[oral argument requested] no. 17-3038 in the united … · thais-lyn trayer attorneys, appellate...

[ORAL ARGUMENT REQUESTED] No. 17-3038

IN THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT

MARKET SYNERGY GROUP, INC.,

Plaintiff-Appellant,

v.

UNITED STATES DEPARTMENT OF LABOR, et al.,

Defendants-Appellees.

On Appeal from the United States District Court for the District of Kansas District Court Case No. 5:16-cv-04083 (Judge Daniel D. Crabtree)

BRIEF FOR APPELLEES

Of Counsel:

NICHOLAS C. GEALE Acting Solicitor of Labor

G. WILLIAM SCOTT Associate Solicitor

EDWARD D. SIEGER Senior Attorney

THOMAS TSO Counsel for Appellate Litigation

MEGAN HANSEN Attorney for Regulations U.S. Department of Labor Office of the Solicitor

HASHIM M. MOOPPAN Deputy Assistant Attorney General

TOM BEALL United States Attorney

MICHAEL S. RAAB MICHAEL SHIH THAIS-LYN TRAYER

Attorneys, Appellate Staff Civil Division, Room 7268 U.S. Department of Justice 950 Pennsylvania Avenue NW Washington, DC 20530 (202) 353-6880

Appellate Case: 17-3038 Document: 01019873682 Date Filed: 09/20/2017 Page: 1

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ................................................................................................ iii

STATEMENT OF RELATED APPEALS ........................................................................ ix

GLOSSARY ............................................................................................................................... x

INTRODUCTION .................................................................................................................. 1

STATEMENT OF JURISDICTION ................................................................................... 2

STATEMENT OF THE ISSUE ............................................................................................ 2

PERTINENT STATUTES ..................................................................................................... 2

STATEMENT OF THE CASE ............................................................................................. 3

I. Statutory Background.................................................................................................... 3

II. Regulatory Background................................................................................................. 6

A. Historical Regulation Of Fiduciary Investment Advice ............................... 6

B. The Fiduciary Rule ............................................................................................. 9

1. Best-Interest Contract Exemption .................................................... 10

2. Prohibited-Transaction Exemption 84-24 ....................................... 11

III. Prior Proceedings ........................................................................................................ 14

SUMMARY OF ARGUMENT ........................................................................................... 14

STANDARD OF REVIEW ................................................................................................ 16

ARGUMENT ......................................................................................................................... 16

I. DOL’s Treatment Of Fixed-Indexed Annuities Was Not Arbitrary Or Capricious. ................................................................................................................... 16


ii

A. DOL Provided A Reasoned Basis for Requiring Conflicted Transactions Involving Fixed-Indexed Annuities To Satisfy The Conditions Of The BIC Exemption. ............................................................ 16

B. Plaintiff’s Counterarguments Are Erroneous. ............................................. 24

II. DOL Complied With The APA’s Notice Requirement. ...................................... 38

A. The Exclusion Of Fixed-Indexed Annuities From PTE 84-24 Was A Logical Outgrowth Of The Proposed Rule. ................................... 39

B. Plaintiff’s Counterarguments Are Erroneous. ............................................. 42

CONCLUSION ..................................................................................................................... 49

REQUEST FOR ORAL ARGUMENT

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF DIGITAL SUBMISSION

CERTIFICATE OF SERVICE

ADDENDUM


iii

TABLE OF AUTHORITIES

Cases: Page(s)

Allina Health Servs. v. Sebelius, 746 F.3d 1102 (D.C. Cir. 2014) ......................................................................................... 43

American Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166 (D.C. Cir. 2010) ...................................................................................... 8, 29

Appalachian Power Co. v. EPA, 135 F.3d 791 (D.C. Cir. 1998) .................................................................................... 42, 43

Auer v. Robbins, 519 U.S. 452 (1997) ............................................................................................................. 35

Barnett Bank, N.A. v. Nelson, 517 U.S. 25 (1996) ............................................................................................................... 26

Brazos Elec. Power Co-op., Inc. v. Southwestern Power Admin., 819 F.2d 537 (5th Cir. 1987) .............................................................................................. 47

Chamber of Commerce of the U.S. v. Hugler, 231 F. Supp. 3d 152 (N.D. Tex. 2017) ............................................................................. 14

Chamber of Commerce of the U.S. v. U.S. Dep’t of Labor, No. 17-10238, 2017 WL 1284187 (5th Cir. Apr. 5, 2017) ............................................ 14

Chemical Mfrs. Ass’n v. EPA, 28 F.3d 1259 (D.C. Cir. 1994) ........................................................................................... 38

Citizens’ Comm. to Save Our Canyons v. Krueger, 513 F.3d 1169 (10th Cir. 2008) .......................................................................................... 25

City of Portland v. EPA, 507 F.3d 706 (D.C. Cir. 2007) ........................................................................................... 44

CSX Transp., Inc. v. Surface Transp. Bd., 584 F.3d 1076 (D.C. Cir. 2009) ............................................................... 39, 43, 44, 47, 48

Custer Cty. Action Ass’n v. Garvey, 256 F.3d 1024 (10th Cir. 2001) .......................................................................................... 28


iv

District Hosp. Partners, L.P. v. Burwell, 786 F.3d 46 (D.C. Cir. 2015) ............................................................................................. 38

Ecology Ctr., Inc. v. U.S. Forest Serv., 451 F.3d 1183 (10th Cir. 2006) .......................................................................................... 24

Forest Guardians v. U.S. Fish & Wildlife Serv., 611 F.3d 692 (10th Cir. 2010) ............................................................................................ 32

Friends of the Bow v. Thompson, 124 F.3d 1210 (10th Cir. 1997) .......................................................................................... 16

Harris Trust & Sav. Bank v. Salomon Smith Barney Inc., 530 U.S. 238 (2000) ............................................................................................................... 4

Humana Inc. v. Forsyth, 525 U.S. 299 (1999) ............................................................................................................. 26

International Bhd. of Teamsters v. Daniel, 439 U.S. 551 (1979) ............................................................................................................. 26

International Union, United Mine Workers of Am. v. Mine Safety & Health Admin., 626 F.3d 84 (D.C. Cir. 2010) ............................................................................................. 44

John Hancock Mut. Life Ins. Co. v. Harris Tr. & Sav. Bank, 510 U.S. 86 (1993) ............................................................................................................... 26

Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007) ............................................................................................................. 39

Michigan v. EPA, 135 S. Ct. 2699 (2015) .................................................................................................. 30, 37

Mid Continent Nail Corp. v. United States, 846 F.3d 1364 (Fed. Cir. 2017) ................................................................................... 44, 45

National Ass’n for Fixed Annuities v. Perez, 217 F. Supp. 3d 1 (D.D.C. 2016) ......................................................................... 11, 14, 39

No. 16-5345 (D.C. Cir. Dec. 15, 2016) ............................................................................ 14

National Trucking Equip. Ass’n v. National Highway Traffic Safety Admin., 711 F.3d 662 (6th Cir. 2013) ....................................................................................... 30, 31


v

New Mexico ex rel. Richardson v. Bureau of Land Mgmt., 565 F.3d 683 (10th Cir. 2009) ............................................................................................ 48

Newspaper Ass’n of Am. v. Postal Regulatory Comm’n, 734 F.3d 1208 (D.C. Cir. 2013) ......................................................................................... 37

Northeast Md. Waste Disposal Auth. v. EPA, 358 F.3d 936 (D.C. Cir. 2004) ........................................................................................... 42

Owner-Operator Indep. Drivers Ass’n v. Federal Motor Carrier Safety Admin., 494 F.3d 188 (D.C. Cir. 2007) .................................................................................... 44, 47

Prairie Band Pottawatomie Nation v. Federal Highway Admin., 684 F.3d 1002 (10th Cir. 2012) .......................................................................................... 47

Secretary of Labor v. Fitzsimmons, 805 F.2d 682 (7th Cir. 1986) ......................................................................................... 3, 27

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983) ................................................................................................................. 3

Shell Oil Co. v. EPA, 950 F.2d 741 (D.C. Cir. 1991) ........................................................................................... 44

Stilwell v. Office of Thrift Supervision, 569 F.3d 514 (D.C. Cir. 2009) ........................................................................................... 37

United States v. Price, 361 U.S. 304 (1960) ............................................................................................................. 27

United States Telecom Ass’n v. FCC, 825 F.3d 674 (D.C. Cir. 2016) .................................................................................... 39, 46

Wagner Electric Corp. v. Volpe, 466 F.2d 1013 (3d Cir. 1972) ............................................................................................. 46

White Stallion Energy Ctr., LLC v. EPA, 748 F.3d 1222 (D.C. Cir. 2014), rev’d on other grounds by Michigan v. EPA, 135 S. Ct. 2699 (2015) .................................... 38

Zen Magnets, LLC v. Consumer Prod. Safety Comm’n, 841 F.3d 1141 (10th Cir. 2016) ................................................................................... 39, 40


vi

Statutes:

Act of Oct. 19, 1984, Pub. L. No. 98-532, 98 Stat. 2705 (codified at 29 U.S.C. § 1001 note) .................... 5, 6 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) ............................................................. 21, 26

Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829 .................................................................................... 3, 4 5 U.S.C. § 706(2)(A) ................................................................................................................ 16

15 U.S.C. § 77b(b) ................................................................................................................... 29

26 U.S.C. § 4975(c)(1) ............................................................................................................... 5

26 U.S.C. § 4975(c)(1)(E) ....................................................................................................... 34

26 U.S.C. § 4975(c)(1)(F) ........................................................................................................ 34

26 U.S.C. § 4975(c)(2) .................................................................................................. 5, 28, 30

26 U.S.C. § 4975(e)(1)(B) .......................................................................................................... 3

26 U.S.C. § 4975(e)(1)(C)-(F) ................................................................................................... 4

26 U.S.C. § 4975(e)(3) ........................................................................................................ 4, 25

26 U.S.C. § 4975(e)(3)(B) .......................................................................................................... 9

26 U.S.C. § 4975(f)(8)(J)(i)(III) .............................................................................................. 25

26 U.S.C. § 4975(f)(8)(J)(i)(VI) .............................................................................................. 25

28 U.S.C. § 1291 ........................................................................................................................ 2

28 U.S.C. § 1331 ........................................................................................................................ 2

29 U.S.C. § 1001(a) .................................................................................................................... 3

29 U.S.C. § 1002(21)(A)(i) ........................................................................................................ 4


vii

29 U.S.C. § 1002(21)(A)(ii) ............................................................................................ 4, 9, 25

29 U.S.C. § 1002(21)(A)(iii) ...................................................................................................... 4

29 U.S.C. § 1003(a) .................................................................................................................... 3

29 U.S.C. § 1106(b)(1) ........................................................................................................ 5, 34

29 U.S.C. § 1106(b)(3) ........................................................................................................ 5, 34

29 U.S.C. § 1108(a) ....................................................................................................... 5, 28, 30

29 U.S.C. § 1135 ........................................................................................................... 5, 29, 30

Rule:

Fed. R. App. P. 4(a)(1)(B) ........................................................................................................ 2

Regulations:

26 C.F.R. § 54.4975-9 (2015) ................................................................................................... 6

29 C.F.R. § 2510.3-21(a) ........................................................................................................... 9

29 C.F.R. § 2510.3-21(b)(1) ...................................................................................................... 9

29 C.F.R. § 2510.3–21(c)(1) (2015) ......................................................................................... 6

29 C.F.R. § 2510.3-21(j)(1)(i)(B)(2) ......................................................................................... 6

Other Authorities:

