The US Court of Appeals for the Tenth Circuit [official website] on Tuesday upheld [opinion, PDF] the US Department of Labor (DOL) [official website] fiduciary rule.

The fiduciary rule placed fixed indexed annuities to fall under the Best Interest Contract Exemption (BICE) [text, PDF]. The BICE, while allowing fiduciaries to receive compensation from annuities sold, places a standard on brokers and advisors, requiring them to select products that are in the customers’ best interests and sign a legal contract. Without meeting the requirements set forth under BICE, these agents, acting as fiduciaries [text], would be barred from receiving commission for annuities sold.

Market Synergy Group Inc. (MSG) [corporate website], a Topeka insurance agency that develops fixed indexed annuities and other proprietary insurance products, argued that the regulation treated annuity products arbitrarily and violated rulemaking procedures. The DOL argued, however, that the addition of fixed indexed annuities to BICE was due to fixed indexed annuities (1) requiring customers to shoulder significant investment risk, (2) not offering the same predictability of payments as fixed rate annuity contracts, (3) quite complex nature and (4) being subject to significant conflicts of interest at the point of sale.

MSG argued that the DOL violated the Administrative Procedure Act [text, PDF] by failing to provide adequate notice of its intention to remove fixed indexed annuities from Prohibited Transaction Exemption (PTE) [text, PDF], which is less stringent than BICE; arbitrarily treating fixed indexed annuities differently from other fixed annuities; and not adequately considering the detrimental economic impact of its exclusion of fixed indexed annuities from PTE.

The appeals court ultimately upheld a district court judge’s ruling [opinion, PDF] that the fiduciary rule did not violate administrative procedures in developing and publishing the fiduciary rule. The court found that the DOL provided adequate notice by providing “interested persons an opportunity to participating in the rulemaking through submission of” written comments and the final rule logical outgrowth of the proposed rule as such amendment was reasonably anticipated. The court also opined that DOL’s finding that fixed rate annuities are not identical to fixed indexed annuities was appropriate given the amount of evidentiary support it relied upon, making its decision not arbitrary or capricious. Finally, the court found the DOL appropriately consider the economic impact, stating that the DOL acknowledge firms may incur costs to adjust, but the benefits to investors outweighed such costs.

Under the orders [press release] of US President Donald Trump, the DOL is reviewing the fiduciary rule, delaying its implementation [JURIST backgrounder] until July 2019.