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 © 2016 The Bureau of National Affairs, Inc. All Rights Reserved. Terms of Service // PAGE 1 Case 1:16-cv-01035-RDM Document 5 Filed 06/02/16 Page 1 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 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