Exec. Order No. 12866 ................................................................................................... 30, 31

40 Fed. Reg. 50842 (Oct. 31, 1975) ........................................................................................ 6

42 Fed. Reg. 32395 (June 24, 1977) .................................................................... 6, 11, 12, 25

43 Fed. Reg. 47713 (Oct. 17, 1978) ........................................................................................ 5

49 Fed. Reg. 13208 (Apr. 3, 1984) ........................................................................... 11, 12, 25

80 Fed. Reg. 21960 (Apr. 20, 2015) ............................................................................... 40, 43


viii

80 Fed. Reg. 22010 (Apr. 20, 2015) .................................................................. 40, 41, 42, 45

81 Fed. Reg. 20946 (Apr. 8, 2016) .................................................................... 6, 7, 8, 10, 25

81 Fed. Reg. 21002 (Apr. 8, 2016), corrected at 81 Fed. Reg. 44773 (July 11, 2016), and amended by 82 Fed. Reg. 16902 (Apr. 7, 2017) ................... 10, 11, 13, 16, 19, 21, 22, 23, 24, 26, 29, 30, 31,

33, 35, 36, 38 81 Fed. Reg. 21147 (Apr. 8, 2016), amended by 82 Fed. Reg. 16902 (Apr. 7, 2017) ....................12, 13, 23, 26, 30, 31, 32, 33 82 Fed. Reg. 7336 (Jan. 19, 2017) .................................................................................. 35, 36

82 Fed. Reg. 16902 (Apr. 7, 2017) ........................................................................... 11, 12, 13

82 Fed. Reg. 41365 (Aug. 31, 2017) ............................................................................... 11, 13

Reorganization Plan No. 4, 43 Fed. Reg. 47713 (codified at 29 U.S.C. § 1001 note) .................................................. 5 U.S. Dep’t of Labor: Conflict of Interest FAQs (Part I—Exemptions) (Oct. 27, 2016) https://go.usa.gov/xRGJj ........................................................................................ 34-35 Field Assistance Bulletin No. 2017-02 (May 22, 2017) https://go.usa.gov/xNH3k ............................................................................................ 13 Field Assistance Bulletin No. 2017-3 (Aug. 30, 2017) https://go.USA.gov/xRMZU ....................................................................................... 11


ix

STATEMENT OF RELATED APPEALS PURSUANT TO 10th CIR. R. 28.2(C)(1)

Counsel for appellees is aware of the following related appeals:

• National Ass’n for Fixed Annuities v. U.S. Dep’t of Labor, No. 16-5345 (D.C. Cir.) (response brief filed Sept. 15, 2017);

• Chamber of Commerce of the United States v. U.S. Dep’t of Labor, No. 17-10238

(5th Cir.) (oral argument held July 31, 2017). Additionally, a related lawsuit is pending in the United States District Court for the

District of Minnesota. See Thrivent Fin. for Lutherans v. U.S. Dep’t of Labor, No. 0:16-cv-

03289 (D. Minn.).


x

GLOSSARY

BIC Exemption Best-Interest Contract Exemption

DOL Department of Labor

ERISA Employee Retirement Income Security Act of 1974

FINRA Financial Industry Regulatory Authority

IALC Indexed Annuity Leadership Council

IMO Independent Marketing Organization

IRA Individual Retirement Account

NAIC National Association of Insurance Commissioners

NASAA North American Securities Administrators Association

PTE Prohibited-Transaction Exemption

SEC Securities and Exchange Commission

SIFMA Securities Industry and Financial Markets Association


INTRODUCTION

This appeal concerns a package of agency actions, known as the “fiduciary

rule,” issued by the Department of Labor (“DOL”) in the exercise of its broad and

express authority to address the issue of conflicts of interest in the market for

retirement-investment advice. The fiduciary rule amends DOL’s prior regulations

implementing the Employee Retirement Income Security Act (“ERISA”) by

expanding DOL’s interpretation of the statutory definition of “fiduciary.” These

advisers are now subject to the duties and restrictions set forth in the statute, which

Congress imposed on fiduciaries to safeguard the Nation’s retirement security.

One such restriction prohibits fiduciaries to tax-preferred plans and individual

retirement accounts (“IRAs”) from engaging in transactions in which they have

personal economic interests. To offer fiduciaries relief from these prohibited-

transaction provisions, Congress vested DOL with broad authority to issue

administrative exemptions to them. In the fiduciary rule, DOL exercised that

authority, on the basis of the record before it, to condition certain exemptions on

compliance with a variety of procedural safeguards. DOL crafted these safeguards to

mitigate the harms of conflicted advice on retirement investors in the modern

investment market.

Plaintiff, a participant in that market, has mounted a narrow challenge to the

terms of one exemption. It argues, under the Administrative Procedure Act, that

DOL failed to provide either adequate notice of, or a reasoned basis for, the


2

exemption’s treatment of otherwise prohibited transactions involving certain annuity

products. The district court, like every other district court to hear similar challenges

to the fiduciary rule, rejected both of plaintiff’s claims. That decision was correct and

should be upheld.

STATEMENT OF JURISDICTION

Plaintiff invoked the district court’s jurisdiction under 28 U.S.C. § 1331. The

district court entered final judgment on February 17, 2017, App’x 490, and plaintiff

filed a timely notice of appeal pursuant to Fed. R. App. P. 4(a)(1)(B), see App’x 491.

This Court has jurisdiction under 28 U.S.C. § 1291.

STATEMENT OF THE ISSUE

The fiduciary rule revised the system of administrative exemptions issued by

DOL to the prohibited-transaction provisions in ERISA. This appeal focuses on the

conditions of one exemption—the Best-Interest Contract (“BIC”) Exemption—in

particular. The issues presented are (1) whether DOL’s decision to require prohibited

transactions involving certain annuities to satisfy the terms of the BIC Exemption (as

opposed to a different administrative exemption) was arbitrary or capricious; and (2)

whether DOL gave adequate notice of its decision to require prohibited transactions

involving those annuities to satisfy the conditions of the BIC Exemption.

PERTINENT STATUTES

Pertinent statutes are reproduced in the addendum to this brief.


3

STATEMENT OF THE CASE

I. Statutory Background

The Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406,

88 Stat. 829 (“ERISA”), is a “comprehensive statute designed to promote the interests

of employees and their beneficiaries in employee benefit plans.” Shaw v. Delta Air

Lines, Inc., 463 U.S. 85, 90 (1983). Before ERISA, “federal involvement in the

monitoring of pension funds . . . was minimal.” Secretary of Labor v. Fitzsimmons, 805

F.2d 682, 689 (7th Cir. 1986) (en banc). ERISA’s predecessor statute provided only

for “limited disclosure of information and filing of reports for … pension funds”;

“primary responsibility for supervising the pension funds was left to the beneficiaries,

‘reserving to the states the detailed regulations relating to insurance and trusts.’” Id.

Congress determined that this existing regulatory system had failed to effectively

“monitor[] and prevent[] fraud and other pension fund abuses.” Id. It enacted

ERISA to establish nationwide “standards . . . assuring the equitable character” and

“financial soundness” of retirement-benefit plans and other tax-favored retirement

vehicles. 29 U.S.C. § 1001(a).

Title I of ERISA governs employee-benefit plans, which are retirement plans

“established or maintained” by employers or unions. 29 U.S.C. § 1003(a). Title II of

ERISA, codified in the Internal Revenue Code (“Code”), governs the conduct of

fiduciaries to some plans not covered by Title I—including individual retirement

accounts (“IRAs”), which Title II created. 26 U.S.C. § 4975(e)(1)(B); see ERISA,


4

§ 408, 88 Stat. at 959-64.1 Both Titles govern the conduct of individuals who satisfy

ERISA’s definition of “fiduciary.” As relevant here, an individual is a fiduciary to an

employee-benefit plan or an IRA “to the extent . . . 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.” 29 U.S.C.

§ 1002(21)(A)(ii); 26 U.S.C. § 4975(e)(3).2

ERISA imposes more duties and restrictions on fiduciaries to employee-benefit

plans than it does on fiduciaries to IRAs. In one important respect, however, the

regimes are identical. ERISA “categorically bar[s]” fiduciaries to both employee-

benefit plans and to IRAs from engaging in certain transactions that, in Congress’s

judgment, are “likely to injure” retirement investors. Harris Trust & Sav. Bank v.

Salomon Smith Barney Inc., 530 U.S. 238, 241-42 (2000). Prohibited transactions include

those Congress deemed fraught with conflicts of interest, such as “deal[ing] with the

assets of the plan in his own interest or for his own account,” and “receiv[ing] any

1 Title II also covers individual retirement annuities, health savings accounts,

and certain other tax-favored trusts and plans. See 26 U.S.C. § 4975(e)(1)(C)-(F). For simplicity, this brief will refer to all such plans as “IRAs.”

2 ERISA contains two other definitions of fiduciary. These define individuals

as fiduciaries to the extent they “exercise[] any discretionary authority or discretionary control respecting management of such plan or exercise[] any authority or control respecting management or disposition of its assets,” 29 U.S.C. § 1002(21)(A)(i), or to the extent they “ha[ve] any discretionary authority or discretionary responsibility in the administration of such plan,” id. § 1002(21)(A)(iii).


5

consideration for his own personal account from any party dealing with such plan in

connection with a transaction involving the assets of the plan.” 29 U.S.C.

§ 1106(b)(1), (3); 26 U.S.C. § 4975(c)(1).

Congress vested the Secretary of Labor with broad and express authority to

“prescribe such regulations as he finds necessary or appropriate to carry out the

provisions” relating to employee-benefit plans. 29 U.S.C. § 1135. Congress also

vested DOL with expansive authority to “grant a conditional or unconditional

exemption” from the prohibition-transaction provisions. Id. § 1108(a). DOL may in

its discretion grant the exemption upon finding that it is (1) “administratively

feasible”; (2) “in the interests of the plan and of its participants and beneficiaries,” and

(3) “protective of the rights of participants and beneficiaries of such plan.” Id. The

statute does not otherwise constrain DOL’s discretion to grant exemptions or craft

protective conditions for exemptive relief. DOL has identical authority to administer

the fiduciary-definition and prohibited-transaction provisions applicable to IRAs.3

3 Congress originally vested responsibility for administering Title II’s

prohibited-transaction provisions in the Secretary of the Treasury. 26 U.S.C. § 4975(c)(2). In 1978, to harmonize administration of the parallel provisions in Title I and Title II, the President transferred to the Secretary of Labor all interpretive, rulemaking, and exemption authority regarding the fiduciary definition and prohibited-transaction provisions in both titles. Reorganization Plan No. 4, 43 Fed. Reg. 47713 (codified at 29 U.S.C. § 1001 note). Congress ratified this transfer in 1984. See Pub. L. No. 98-532, 98 Stat. 2705 (1984). References to Title I of ERISA in this brief refer also to the parallel Code provisions.


6

II. Regulatory Background

A. Historical Regulation Of Fiduciary Investment Advice

Shortly after Congress passed ERISA, DOL issued a regulation interpreting

when a person “renders investment advice” under ERISA’s “fiduciary” definition. 40

Fed. Reg. 50842 (Oct. 31, 1975) (“the 1975 regulation”). The 1975 regulation limited

the “rendering ‘investment advice’” definition by five criteria, including that the advice

be provided on a “regular basis.” See 29 C.F.R. § 2510.3–21(c)(1) (2015); 26 C.F.R.

§ 54.4975-9 (2015) (the “five-part test”).4 At around the same time, DOL began

granting administrative exemptions permitting otherwise prohibited transactions,

including transactions involving insurance and annuity contracts. See, e.g., 42 Fed. Reg.

