to registered investment advisors (RIAs) or securities broker outside of Compass Financial Solutions.

10. Over the past 15 years, my business has averaged $6 million in annuity premium sold. 5.5 million—or nearly 92%—of this amount is in qualified funds through IRAs.

L179888901.9 011 `slpues bupelS e8C:0n 91, 1,£ Ae1A1

Case 1:16-cv-01035-RDM Document 5-7 Filed 06/02/16 Page 4 of 5

11. I currently pay approximately $750.00 per year for Errors and Omissions

("E& ") insurance. E&O insurance covers our agents if we have to defend against professional

negli ence claims but will not likely cover us if we are deemed to be "fiduciaries." Or the cost of

E&O overage will go up to the point that many agents or small agencies will not be able to

affor.

12. If the Department of Labor's new fiduciary rule takes effect, many annuity prole ionals like me will be put out of business because we are not securities brokers and are

not li•- nsed to handle securities transactions. In fact, we are prohibited from giving investment advic We will either have to leave the FIA market altogether or risk losing our market share to securi ies-licensed dealers who are readily equipped to comply with these kinds of regulations.

13. A 92% loss to our average annual premium revenue will be devastating to

Compass Financial Solutions.

14. The rule is "effective" on June 7, 2016 but it is "applicable" on April 10, 2017.

What er that means, I expect that Compass Financial Solutions will have to begin restructuring our b mess model long before the rule is applicable. By the time a court resolves this problem, we wi I have already lost some of our market share for FIAs and will not be able to recover the costs \ e will lose in attempting to comply with a regulation that is clearly not designed with insuralice products in. mind.

L17988890 19 `sTileues bulliels e9£:01, 91, 1,£ Aetil

Case 1:16-cv-01035-RDM Document 5-7 Filed 06/02/16 Page 5 of 5

15. Consumers who warn and need a viable guaranteed income solution will suffer great' under this regulation because they will lose access to no-cost financial and retirement advic . The regulation will hurt the people it is intended to help,

Pursuant to 28 U.S.C. §1746, I declare under penalty of perjury that the foregoing is true and c rreet.

Executed on: MaY3/ , 2016

L17988890 19 `sTileues 6uIIJeTS e9£:01, 91, 1,£ AetAl Case 1:16-cv-01035-RDM Document 5-8 Filed 06/02/16 Page 1 of 4 Case 1:16-cv-01035-RDM Document 5-8 Filed 06/02/16 Page 2 of 4 Case 1:16-cv-01035-RDM Document 5-8 Filed 06/02/16 Page 3 of 4 Case 1:16-cv-01035-RDM Document 5-8 Filed 06/02/16 Page 4 of 4 Case 1:16-cv-01035-RDM Document 5-9 Filed 06/02/16 Page 1 of 5 Case 1:16-cv-01035-RDM Document 5-9 Filed 06/02/16 Page 2 of 5 Case 1:16-cv-01035-RDM Document 5-9 Filed 06/02/16 Page 3 of 5 Case 1:16-cv-01035-RDM Document 5-9 Filed 06/02/16 Page 4 of 5 Case 1:16-cv-01035-RDM Document 5-9 Filed 06/02/16 Page 5 of 5 Case 1:16-cv-01035-RDM Document 5-10 Filed 06/02/16 Page 1 of 10 Case 1:16-cv-01035-RDM Document 5-10 Filed 06/02/16 Page 2 of 10 Case 1:16-cv-01035-RDM Document 5-10 Filed 06/02/16 Page 3 of 10 Case 1:16-cv-01035-RDM Document 5-10 Filed 06/02/16 Page 4 of 10 Case 1:16-cv-01035-RDM Document 5-10 Filed 06/02/16 Page 5 of 10 Case 1:16-cv-01035-RDM Document 5-10 Filed 06/02/16 Page 6 of 10 Case 1:16-cv-01035-RDM Document 5-10 Filed 06/02/16 Page 7 of 10 Case 1:16-cv-01035-RDM Document 5-10 Filed 06/02/16 Page 8 of 10 Case 1:16-cv-01035-RDM Document 5-10 Filed 06/02/16 Page 9 of 10 Case 1:16-cv-01035-RDM Document 5-10 Filed 06/02/16 Page 10 of 10 Case 1:16-cv-01035-RDM Document 5-11 Filed 06/02/16 Page 1 of 1

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

The National Association for Fixed Annuities,

Plaintiff,

vs.

Thomas E. Perez, in his official capacity as Secretary of the United States Department of Civil Action No. 1:16-cv-1035 Labor and

United States Department of Labor,

Defendants.

ORDER

The Court having considered Plaintiff’s Application for a Preliminary Injunction To Stay the

April 10, 2017 Applicability Date of the Department of Labor Fiduciary Rule, and for good cause shown, IT IS HEREBY ORDERED THAT:

The Application is granted, and the Department of Labor, its officers, employees, and agents are preliminarily enjoined from effectuating, implementing, applying, or taking any action whatsoever to enforce the Fiduciary Rule and its related Exemptions during the pendency of this litigation.

IT IS SO ORDERED

______UNITED STATES DISTRICT JUDGE

Dated: ______NATIONAL ASSOCIATION FOR FIXED ANNUITIES v. UNITED STATES DEPARTMENT OF LABOR et al, Docket No. 1:16-cv-

General Information

Court United States District Court for the District of Columbia; United States District Court for the District of Columbia

Federal Nature of Suit Other Statutes - Administrative Procedure Act/Review or Appeal of Agency Decision[899]

Docket Number 1:16-cv-01035