32395, 32398 (June 24, 1977).

DOL determined, on the basis of the record, that “[t]he market for retirement

advice has changed dramatically since [DOL] promulgated the 1975 regulation.” 81

Fed. Reg. 20946, 20954 (Apr. 8, 2016). At the time, IRAs had only recently been

created (by ERISA itself), and participant-directed 401(k) plans did not yet exist. Id.

Retirement assets were principally held in pensions controlled by large employers and

4 To qualify, an adviser had to (1) “render[] advice . . . or make[]

recommendation[s] 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 . . . between such person and the plan.” 29 C.F.R. § 2510.3-21(c)(1) (2015). The advice itself had to (4) “serve as a primary basis for investment decisions with respect to plan assets”; and be (5) “individualized . . . based on the particular needs of the plan.” Id. § 2510.3-21(j)(1)(i)(B)(2).


7

professional money managers. Id. Today, “IRAs and participant-directed plans, such

as 401(k) plans, have supplanted . . . pensions” as the retirement vehicles of choice.

Id.

DOL found, on the basis of the qualitative and quantitative evidence before it,

that individual retirement investors are now “increasingly responsible” for their own

retirement savings. 81 Fed. Reg. at 20954. For example, many “baby boomers” are

now moving money from Title I plans to the IRA market, “where both good and bad

investment choices are more numerous and much advice is conflicted.” Id. at 20949.

These “rollovers,” often representing “the most important financial decision[] that

investors make in their lifetime[s],” will involve assets worth up to $2.4 trillion over

the next five years. Id. But because rollovers are typically one-time transactions, the

regular-basis requirement of the five-part test permitted many investment advisers,

who did not qualify as ERISA fiduciaries, to “receive compensation from the financial

institutions whose investment products they recommend.” Id. at 20956. Moreover,

“[c]onsolidation of the financial services industry and innovations in compensation

arrangements have multiplied the opportunities for self-dealing and reduced the

transparency of fees.” Id. In DOL’s judgment, the impact of such conflicted advice

“is large and negative.” Id. at 20950. The evidence available in 2016 indicated that

“[a]n ERISA plan investor who rolls her retirement savings into an IRA could lose 6

to 12 and possibly as much as 23 percent of the value of her savings over 30 years of

retirement by accepting advice from a conflicted financial adviser.” Id. at 20949.


8

DOL further found, on the basis of that same record, that the shift toward

individual control of retirement investments has been accompanied by a dramatic

increase in the “variety and complexity of financial products.” 81 Fed. Reg. at 20954.

The market for deferred annuities is illustrative. Fixed-rate annuities, which insulate

investors from market downturns, dominated that market when the 1975 regulation

was issued. App’x 738. By guaranteeing investors a minimum rate of interest on

their investment, these products allocate all investment risk to insurers; investors are

sure to earn at least that minimum specified rate. Id. at 402.

Subsequent years saw the creation of, and increased investments in, variable

annuities. App’x 738. These products are annuities “whose investment returns vary

depending on the value of the assets in which their funds are invested.” Id. at 403.

They “resemble mutual funds” but with additional, complex features, see id. at 837,

and like mutual funds do not guarantee future income to investors; their payouts

instead depend on the success of the underlying investment strategy. Id. at 403. This

structure allocates investment risk to investors by offering them the opportunity to

realize higher returns at the cost of losing both principal and interest should their

investment strategy fail. Id. at 738.

Investments in fixed-indexed annuities have recently supplanted variable

annuities. App’x 739; see also American Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166,

168 (D.C. Cir. 2010). These annuities link interest rates to an external market index.

App’x 821. However, investors may not reap the full benefit should the index


9

increase in value; many fixed-indexed contracts limit gains by deducting administrative

fees, crediting investors with only a portion of the designated index’s increase in value,

or imposing upper limits on returns. Id. at 817, 821. At the same time, fixed-indexed

contracts guarantee investors that their rate of return will never fall below zero. Id. at

403. Such guarantees shield investors from investment losses during downturns in

the market—although investors may still lose principal if they need to terminate an

annuity before the end of a contractually specified period and consequently incur

surrender charges. This structure allocates investors more risk (and more potential

return) than fixed-rate annuities, but is just as complex as variable annuities. Id. at

442, 706.

B. The Fiduciary Rule

DOL reasonably determined to revisit its decades-old regulatory structure in

light of these market changes, and responded to them by issuing the fiduciary rule.

The rule has two components. The first component replaces the 1975 regulation’s

five-part test for fiduciary status with a new interpretation of ERISA’s definition of an

investment-advice fiduciary.5 The second component, and the only part of the

5 Under the new definition, an individual “renders investment advice for a fee

or other compensation,” 29 U.S.C. § 1002(21)(A)(ii); 26 U.S.C. § 4975(e)(3)(B), when he is compensated in connection with a “recommendation as to the advisability of” buying, selling, or managing “investment property,” 29 C.F.R. § 2510.3-21(a). A “recommendation” is a “communication that . . . would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” Id. § 2510.3-21(b)(1).


10

fiduciary rule at issue in this case, revises the system of administrative exemptions

under which fiduciary investment advisers may obtain relief from ERISA’s

prohibited-transaction provisions. The revised exemption structure “preserve[s]

beneficial business models for delivery of investment advice” by “permit[ting] firms to

continue to receive many common types of fees, as long as they are willing to adhere

to . . . standards aimed at ensuring that their advice is impartial and in the best interest

of their customers.” 81 Fed. Reg. 20946, 20946 (Apr. 8, 2016). In other words, the

specific exemptions allow fiduciaries to engage in otherwise prohibited transactions if

they comply with conditions designed to mitigate their conflicts of interest.

This lawsuit concerns two exemptions in particular. The rule created a new

exemption called the Best-Interest Contract (“BIC”) Exemption. The rule also

amended the existing Prohibited-Transaction Exemption (“PTE”) 84-24 by narrowing

its scope.

1. Best-Interest Contract Exemption

The new BIC Exemption6 may be invoked by fiduciaries to Title I plans or

IRAs. The exemption is conditioned on compliance with “Impartial Conduct

Standards” that reflect “fundamental obligations of fair dealing and fiduciary

conduct.” 81 Fed. Reg. at 21007. Under these standards, fiduciaries must adhere to

the duties of loyalty and prudence, “avoid misleading statements,” and “receive no

6 81 Fed. Reg. 21002 (Apr. 8, 2016), corrected at 81 Fed. Reg. 44773 (July 11,

2016), and amended by 82 Fed. Reg. 16902 (Apr. 7, 2017).


11

more than reasonable compensation.” Id. at 21003. This condition to the exemption,

and the exemption itself, became applicable on June 9, 2017. 82 Fed. Reg. 16902

(Apr. 7, 2017).

On January 1, 2018, fiduciaries must comply with additional conditions to

qualify for the exemption. 82 Fed. Reg. at 16902; but see 82 Fed. Reg. 41365 (Aug. 31,

2017) (proposing to extend this date to July 1, 2019). To qualify, contracts between

advisers and IRA clients must include an acknowledgment of fiduciary status, a

guarantee of compliance with the Impartial Conduct Standards, and various

warranties and disclosures. 81 Fed. Reg. at 21002. The contracts may not include

exculpatory or certain liability-limiting provisions, or class-action waivers. Id. at

21078.7 The rule does not provide a federal cause of action to enforce any of the

contractual conditions specified in the exemption; however, contract actions under

state law would be available to enforce them because Title II of ERISA does not

preempt state-law remedies concerning IRAs. See National Ass’n for Fixed Annuities v.

Perez, 217 F. Supp. 3d 1, 12, 37 (D.D.C. 2016).

2. Prohibited-Transaction Exemption 84-24

PTE 84-24, originally issued in 1977, can be invoked by some fiduciaries to

Title I plans or IRAs. 49 Fed. Reg. 13208, 13211 (Apr. 3, 1984); see 42 Fed. Reg.

7 DOL recently announced a non-enforcement policy regarding the class-action

waiver provisions of the BIC Exemption as they apply to arbitration agreements. See U.S. Dep’t of Labor, Field Assistance Bulletin No. 2017-3 (Aug. 30, 2017), https://go.USA.gov/xRMZU.


12

32395, 32398 (June 24, 1977) (precursor to PTE 84-24). When issued, the exemption

applied to the receipt of sales commissions by fiduciaries in certain transactions,

which had terms “at least as favorable” as offered at arm’s length, which paid no more

than “reasonable compensation” to the adviser, and which contained various

disclosures. 49 Fed. Reg. at 13211. At its inception, the exemption covered

transactions involving mutual-fund shares and annuity insurance contracts. Id.

The fiduciary rule modified PTE 84-24 in two important respects.8 First, PTE

84-24 is now conditioned on the additional requirement that fiduciaries comply with

the same Impartial Conduct Standards set forth in the BIC Exemption. 81 Fed. Reg.

at 21174. That modification became applicable on June 9, 2017. 82 Fed. Reg. at

16902.

Second, DOL limited PTE 84-24 to transactions involving fixed-rate annuities

rather than variable and fixed-indexed annuities. 81 Fed. Reg. at 21154-55. DOL did

so because it determined, on the basis of the record before it, that fixed-rate annuities

“provide payments that are . . . predictable” under terms that are “more

understandable to consumers.” Id. at 21152. Variable and fixed-indexed annuities, by

contrast, may require investors “to shoulder significant investment risk and do not

offer the same predictability of payments.” Id. at 21152-53. They are also “quite

complex and subject to significant conflicts of interest at the point of sale.” Id. at

8 81 Fed. Reg. 21147 (Apr. 8, 2016), amended by 82 Fed. Reg. 16902 (Apr. 7,

2017).


13

21153. Because these latter products are more complicated and may be more

“susceptible to abuse,” DOL determined that “recommendations to purchase such

annuities should be subject to the greater protections of the Best Interest Contract

Exemption.” Id. at 21153-54. In this way, the Department sought to ensure a “level

playing field for variable annuities, indexed annuities, and mutual funds under a

common set of requirements, and avoid[] creating a regulatory incentive to

preferentially recommend indexed annuities.” 81 Fed. Reg. at 21018. This

modification is currently scheduled to become applicable on January 1, 2018; until

then, PTE 84-24 will continue to apply to transactions involving variable and fixed-

indexed annuities. 82 Fed. Reg. at 16902; but see 82 Fed. Reg. 41365, 41365-76 (Aug.

31, 2017) (proposing an 18-month delay).9

9 The President has directed DOL to reexamine the fiduciary rule and to

“prepare an updated economic and legal analysis” of its provisions. 82 Fed. Reg. 9675, 9675 (Feb. 3, 2017). DOL has begun implementing that directive by soliciting public comment. For this reason and others, the agency has postponed the applicability date of certain exemption conditions until January 1, 2018, as reflected in the preceding discussion. See 82 Fed. Reg. at 16902. DOL, the Treasury Department, and the IRS have issued temporary non-enforcement policies covering the transitional period between June 9, 2017, and January 1, 2018, which DOL has proposed to extend to July 1, 2019. See U.S. Dep’t of Labor, Field Assistance Bulletin No. 2017-02 (May 22, 2017), https://go.usa.gov/xNH3k; 82 Fed. Reg. 41365 (Aug. 31, 2017). DOL has also sought additional comment on whether the fiduciary rule’s revised exemption structure should be modified. See 82 Fed. Reg. at 41366.


14

III. Prior Proceedings

In 2016, plaintiff challenged the fiduciary rule in federal district court. App’x

12. In November 2016, the district court denied plaintiff’s motion for a preliminary

injunction. App’x 398. In February 2017, the district court—like every other court to

consider the legality of the fiduciary rule10—rejected plaintiff’s claims and entered

summary judgment for the government. App’x 490.

SUMMARY OF ARGUMENT

1. Plaintiff does not contest that it and similar entities may be regulated as

ERISA fiduciaries. Plaintiff also does not contest that ERISA as a general rule

prohibits fiduciaries from rendering investment advice pursuant to a conflict of

interest. The only issue on appeal is whether transactions involving conflicted advice

should be exempted under the conditions of the BIC Exemption, as opposed to the

less stringent conditions of PTE 84-24. DOL issued both exemptions to permit

fiduciaries to engage in transactions otherwise prohibited by the statute.

DOL reasonably concluded that the more stringent BIC Exemption’s

conditions are warranted to protect retirement investors from the harms posed by

10 Chamber of Commerce of the U.S. v. Hugler, 231 F. Supp. 3d 152 (N.D. Tex.

2017); National Ass’n for Fixed Annuities v. Perez, 217 F. Supp. 3d 1 (D.D.C. 2016); see also National Ass’n for Fixed Annuities v. Perez, No. 16-5345 (D.C. Cir. Dec. 15, 2016) (denying injunction pending appeal); Chamber of Commerce of the U.S. v. U.S. Dep’t of Labor, No. 17-10238, 2017 WL 1284187 (5th Cir. Apr. 5, 2017) (same).


15

conflicted transactions involving fixed-indexed annuities, which are more complicated

products than fixed-rate annuities.

Plaintiff’s challenge amounts to an invitation to second-guess DOL’s policy

judgments. For example, plaintiff alleges that DOL did not adequately explain why

additional regulation of fixed-indexed annuities was necessary in light of existing

regulations governing such products. But plaintiff has identified no authority

foreclosing DOL from exercising its authority to interpret and implement ERISA’s

fiduciary requirements for retirement-investment advisers absent a determination that

existing regulations are insufficient. In any event, DOL’s reasonable determination

that existing regulations do not adequately address conflicts of interest in the market

for retirement-investment advice more than satisfies the arbitrary-and-capricious

standard.

Plaintiff also alleges that DOL did not adequately assess the impact of its

decision on the market for fixed-indexed annuities. To the contrary, DOL not only

discussed this issue but also adapted the proposed rule with that particular market in

mind.

2. Plaintiff separately argues that DOL failed to provide adequate notice of its

decision to require conflicted transactions involving fixed-indexed annuities to satisfy

the conditions of the BIC Exemption. But DOL’s proposed rulemaking asked for

comment on that very question. Numerous commenters—including an entity

affiliated with plaintiff itself—acknowledged that question and suggested different


16

answers to it. Because DOL’s final rule was a logical outgrowth of its proposed rule,

the district court properly rejected plaintiff’s procedural challenge.

STANDARD OF REVIEW

This Court reviews a grant of summary judgment de novo. Friends of the Bow v.

Thompson, 124 F.3d 1210, 1216 (10th Cir. 1997). DOL’s actions may be set aside only

if they were “arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law.” 5 U.S.C. § 706(2)(A).

ARGUMENT

I. DOL’s Treatment Of Fixed-Indexed Annuities Was Not Arbitrary Or Capricious.

A. DOL Provided A Reasoned Basis for Requiring Conflicted Transactions Involving Fixed-Indexed Annuities To Satisfy The Conditions Of The BIC Exemption.

DOL compiled a collection of academic research, industry statistics, and public

comments demonstrating that fixed-indexed annuities require careful consideration of

their terms and risks, which are not readily discernible to retirement investors. After

reviewing the available evidence, DOL reasonably determined that, “[g]iven the risks

and complexities of these investments,” conflicted transactions involving

fixed-indexed annuities should occur under the same protective conditions—that is,

the conditions of the BIC Exemption—as conflicted transactions involving variable

annuities and mutual funds. 81 Fed. Reg. 21002, 21018 (Apr. 8, 2016). In DOL’s

expert assessment, fixed-indexed annuities are more similar to those investment


17

products than to fixed-rate annuities. This Court should not second-guess that

reasonable policy judgment.

1. DOL reasonably determined, based on a thorough review of the available

empirical and qualitative evidence, that unaddressed conflicts of interests can

significantly harm retirement investors. See, e.g., App’x 836, 847, 1047 (econometric

literature); id. at 892-93 (U.S. Government Accountability Office report). DOL

further concluded that disclosure alone may not effectively mitigate these conflicts,

based on evidence indicating that consumers generally lack the attention and financial

sophistication necessary to evaluate the many complex attributes of certain investment

products sold in the retail marketplace. See id. at 707, 819, 825, 828, 830, 836, 840-42.

The record compiled by DOL further demonstrated that commission-based

compensation practices create conflicts of interest. See App’x 719, 826-32. Advisers

paid by commission may have incentives to recommend products from which they

will earn larger commissions over products with smaller commissions that would

make their clients more money. Id. at 842; see id. at 825 (discussing incentive to

recommend products proprietary to the adviser’s employer or employer’s affiliate).

These conflicts have been well documented by regulators and outside groups; indeed,

they have been acknowledged by the financial-services industry itself. See id. at 828,

831 & n.315, 832. And IRA holders receiving conflicted advice can expect their

investments to underperform. See id. at 856 (estimating underperformance in the

mutual-fund market over the next 20 years); id. at 856-58 (summarizing nine empirical


18

studies supporting this conclusion). For example, DOL estimated that conflicts of

interest in the mutual-fund market could cost IRA investors between $95 billion and

$189 billion over the next 10 years. Id. at 856. The true cost may indeed be higher:

As DOL explained, its estimate reflects just one of many types of losses that can arise

from conflicted transactions; just one of many types of conflicts that advisers face; in

just one of many segments of the retirement-investment market. Id.; id. at 997; see id.

at 1000 (explaining that DOL surveyed “strong evidence that advisory conflicts inflict

more types of harm than are quantified in this analysis”).

2. DOL reasonably determined that the issue of conflicted advice is in many

respects more problematic in the market for annuities than in the market for mutual

funds. See App’x 820, 828-30. Specifically, the record showed that fixed-indexed

annuities are especially complex and risky products. See id. at 821, 838. Returns can

vary widely because they are tied to the selection and performance of a crediting

index. Id. at 815. There are many indices to choose from; a 2014 report identified

317 different indexed annuities, and 1648 indexed-annuity strategies, counting by

index-crediting method. Id. at 817. Moreover, investors generally do not receive

returns that reflect the full amount of index-linked gains due to methods of crediting

interest that may not be apparent on the face of the annuity contract. Id.; id. at 982

(describing contractual features that limit full crediting). These methods of crediting

interest limit investors’ ability to realize market gains and impose considerable risks on

them. Id. at 821.


19

Fixed-indexed annuities have other counterintuitive features. As DOL

observed,

Assessing the prudence of a particular indexed annuity requires an understanding, inter alia, of surrender terms and charges; interest rate caps . . . the scope of any downside risk; associated administrative and other charges; [and] the insurer’s authority to revise terms and charges over the life of the investment . . . . In operation, the index-linked interest rate can be affected by participation rates; spread, margin or asset fees; interest rate caps; the particular method for determining the change in the relevant index over the annuity’s period (annual, high water mark, or point-to-point); and the method for calculating interest earned during the annuity’s term (e.g., simple or compounded interest).

81 Fed. Reg. at 21018. In contrast to fixed-rate annuities, fixed-indexed annuities

oftentimes also include guaranteed living benefits, of which there are three types, for

an extra fee. App’x 817, 824.

In light of these complexities, DOL found the informational gap between

investors and advisers to be especially acute in the context of fixed-indexed annuities.

The Financial Industry Regulatory Authority (“FINRA”) and Securities and Exchange

Commission (“SEC”) in particular have looked on fixed-indexed annuities with

concern. They have warned that fixed-indexed annuities are “complicated” and

“anything but easy to understand.” App’x 1149 (SEC bulletin); App’x 1145 (FINRA

bulletin). Not only are these types of annuities difficult to compare due to the

“variety and complexity of the methods used to credit interest,” App’x 1145 (FINRA

bulletin), but investors “could lose money” for several reasons: (1) many insurance


20

companies only guarantee 87.5% of the premiums that investors pay; (2) if the index

linked to the annuity declines, investors will not realize any index-linked interest; and

(3) if investors surrender the fixed-indexed annuity before its maturity date, they could

pay large surrender charges and tax penalties that would eliminate any gains, id. at

1148 (FINRA bulletin); id. at 1149 (SEC bulletin). FINRA has also expressed

concerns that sales materials for such products do not fully describe them, and could

confuse or mislead investors. Id. at 741.11

Commissions for fixed-indexed annuities are also higher than for other

products. They are often substantially higher than those for mutual funds. App’x

827, 829. According to one source, the typical commission for the sale of a fixed-

indexed annuity averages 6.3% of the principal payment, as compared to the average

commission of 1.37% for the sale of shares in a mutual fund. Id. at 829, 1043. And

according to the academic literature available at the time, “high and variable”

insurance product commissions “can encourage agents and brokers to recommend

products that are not suitable for their customers, and/or to favor one suitable

product over others that would better serve their customers’ interests.” Id. at 829.

11 Plaintiff claims these bulletins described fixed-indexed annuities as complex

and risky only “if surrendered prematurely.” Br. 43. That is inaccurate. See App’x 1145 (FINRA bulletin stating that “[b]ecause of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one [indexed annuity] to another”); App’x 1149 (SEC bulletin noting variations in “some indexed annuities” such that investors “could lose money, whether or not you cancel early”); App’x 1714 (NASAA statement).


21

Relying on all of this evidence, DOL reasonably determined that retirement

investors—particularly individual investors in the retail market—are “acutely

dependent” on investment advice in the fixed-indexed-annuity context. 81 Fed. Reg.

at 21018; App’x 726; see also App’x 1000. Without expert guidance, “[i]nvestors can all

too easily overestimate the value of these contracts, misunderstand the linkage

between the contract value and the index performance, underestimate the costs of the

contract, and overestimate the scope of their protection from downside risk (or

wrongly believe they have no risk of loss).” 81 Fed. Reg. at 21018.

3. DOL examined the record before it to determine whether existing laws

governing annuity products could mitigate the harms of conflicts of interest. After

evaluating federal securities regulation for variable annuities, and state insurance

regulation of all annuities, DOL reasonably concluded that those regulations did not

adequately protect retirement investors.

Fixed-indexed annuities are exempt securities described in the Securities Act of

1933. See Pub. L. No. 111-203, § 989J, 124 Stat. 1376, 1949 (2010). This status is

contingent on the annuity satisfying certain suitability standards set by the National

Association of Insurance Commissioners (“NAIC”), a standard-setting and

regulatory-support organization. See App’x 739-40. Many states have adopted some

version of the NAIC’s “Suitability in Annuity Transactions Model Regulation.” Id. at

737. The model rule requires that insurance companies establish reasonable policies

and procedures to assess the suitability of each product recommendation. 81 Fed.


22

Reg. at 21018. Insurance companies must also develop supervisory systems to ensure

that insurers and their agents comply with the rule’s suitability requirements. Id. In

contrast to a best-interest-of-the-customer standard, a suitability standard requires

only that an investment adviser have a reasonable basis to believe that the

recommended insurance product is suitable for the customer’s investment profile.

App’x 731, 737, 739.

DOL explained that, because these and similar suitability standards do not

prohibit conflicted advice-giving, they may “permit brokers to recommend

investments that favor their own financial interests . . . in preference to better

investments that favor the customers’ interests.” App’x 732. Moreover, not every

State has adopted the model regulation. Id. at 737, 740. Suitability standards thus still

differ from State to State—a regulatory patchwork the Federal Insurance Office has

described as “particularly concerning” and “increasingly problematic.” Id. at 737, 740,

809.

Apart from this lack of uniformity, lessons from the mutual-fund market—

which is subject to functionally identical suitability standards—persuaded DOL to

adopt a more protective standard governing fixed-indexed annuities in the retirement-

investment context. Nine quantitative studies of that market confirmed the

substantial negative effect of commissions on those investors notwithstanding the

existence of a suitability regime. See App’x 794, 856-60, 870. These data, as noted,

showed that advisers’ bias toward mutual funds that pay higher compensation could


23

cost IRA investors between $95 billion and $189 billion over the next 10 years. Id. at

856.

In light of this record, DOL determined to revise the exemption structure

governing conflicted transactions involving fixed-indexed annuities. Specifically,

DOL limited the availability of PTE 84-24 so that conflicted transactions involving

such products would be required to satisfy the conditions of the BIC Exemption. In

DOL’s judgment, those conditions “serve as strong counterweights to the conflicts of

interest associated with complex investment products, such as variable and indexed

annuities.” 81 Fed. Reg. at 21154. The requirement to enter into an enforceable,

written contract with the investor gives “fiduciaries a powerful incentive” to adhere to

the conduct standards. Id. at 21022. Moreover, the fiduciary acknowledgement is

“critical to ensuring clarity and certainty with respect to the fiduciary status of both

the Adviser and Financial Institution.” Id. at 21025. For example, the policies-and-

procedures requirement is “one of the most critical investor protections,” because

“[s]trong policies and procedures reduce the temptation (conscious or unconscious)

to violate the Best Interest standard in the first place.” Id. at 21034. Finally, DOL

recognized the importance of a “level playing field for variable annuities, indexed

annuities, and mutual funds under a common set of requirements” to avoid

“regulatory incentive[s] to preferentially recommend indexed annuities.” 81 Fed. Reg.

at 21018.


24

For all of these reasons, it was reasonable for DOL to decline to allow

conflicted transactions involving fixed-indexed annuities to proceed under the more

“streamlined” PTE 84-24—eligibility for which DOL narrowed to fixed-rate

annuities, whose “relative[] simpl[icity]” warrants fewer protective conditions. See 81

Fed. Reg. at 21018.

B. Plaintiff’s Counterarguments Are Erroneous.

Plaintiff does not contest DOL’s authority to regulate it and similar entities as

fiduciaries under ERISA. Plaintiff also does not contest that a fiduciary’s conflicted

advice is a prohibited transaction under the statute, or that a fiduciary could choose to

adopt alternative compensation schemes and avoid the need to rely on any exemption

at all. Plaintiff instead mounts a procedural challenge to the conditions under which

DOL has chosen to provide relief from ERISA’s prohibited-transaction provisions.

Specifically, plaintiff claims that DOL acted arbitrarily and capriciously by requiring

conflicted transactions involving fixed-indexed annuities to satisfy the BIC Exemption

rather than the amended PTE 84-24.

The district court correctly rejected this argument, see App’x 438-48, because

DOL’s judgment—based on the extensive record before it—more than satisfies the

“highly deferential” arbitrary-and-capricious standard, Ecology Ctr., Inc. v. U.S. Forest

Serv., 451 F.3d 1183, 1188 (10th Cir. 2006). Under that standard, “[t]he duty of a

court reviewing agency action . . . is to ascertain whether the agency examined the

relevant data and articulated a rational connection between the facts found and the


25

decision made.” Citizens’ Comm. to Save Our Canyons v. Krueger, 513 F.3d 1169, 1176

(10th Cir. 2008).

1. Plaintiff first contends (Br. 45) that DOL lacks authority to regulate

insurance products. That argument is refuted by ERISA itself, which governs the

conduct of any individual “to the extent . . . he renders investment advice . . . with

respect to any moneys or other property” of a retirement investor without regard for

whether such property takes the form of an insurance product. See 29 U.S.C.

§ 1002(21)(A)(ii); 26 U.S.C. § 4975(e)(3). Congress recognized as much in 2006, when

it enacted a different statutory exemption to ERISA’s prohibited-transaction

provisions that applies to insurance agents who qualify as ERISA fiduciaries. See 26

U.S.C. § 4975(f)(8)(J)(i)(III), (VI). State insurance regulators concur that DOL has

such authority. See 81 Fed. Reg. at 20959 (“The NAIC agree[s] that [both] state

insurance regulators [and] the DOL, SEC and FINRA, . . . have an important role in

the administration and enforcement of standards for retirement plans and products

within their jurisdiction.”). And DOL has regulated insurance products for decades;

indeed, when PTE 84-24 was originally issued in 1977, the exemption applied

specifically to deferred annuities. See 49 Fed. Reg. at 13211; 42 Fed. Reg. at 32398

(predecessor to PTE 84-24). It is therefore unsurprising that plaintiff has failed to

identify any provision in ERISA that prohibits DOL from regulating advice rendered

by a fiduciary simply because that advice concerns insurance products.


26

The Harkin Amendment to the Dodd-Frank Wall Street Reform and

Consumer Protection Act did not eliminate DOL’s well-settled authority to regulate

investment advice rendered by fiduciaries to retirement investors in the context of

certain annuity sales. That provision requires a different agency—the SEC—to treat

fixed-indexed annuities as “exempt securities described under” a different statute—

“the Securities Act of 1933”—so long as their sale satisfies suitability standards of the

NAIC and other standards set forth in the Dodd-Frank Act. See Pub. L. No. 111-203,

§ 989J, 124 Stat. at 1949. The Amendment applies by its terms to SEC and the

Securities Act, not to DOL and ERISA. And federal securities laws need not be

construed in parallel with ERISA.12 See International Bhd. of Teamsters, Chauffeurs,

Warehousemen & Helpers of Am. v. Daniel, 439 U.S. 551, 570 (1979) (“Congress believed

that it was filling a regulatory void when it enacted ERISA, a belief which the SEC

actively encouraged.”). The former applies to securities transactions regardless of the

12 Although plaintiff references the McCarran-Ferguson Act, it does not argue

that the rule violates this statute. Br. 45. And for good reason: The Act exempts certain state insurance laws from inadvertent preemption by federal law that does not “specifically relate[] to the business of insurance.” See Barnett Bank, N.A. v. Nelson, 517 U.S. 25, 28, 40 (1996) (quoting 15 U.S.C. § 1012(b)). Because “ERISA . . . obviously and specifically relates to the business of insurance . . .[,] the McCarran–Ferguson Act does not surrender regulation exclusively to the States.” John Hancock Mut. Life Ins. Co. v. Harris Tr. & Sav. Bank, 510 U.S. 86, 98 (1993). Moreover, the Department worked closely with state insurance regulators and designed the rulemaking to work with and complement state insurance laws, not supersede them. See 81 Fed. Reg. at 21019 n.32 (responding to commenters who raised concerns about the Act); 81 Fed. Reg. at 21161. For this reason also, the McCarran-Ferguson Act has no application. See Humana Inc. v. Forsyth, 525 U.S. 299, 310 (1999).


27

nature of their investor, while the latter imposes additional and more stringent

obligations on advisers to retirement investors in tax-preferred funds in particular. See

Secretary of Labor v. Fitzsimmons, 805 F.2d 682, 689 (7th Cir. 1986) (en banc). Moreover,

this particular securities law was enacted more than three decades after ERISA, and

“the views of a subsequent Congress form a hazardous basis for inferring the intent

of an earlier one.” United States v. Price, 361 U.S. 304, 313 (1960).

2. Plaintiff next contends (Br. 43, 45) that fixed-indexed annuities do not

require federal regulation in light of state suitability regulations. But DOL, after

studying the existing regulations governing fixed-indexed annuities, reasonably

determined otherwise. See supra pp. 21-24. The Harkin Amendment does not render

that determination unreasonable. As noted, the Amendment only encourages

voluntary adherence to a suitability standard. App’x 740 (noting that, “[a]s a result of”

the Amendment, fixed-indexed annuities “remain subject to state regulation under

current law”). And as DOL explained, existing suitability laws “do not always limit or

mitigate potentially harmful adviser conflicts as robustly” as the fiduciary rule’s

Impartial Conduct Standards would. Id. at 808.13

13 Plaintiff mentions in passing (Br. 43) that sufficient disclosure, as opposed to

suitability, requirements exist at the state level to address concerns reflected in bulletins issued by the SEC and FINRA. DOL considered, but ultimately rejected, basing exemptive relief solely on disclosure of conflicts. App’x 966. DOL explained that “disclosures often fail to make investors aware of their advisers’ conflicts,” and that the “available academic and empirical evidence strongly suggest[ed]” that disclosure by itself does not serve to actually mitigate conflicts. Id. That reasoned explanation is all the APA requires.


28

Relatedly, plaintiff argues that state suitability regulations are adequately

protective of retirement investors because “hardly anybody complains to state

insurance regulators about [fixed-indexed annuities].” Br. 46 (citing App’x 133). But

DOL reasonably relied on news reports to the contrary. App’x 830. The only

contrary evidence plaintiff cites is a declaration appended to one of its district-court

filings—a document that is not properly before this Court. See Custer Cty. Action Ass’n

v. Garvey, 256 F.3d 1024, 1027 n.1 (10th Cir. 2001) (“Judicial review of an agency

decision is generally limited to review of the administrative record.”). Nor would such

evidence, if properly presented to the agency, render DOL’s determination

unreasonable. As one commenter noted, “with opaque transactions, consumers lack

the information to complain.” App’x 446 (citing AR 31685).

Nor is it significant that, according to plaintiff (Br. 46-47), certain state

insurance regulators opposed the fiduciary rule because it allegedly creates a

disuniform regulatory scheme. To reiterate, ERISA does not constrain DOL’s

authority to issue administrative exemptions even where state regulation is sufficient.

See 29 U.S.C. § 1108(a); 26 U.S.C. § 4975(c)(2). In any event, DOL thoroughly

analyzed the existing regulatory structure and consulted with state regulators. App’x

726-45; 81 Fed. Reg. at 21018. It specifically studied whether its rulemaking “would

interfere with state insurance regulatory programs,” and determined that the rule’s

requirements would “work cohesively with . . . requirements currently in place.” 81

Fed. Reg. at 21018. That rational explanation must be credited. The isolated


29

statements that plaintiff points to, which postdate the 2016 rulemaking and are not

included in the administrative record, do not change this conclusion.

Nor does the D.C. Circuit’s decision in American Equity Investment Life Insurance

Co. v. SEC, 613 F.3d 166, 179 (D.C. Cir. 2010). Although the court found that the

SEC reasonably interpreted the term “annuity contract” to exclude fixed-indexed

annuities, it reversed an SEC rule because the agency had “fail[ed] to analyze the

efficiency of the existing state law regime” for annuities. Id. The court based its

holding on a specific provision of the SEC’s enabling statute requiring the agency to

analyze the effects of its rule on “efficiency, competition, and capital formation.” See

id. at 177 (quoting 15 U.S.C. § 77b(b)). Because ERISA contains no analogous

requirement, the court’s holding has no application here.

To rehabilitate its reliance on American Equity, plaintiff relies (Br. 48) on an

entirely incomparable provision of ERISA: 29 U.S.C. § 1135, which provides merely

that DOL “may prescribe such regulations as [it] finds necessary or appropriate.” To

begin with, that is not the relevant statutory provision. Congress granted DOL broad

authority to grant conditional administrative exemptions so long as the agency makes

three different and more specific findings: that the exemption is administratively

feasible, in the interests of the plan and its participants and beneficiaries, and

protective of participants’ and beneficiaries’ rights. 29 U.S.C. § 1108(a); 26 U.S.C.

§ 4975(c)(2). DOL made those findings here, and plaintiff has failed to contest the

validity of those findings on appeal. See 81 Fed. Reg. at 21003; 81 Fed. Reg. at 21148.


30

Under plaintiff’s logic, it would be neither “necessary” nor “appropriate” for DOL to

issue any administrative exemption, even PTE 84-24, to permit plaintiff to render

conflicted advice with respect to annuities—thus leaving in place ERISA’s statutory

prohibition on all conflicted advice, a result plaintiff presumably does not intend.

Even if 29 U.S.C. § 1135 were the relevant limitation on DOL’s authority to

issue the BIC Exemption, it would not mandate plaintiff’s preferred result: that DOL

assess the sufficiency of state-law suitability requirements. As the Supreme Court held

in Michigan v. EPA, 135 S. Ct. 2699 (2015), a statutory requirement that an agency

consider the costs as well as the benefits of a rulemaking does not mandate a

particular sort of cost-benefit analysis. Id. at 2711-12. That discretion remains vested

in the agency. See id. at 2711. In any event, DOL did account for existing state

regulation in the rulemaking, see supra pp. 21-24, and its formal cost-benefit analysis

addressed the costs associated with the BIC Exemption’s disclosure, contract, and

supervisory and oversight requirements, see App’x 904-58.14

3. Plaintiff then contends (Br. 40) that, even if DOL could regulate fixed-

indexed annuities and even if fixed-indexed annuities needed regulation, DOL

unreasonably treated these products differently from fixed-rate annuities. But DOL

14 DOL conducted a regulatory impact analysis primarily to satisfy Executive

Order No. 12866, which is an internal government requirement that is not judicially enforceable. See App’x 714-15; National Trucking Equipment Ass’n v. National Highway. Traffic Safety Admin., 711 F.3d 662, 670 (6th Cir. 2013) (express terms of Exec. Order No. 12866 preclude judicial review of an agency’s compliance with its standard).


31

explained why the two products are not the same. In contrast to fixed-rate annuities,

which are “relatively simpler annuity products,” fixed-indexed annuities are “complex

products requiring careful consideration of their terms and risks,” “do not offer the

same predictability of payments as [fixed-rate annuities],” and are “susceptible to

abuse.” 81 Fed. Reg. at 21018; 81 Fed. Reg. at 21152-53. Thus, such annuities are

better analogized to variable annuities, as commenters—including industry

participants—informed DOL. See, e.g., Supp. App’x 88 (cmt. of Jackson Nat’l Life

Ins. Co.) (“Recent changes to the structures of fixed indexed annuities (FIAs) and

variable annuities, including increasingly complex indexes within FIAs . . . have

resulted in these products becoming remarkably similar.”); App’x 1602 (cmt. of

Allianz Life Ins. Co.) (explaining that, “increasingly, different types of annuities look

more similar to other types of annuities than to traditional investment products”).

DOL described one comment as indicating that “indexed and variable annuities raise

similar issues with respect to conflicted compensation, and . . . different treatment of

the two would create incentives to sell more indexed annuities subject to the less

restrictive regulation.” 81 Fed. Reg. at 21017; see also App’x 1676 (cmt. of Fund

Democracy). It was therefore reasonable for DOL to treat fixed-indexed annuities

like variable annuities, which the agency likewise removed from the scope of the

revised PTE 84-24.

Plaintiff’s contrary argument (Br. 41) amounts to a request that this Court

reevaluate DOL’s policy judgment in light of plaintiff’s belief that fixed-indexed


32

annuities and fixed-rate annuities are functionally identical save for the manner in

which returns are credited to investors. As proof, plaintiff cites (Br. 41-42) several

comments DOL allegedly disregarded. But DOL reasonably credited other

commenters’ conclusion that, “due to their complexity, fee structure, inherent

conflicts of interest, as well as lack of regulation under the securities laws, indexed

annuities similarly require heightened regulation.” 81 Fed. Reg. at 21156. DOL’s

reasoned choice between “two fairly conflicting views” warrants deference. See Forest

Guardians v. U.S. Fish & Wildlife Serv., 611 F.3d 692, 704 (10th Cir. 2010); App’x 441.

Nor would plaintiff prevail even assuming the APA required the agency to

credit plaintiff’s characterization of the two products. As DOL explained and as the

record shows, consumers often struggle to understand the methods for determining

changes in the crediting index, as well as the manner in which returns are calculated,

including “participation rates” and “interest rate caps” that limit index gains, and fees

that investors pay directly and indirectly to the insurance company (termed “spreads,”

“margins,” and “administration fees”). See App’x 817, 821, 980. The different

methods of crediting returns are thus significant enough to justify regulating the two

products differently.

Plaintiff responds (Br. 39) that, even if fixed-indexed annuities and fixed-rate

annuities are indeed different, DOL could not regulate those products differently

absent evidence that conflicts of interest affect the former to a greater extent than

they affect the latter. But this argument ignores DOL’s reasoning. Even assuming


33

that the magnitude of the conflicts associated with both types of annuities are equally

severe, such conflicts are exacerbated in the fixed-indexed annuity context, where—as

explained—the contractual terms are much more complex, confusing, and risky for

investors. 81 Fed. Reg. at 21018. As DOL explained, “the increasing complexity and

conflicted payment structures associated with these annuity products have heightened

the conflicts of interest experienced by investment advice providers that recommend

them.” 81 Fed. Reg. at 21154. It was therefore reasonable for DOL to find that, due

to the heightened complexity of fixed-indexed annuities, retirement investors are less

able to counteract potential conflicts in this sector of the market, and thereby more

dependent on a fiduciary investment adviser’s guidance. Id.

4. Plaintiff lastly contends that the BIC Exemption is arbitrary and capricious

because sellers of fixed-indexed annuities cannot comply with its conditions. But

these conditions are not regulatory requirements to which all sellers of fixed-indexed

annuities must adhere. On the contrary, DOL determined that regulated entities can

adopt alternative compensation systems designed to mitigate or eliminate conflicts of

interest. See App’x 1008. In this manner, industry participants can avoid triggering

ERISA’s prohibited-transaction provisions in the first place, relieving them of the

need to invoke any exemption—let alone the BIC Exemption. Plaintiff has not

challenged this determination on appeal. To the extent plaintiff believes DOL must

accommodate a hypothetical fiduciary investment adviser whose business model

requires engaging in conflicted transactions, plaintiff is mistaken. Nothing in ERISA


34

obliges DOL to preserve conflicted compensation systems; to the contrary, ERISA

prohibits such systems in the absence of an applicable statutory or administrative

exemption. See 26 U.S.C. § 4975(c)(1)(E), (F); 29 U.S.C. § 1106(b)(1), (3). And the

APA requires only that DOL give a reasoned explanation concerning its response to

such a fiduciary’s dilemma—as the agency in fact did.

Plaintiff suggests (Br. 52), that the BIC Exemption is arbitrary and capricious

because it imposes unworkable supervisory obligations on insurance companies that

sell fixed-indexed annuities. Such products are typically sold through independent

agents who also sell products from multiple companies. See App’x 799-800. Plaintiff

reads the exemption (Br. 18) to require, as a condition of eligibility, each company to

certify that its independent agents have complied with the Impartial Conduct

Standards with respect to the sale of every other company’s products in addition to the

sale of its own products. In plaintiff’s view, this condition is impossible to meet. But

plaintiff has misunderstood the relevant condition, which requires only that insurance

companies adopt “policies and procedures reasonably and prudently designed to

ensure that its [agents] adhere to the Impartial Conduct Standards.” 81 Fed. Reg. at

21033. To clarify this standard, DOL has explained that the exemption “does not

require insurance companies to exercise supervisory responsibility with respect to the

practices of unrelated and unaffiliated insurance companies”; a company’s

responsibility extends only to its own products, not recommendations and transactions

involving other insurers. See U.S. Dep’t of Labor, Conflict of Interest FAQs (Part I—


35

Exemptions) 20 (Oct. 27, 2016), https://go.usa.gov/xRGJj. And DOL’s interpretation

of its own regulation—which is neither “plainly erroneous” nor “inconsistent with”

the regulation’s terms—is controlling. See Auer v. Robbins, 519 U.S. 452, 461 (1997).

In any event, DOL considered and explained why the BIC Exemption’s

supervision requirement is workable. Existing state-law suitability regimes—which

plaintiff advocates as an alternative to the fiduciary rule, see Br. 45-46—impose similar

supervisory obligations on companies that sell fixed-indexed annuities. 81 Fed. Reg.

at 21018 n.31; 82 Fed. Reg. 7336, 7341-42 (Jan. 19, 2017) (discussing options by

insurance companies to achieve compliance, including the role of IMOs, even in the

absence of a specialized exemption). These companies are already required to

“maintain procedures for review of each recommendation prior to issuance of an

annuity that [are] designed to ensure that there is a reasonable basis to determine that

a recommendation is suitable.” 81 Fed. Reg. at 21018 n.31 (citing the NAIC Model

Regulations). It was therefore reasonable for DOL to condition the BIC Exemption

on a similar degree of supervision.

Relatedly, plaintiff faults DOL (Br. 52) for not classifying independent

marketing organizations (“IMOs”) as “financial institutions” eligible for the BIC

Exemption. IMOs are middlemen in the annuity distribution system whose principal

function is to market, distribute, and wholesale insurance products, including fixed-

indexed annuities. See App’x 800. But DOL reasonably declined to adopt

commenters’ suggestion that the exemption’s definition of “financial institution” be


36

extended to cover IMOs, which do not otherwise meet the definition’s terms. DOL

instead determined to make the exemption available only to “entities . . . subject to

well-established regulatory conditions and oversight”—that is, banks, broker-dealers,

registered investment advisers, and insurance companies. 81 Fed. Reg. at 21067. As

DOL emphasized, an IMO may still obtain relief from ERISA’s prohibited-

transaction provisions by petitioning the agency for an individual exemption. Id.

Additionally, DOL has proposed a companion exemption that would permit IMOs to

act as “financial institutions.” See 82 Fed. Reg. at 7372. These characteristics are

designed to ensure that the exemption is accessible only to those IMOs with the

“financial stability” and “operational capacity” to supervise affiliated insurance agents

meaningfully. Id. at 7341, 7345. This reasoned explanation for DOL’s case-by-case

approach to the regulation of IMOs was not arbitrary or capricious.

Plaintiff further speculates (Br. 52) that independent insurance agents might

leave the market to avoid the cost of adopting an alternative compensation system or

of complying with the BIC Exemption’s conditions. But DOL seriously considered

this concern during the rulemaking process. The agency acknowledged that “the

frictions associated with market adjustments . . . may be significant and may pose a

particular challenge to some parties in the near term,” especially retirement-insurance

providers “whose commission . . . structures” the record suggested have historically

been “laden with . . . acute conflicts of interest.” App’x 1006-07. Nevertheless, DOL

determined that “any frictional cost . . . will be justified by the rule’s intended long-


37

term effects of greater market efficiency and a distributional outcome that favors

retirement investors over the financial industry.” Id. at 1007. Such “predictive

judgments about the likely economic effects of a rule” are entitled to particular

deference. See Newspaper Ass’n of Am. v. Postal Regulatory Comm’n, 734 F.3d 1208, 1216

(D.C. Cir. 2013).

Plaintiff invites this Court to second-guess DOL’s policy judgment (Br. 50)

because the agency allegedly did not quantify the fiduciary rule’s impact on

independent agents. But the APA requires only a “reasoned explanation,” not a

specific quantum of empirical data. See Stilwell v. Office of Thrift Supervision, 569 F.3d

514, 519 (D.C. Cir. 2009). An agency retains discretion as to how best to account for

cost even where a statute requires costs to be considered. See Michigan, 135 S. Ct. at

2711.

Here, recognizing that “[i]ndependent insurance agents could also be affected”

by the fiduciary rule but that “[r]eliable data” as to the number of such agents “are not

available,” DOL assessed the rule’s impact in two ways. App’x 936. DOL first

observed that many independent agents are also registered as broker-dealers under

federal securities laws, meaning that DOL’s estimate of broker-dealers’ compliance

costs “captured” costs to these agents as well. Id. DOL also observed that

independent agents receive “support” from insurance companies, meaning that

DOL’s estimate of insurers’ compliance costs “accounted for” another portion of the

overall costs to independent agents. Id. at 936 n.519; see id. at 935.


38

Plaintiff has failed to answer the substance of this analysis. Plaintiff instead

reiterates (Br. 51) its mistaken claim—which the district court correctly rejected for

the reasons given above, see App’x 448-49—that DOL “omitted any analysis” of the

fiduciary rule’s impact on independent insurance agents by focusing solely on the

rule’s effect on insurance companies. Plaintiff also emphasizes the shortcomings in

DOL’s data. But the “mere fact that” an agency “relied on necessarily imperfect

information . . . does not render [its decision] arbitrary.” District Hosp. Partners, L.P. v.

Burwell, 786 F.3d 46, 62 (D.C. Cir. 2015). The APA requires only that an agency’s

“data-collection process” be “reasonable,” White Stallion Energy Ctr., LLC v. EPA, 748

F.3d 1222, 1248 (D.C. Cir. 2014), rev’d on other grounds by Michigan v. EPA, 135 S. Ct.

2699 (2015); it does not require an agency’s quantitative models to be “a perfect fit,”

Chemical Mfrs. Ass’n v. EPA, 28 F.3d 1259, 1265 (D.C. Cir. 1994). These principles

have particular force where, as here, “the industry . . . declined to provide” DOL with

additional quantitative data during notice-and-comment proceedings despite the

agency’s requests. App’x 449. Because DOL reasonably accounted for the costs to

independent agents notwithstanding the imperfect data available to it, its explanation

satisfies the APA.

II. DOL Complied With The APA’s Notice Requirement.

DOL provided adequate notice of its decision to remove fixed-indexed

annuities from the scope of the revised PTE 84-24. 81 Fed. Reg. at 21018. The APA

requires only that an agency’s final rule constitute a “logical outgrowth” of the


39

proposed rule, not that it be identical to the proposed rule. See Long Island Care at

Home, Ltd. v. Coke, 551 U.S. 158, 174 (2007); CSX Transp., Inc. v. Surface Transp. Bd.,

584 F.3d 1076, 1079-80 (D.C. Cir. 2009). An agency’s notice of proposed rulemaking

(“NPRM”) is sufficient where it “expressly ask[s] for comments on a particular issue

or otherwise ma[kes] clear that the agency [is] contemplating a particular change.”

United States Telecom Ass’n v. FCC, 825 F.3d 674, 700 (D.C. Cir. 2016) (alterations in

original) (quoting CSX Transp., Inc., 584 F.3d at 1081); accord Zen Magnets, LLC v.

Consumer Prod. Safety Comm’n, 841 F.3d 1141, 1154 (10th Cir. 2016). DOL easily

satisfied this standard. App’x 424; see also National Ass’n for Fixed Annuities v. Perez, 217

F. Supp. 3d 1, 47 (D.D.C. 2016) (upholding DOL’s proposed rule in identical

procedural challenge).

A. The Exclusion Of Fixed-Indexed Annuities From PTE 84-24 Was A Logical Outgrowth Of The Proposed Rule.

DOL “expressly requested comments regarding the . . . scope” of both PTE

84-24 and the BIC Exemption. See Zen Magnets, LLC, 841 F.3d at 1154. DOL initially

proposed to limit eligibility for PTE 84-24 to transactions involving annuities that are

not securities; transactions involving “variable annuity contracts and other annuity

contracts that are securities under federal securities laws,” would “occur under the

conditions of the Best Interest Contract Exemption.” 80 Fed. Reg. 22010, 22014

(Apr. 20, 2015). In that proposal, DOL specifically “request[ed] comment on whether


40

the proposal to revoke relief for” the specified transactions “strikes the appropriate

balance and is protective of the interests of the IRAs.” Id. at 22015.

DOL requested similar comments in the proposed BIC Exemption, which

expressed doubt as to “whether we have drawn the correct lines between insurance

and annuity products that are securities and those that are not,” and “request[ed]

comment on this approach”—that is, its “decision to continue to allow IRA

transactions involving non-security insurance and annuity contracts to occur under

the conditions of PTE 84-24[,] while requiring IRA transactions involving securities

to occur under” the BIC Exemption conditions. 80 Fed. Reg. 21960, 21975 (Apr. 20,

2015). DOL also inquired whether, to the extent annuity products not regulated as

securities should be placed in the BIC Exemption, the exemption’s conditions

governing disclosures “would be readily applicable” to them. 80 Fed. Reg. at 22015.

Such conditions, DOL noted, might not be workable when applied to those products’

unique distribution systems. Id.

Many commenters recognized that the placement of annuity contracts

remained under review. For example, the Allianz Life Insurance Company of North

America read the proposed rule as “specifically request[ing] comment on which

exemption—PTE 84-24 or the BIC Exemption—should apply to which types of

annuity.” App’x 1598. The Indexed Annuity Leadership Council (“IALC”) likewise

understood DOL to have posed an “inquir[y] . . . about whether it has struck the right

balance in terms of providing exemptions for securities and non-securities products.”


41

App’x 1647. Commenters also proposed various solutions to DOL’s question. The

National Association on Fixed Annuities endorsed the approach in the NPRM: “the

Department’s inclusion of all non-security fixed annuity products under PTE 84-24.”

A.R. 47040. Other commenters such as Allianz Life preferred PTE 84-24 to remain a

“single regulatory standard” that would apply to both variable and fixed-indexed

annuities. App’x 1598-99; see also Supp. App’x 12 (cmt. of SIFMA). Still others urged

that transactions involving fixed-indexed annuities satisfy the conditions of the BIC

Exemption, rather than PTE 84-24—a result DOL ultimately adopted. See, e.g., App’x

1674 (cmt. of Fund Democracy); Supp. App’x 20 (cmt. of University of Miami

Investor Rights Clinic); Supp. App’x 77 (cmt. of Prof. Ron Rhoades).

Even an IMO within plaintiff’s network, Advisors Excel, acknowledged the

nature of DOL’s inquiry. “[I]n the interest of brevity,” Advisors Excel decided to

“concur with many of the concerns” in IALC’s comments to the rule in lieu of

“revisit[ing] each of the points laid out.” App’x 1711. IALC understood that DOL

sought further clarity about “whether it . . . struck the right balance” with the

exemptions, and stated that it “believe[d] that the conditions of the [BIC exemption]

would be problematic for fixed annuities.” Id. at 1647.

Because commenters “clearly understood” that the applicable conditions and

grouping of annuities remained under consideration by DOL, the “evolution” of the

fiduciary rule did not “deprive[]” plaintiff “of adequate notice and an opportunity to


42

comment.” See Northeast Md. Waste Disposal Auth. v. EPA, 358 F.3d 936, 952 (D.C.

Cir. 2004) (per curiam).

B. Plaintiff’s Counterarguments Are Erroneous.

To argue that the final rule was not a logical outgrowth of the proposed rule,

plaintiff mischaracterizes the NPRM in several ways.

1. Plaintiff first observes (Br. 25) that DOL’s proposed revision to PTE 84-24

stated that “the amendment would revoke relief for” transactions involving “variable

annuity contracts and other annuity contracts that are securities under federal securities laws[.]”

Relying on this statement, plaintiff contends (Br. 25) that DOL engaged in an

unlawful “[s]witcheroo” when the final revision to PTE 84-24 modified the

exemption still more. But an agency’s “modification of a proposed rule, in response

to the comments it solicited and received on alternative possibilities, complies with

the requirements of administrative law.” Appalachian Power Co. v. EPA, 135 F.3d 791,

816 (D.C. Cir. 1998) (per curiam). The APA does not “insist that an agency learn

from the comments on its proposals only at the peril of starting a new procedural

round of commentary.” Id. at 804 n.22 (citation omitted).

Here, DOL indicated that the scope of PTE 84-24 had not yet been set in

stone. In the proposed PTE 84-24, DOL asked whether it should “leave in place

relief for IRA transactions involving insurance and annuity contracts that are not

securities.” 80 Fed. Reg. at 22015. And in the proposed BIC exemption, DOL asked

whether it had “drawn the correct lines between insurance and annuity products that


43

are securities and those that are not.” 80 Fed. Reg. at 21975. DOL permissibly

modified its proposed approach in response to comments it received.

2. Plaintiff next asserts that it failed to understand what DOL was asking. But

plaintiff’s misunderstanding of DOL’s questions does not an APA violation make.

What matters is whether a “reasonable interested party” would have understood what

remained on the table. See Allina Health Servs. v. Sebelius, 746 F.3d 1102, 1109 (D.C.

Cir. 2014). Here, many commenters—including a member of plaintiff’s network, see

supra pp. 41—understood and responded to DOL’s concerns, confirming that the

final rule was a logical outgrowth of the proposed rule. See CSX Transp., Inc., 584 F.3d

at 1079-80.

In any event, plaintiff’s idiosyncratic readings of DOL’s questions are

unreasonable. Plaintiff first complains (Br. 28) that the questions DOL asked were

too vague. But there is no notice problem where an agency “include[s] specific

questions in the NPRM,” “ask[s] the commentators to address [its] questions about

the feasibility” of a proposed solution, and then makes its final decision. International

Union, United Mine Workers of Am. v. Mine Safety & Health Admin., 626 F.3d 84, 96

(D.C. Cir. 2010); CSX Transp., Inc., 584 F.3d at 1081. DOL proceeded in exactly this

way. By transparently discussing its concerns about its proposed approach, DOL

made it “reasonably foreseeable” that it would make an informed decision about

whether to continue to adhere to that course based in part on forthcoming

information from the public. Owner-Operator Indep. Drivers Ass’n v. Federal Motor Carrier


44

Safety Admin., 494 F.3d 188, 210 (D.C. Cir. 2007); see also id. (finding final rule “could

hardly have been a surprise to anyone” where notice “outlined specific” agency

considerations); City of Portland v. EPA, 507 F.3d 706, 715 (D.C. Cir. 2007) (same).

The cases cited by plaintiff do not dictate a different result. In Shell Oil Co. v.

EPA, 950 F.2d 741 (D.C. Cir. 1991) (per curiam), the agency failed to request any

comment on the portion of the final rule it changed. See id. at 749. The EPA adopted

that part of the final rule to solve “a major loophole” highlighted not by the EPA but

by commenters. Id. at 749, 751. Mid Continent Nail Corp. v. United States, 846 F.3d

1364 (Fed. Cir. 2017) is likewise inapposite. There, the Department of Commerce

withdrew a regulation and “expressly waived” the notice-and-comment requirement

by invoking the APA’s good cause exception. Id. at 1370 (quotation marks and

alteration omitted). Not even the agency “consider[e]d its prior notices to have

satisfied the statute’s procedural requirements.” Id. at 1379-80; see also id. at 1376,

1378 (confirming agency’s original position after examining prior notices). These

cases caution that “[s]omething is not a logical outgrowth of nothing.” Id. at 1374.

Here, by contrast, DOL’s final rule was a logical outgrowth of its specific request for

comment.

Plaintiff contends, in the alternative, that DOL’s questions were too specific. It

asserts (Br. 25, 28-29) that DOL’s NPRM put regulated entities on notice only of the

agency’s intent to revisit the treatment of “annuity contracts that are securities under

federal securities laws”—and fixed-indexed annuities are not regulated as securities.


45

In fact, DOL put the question more broadly. See 80 Fed. Reg. at 22015 (“The

Department requests comment on this approach[, and] [i]n particular . . . whether the

proposal to revoke relief for securities transactions involving IRAs . . . strikes the

appropriate balance.”). But even plaintiff’s preferred reading of DOL’s questions

leaves open the possibility that fixed-indexed annuities would be excluded from PTE

84-24. As plaintiff acknowledged in district court, all annuity contracts are

“securities” under federal securities laws, and certain annuity contracts are treated as

“exempt” securities. See App’x 83. As such, the distinction between securities and

non-securities is not so clear-cut. See A.R. 38218 n.11 (SIFMA cmt.) (quoting SEC

statement that “[a]n indexed annuity may or may not be a security”). Thus, even

under plaintiff’s proposed reading of the NPRM, it should have been aware that

consideration of where to place fixed-indexed securities was on the table.

3. Plaintiff next urges this Court (Br. 32) to ignore the comments DOL

received, on the theory that the comments of other parties do not demonstrate that a

particular party had actual notice of an agency’s proposed inquiry. That principle does

not apply here because DOL’s notice supplied all parties with a reasonable description

of the possibilities on the table, as evinced by the fact that many commenters

understood that DOL’s initial treatment of fixed-indexed annuities might not be


46

DOL’s final word on the matter. See United States Telecom Ass’n, 825 F.3d at 700, 725.

Whether plaintiff had actual notice is therefore irrelevant.15

Plaintiff then claims that commenters did not actually understand DOL’s

questions either. But plaintiff has misread both of the comments it discusses. The

Allianz Life Insurance Company did not address only “whether variable and other

securities-type annuities should remain in PTE 84-24,” Br. 32; it advocated for PTE

84-24 as a “single regulatory standard” that would include “fixed index annuities.”

App’x 1598-99. And although Advisors Excel did not itself discuss DOL’s treatment

of fixed-indexed annuities, it expressly “concur[red] with many of the concerns” in

the separate comment of a different industry group—a comment that expressed

concern that DOL might regulate fixed-indexed annuities under the “problematic”

conditions of the BIC Exemption. App’x 1711, 1642, 1647.

4. Finally, plaintiff urges this Court to vacate the fiduciary rule on account of

factors not relevant to the logical-outgrowth test. Plaintiff contends, for example

(Br. 26), that a final rule cannot be a logical outgrowth of the proposed rule where

media reports postdating the rule reflect public surprise. “That [plaintiff] might have

been surprised or disappointed,” however, “provides no basis for claiming a

15 Plaintiff’s reliance on Wagner Electric Corp. v. Volpe, 466 F.2d 1013 (3d Cir.

1972), is misplaced. The court there held that the agency’s notice was insufficient because interested but less sophisticated segments of the public could not reasonably understand the NPRM. Id. at 1019. But plaintiff is a sophisticated marketplace participant, and many similarly sophisticated members of the industry submitted comments as to DOL’s treatment of fixed-indexed annuities.


47

statutorily deficient notice of rulemaking.” Brazos Elec. Power Co-op., Inc. v. Southwestern

Power Admin., 819 F.2d 537, 543 (5th Cir. 1987); see also Owner-Operator Indep. Drivers

Ass’n, 494 F.3d at 211 n.7 (“[P]ost-promulgation outpouring may merely indicate that

the commenters strenuously opposed the final rule. In any event, it tells us little

about what was ‘reasonably foreseeable,’ which is the crux of the logical outgrowth

test.”). Plaintiff cites no caselaw indicating otherwise. And to the extent such

statements might be probative, public statements show that the industry was aware

that DOL might subject transactions involving fixed-indexed annuities to heightened

consumer protections. See App’x 358.

Plaintiff also suggests (Br. 30) that the NPRM was procedurally deficient

because it did not identify the “assumptions on which it would distinguish” fixed-

indexed annuities from other annuities. That is not the applicable standard either.

The APA requires an agency to give notice reasonably calculated to afford interested

parties an opportunity to provide meaningful comment. See CSX Transp., Inc., 584

F.3d at 1080. It does not require an agency to set forth the reasons for adopting its

final rule in its proposed rule—before the agency could possibly benefit from the

comments the proposed rule was meant to solicit.

5. Plaintiff cannot prevail even assuming that the final rule was not a logical

outgrowth of the proposed rule. An APA violation “does not require reversal unless

a plaintiff demonstrates prejudice resulting from the error.” See Prairie Band

Pottawatomie Nation v. Federal Highway Admin., 684 F.3d 1002, 1008 (10th Cir. 2012)


48

(citing 5 U.S.C. § 706). “A presumption of validity attaches to the agency action and

the burden of proof rests with the appellants who challenge such action.” New Mexico

ex rel. Richardson v. Bureau of Land Mgmt., 565 F.3d 683, 704 (10th Cir. 2009). Plaintiff

has failed to carry its burden here. Plaintiff asserts (Br. 34-35) that it would have

supplied DOL with more data had it known its business model was at stake, and

speculates that other commenters would have done the same. But plaintiff has at no

point explained what this hypothetical data would show. Plaintiff also suggests that it

and other commenters would have resisted DOL’s eventual treatment of fixed-

indexed annuities more forcefully. But plaintiff has at no point explained what these

hypothetical comments would have argued—and as explained in detail above, supra

pp. 32, 36, 40-42, the arguments plaintiff now marshals against the fiduciary rule were

already considered and rejected by the agency.


49

CONCLUSION

For these reasons, the judgment of the district court should be affirmed.

Respectfully submitted,

Of Counsel:

NICHOLAS C. GEALE Acting Solicitor of Labor

G. WILLIAM SCOTT Associate Solicitor

EDWARD D. SIEGER Senior Attorney

THOMAS TSO Counsel for Appellate Litigation

MEGAN HANSEN Attorney for Regulations U.S. Department of Labor Office of the Solicitor

HASHIM M. MOOPPAN Deputy Assistant Attorney General †

TOM BEALL United States Attorney

MICHAEL S. RAAB MICHAEL SHIH THAIS-LYN TRAYER

Attorneys, Appellate Staff Civil Division, Room 7268 U.S. Department of Justice 950 Pennsylvania Avenue NW Washington, DC 20530 (202) 353-6880

September 2017

† The Acting Assistant Attorney General is recused in this case.


REQUEST FOR ORAL ARGUMENT

Appellees believe that oral argument would be of assistance to this Court, and

respectfully request oral argument.


CERTIFICATE OF COMPLIANCE

This brief complies with the type-volume limit of Federal Rule of Appellate

Procedure 32(a)(7)(B) because it contains 11,942 words. This brief also complies with

the typeface and type-style requirements of Federal Rule of Appellate Procedure

32(a)(5)-(6) because it was prepared using Microsoft Word 2013 in Garamond 14-

point font, a proportionally spaced typeface.

s/ Thais-Lyn Trayer THAIS-LYN TRAYER


CERTIFICATE OF DIGITAL SUBMISSION

I hereby certify that (1) all required privacy redactions have been made; (2) any

paper copies of this document submitted to the Court are exact copies of the version

filed electronically; and (3) the electronic submission was scanned for viruses and

found to be virus-free.



CERTIFICATE OF SERVICE

I hereby certify that on September 20, 2017, I electronically filed the foregoing

brief with the Clerk of the Court for the United States Court of Appeals for the Tenth

Circuit by using the appellate CM/ECF system. Participants in the case are registered

CM/ECF users, and service will be accomplished by the appellate CM/ECF system.



ADDENDUM


TABLE OF CONTENTS

26 U.S.C. § 4975(c)(1) ............................................................................................................A1

26 U.S.C. § 4975(c)(2) ............................................................................................................A2

29 U.S.C. § 1106(b) ................................................................................................................A3

29 U.S.C. § 1108(a) .................................................................................................................A4


A1

26 U.S.C. § 4975

§ 4975. Tax on prohibited transactions.

* * * *

(c) Prohibited transaction.—

(1) General rule.—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;

(C) furnishing of goods, services, or facilities between a plan and a disqualified person;

(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 interest 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.

* * * *


A2

26 U.S.C. § 4975

§ 4975. Tax on prohibited transactions.

* * * *

(c) Prohibited transaction.—

* * * *

(2) Special exemption.—The Secretary shall establish an exemption procedure for purposes of this subsection. Pursuant to such procedure, he may grant a conditional or unconditional exemption of any disqualified person or transaction, orders of disqualified persons or transactions, from all or part of the restrictions imposed by paragraph (1) of this subsection. Action under this subparagraph may be taken only after consultation and coordination with the Secretary of Labor. The Secretary may not grant an exemption under this paragraph unless he finds that such exemption is—

(A) administratively feasible,

(B) in the interests of the plan and of its participants and beneficiaries, and

(C) protective of the rights of participants and beneficiaries of the plan.

Before granting an exemption under this paragraph, the Secretary shall require adequate notice to be given to interested persons and shall publish notice in the Federal Register of the pendency of such exemption and shall afford interested persons an opportunity to present views. No exemption may be granted under this paragraph with respect to a transaction described in subparagraph (E) or (F) of paragraph (1) unless the Secretary affords an opportunity for a hearing and makes a determination on the record with respect to the findings required under subparagraphs (A), (B), and (C) of this paragraph, except that in lieu of such hearing the Secretary may accept any record made by the Secretary of Labor with respect to an application for exemption under section 408(a) of title I of the Employee Retirement Income Security Act of 1974.

* * * *


A3

29 U.S.C. § 1106

§ 1106. Prohibited transactions.

* * * *

(b) Transactions between plan and fiduciary

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.

* * * *


A4

29 U.S.C. § 1108

§ 1108. Exemptions from prohibited transactions.

(a) Grant of exemptions

The Secretary shall establish an exemption procedure for purposes of this subsection. Pursuant to such procedure, he may grant a conditional or unconditional exemption of any fiduciary or transaction, or class of fiduciaries or transactions, from all or part of the restrictions imposed by sections 1106 and 1107(a) of this title. Action under this subsection may be taken only after consultation and coordination with the Secretary of the Treasury. An exemption granted under this section shall not relieve a fiduciary from any other applicable provision of this chapter. The Secretary may not grant an exemption under this subsection unless he finds that such exemption is--

(1) administratively feasible,

(2) in the interests of the plan and of its participants and beneficiaries, and

(3) protective of the rights of participants and beneficiaries of such plan.

Before granting an exemption under this subsection from section 1106(a) or 1107(a) of this title, the Secretary shall publish notice in the Federal Register of the pendency of the exemption, shall require that adequate notice be given to interested persons, and shall afford interested persons opportunity to present views. The Secretary may not grant an exemption under this subsection from section 1106(b) of this title unless he affords an opportunity for a hearing and makes a determination on the record with respect to the findings required by paragraphs (1), (2), and (3) of this subsection.

* * * *


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