in the united states district court for the northern ...€¦ · in their memorandum supporting...

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS

CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA, FINANCIAL SERVICES INSTITUTE, INC., FINANCIAL SERVICES ROUNDTABLE, GREATER IRVING-LAS COLINAS CHAMBER OF COMMERCE, HUMBLE AREA CHAMBER OF COMMERCE DBA LAKE HOUSTON AREA CHAMBER OF COMMERCE, INSURED RETIREMENT INSTITUTE, LUBBOCK CHAMBER OF COMMERCE, SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION, and TEXAS ASSOCIATION OF BUSINESS,

Plaintiffs,

v.

EDWARD C. HUGLER, SECRETARY OF LABOR, and UNITED STATES DEPARTMENT OF LABOR,

Defendants.

Civil Action No. 3:16-cv-1476-M Consolidated with: 3:16-cv-1530-C 3:16-cv-1537-N

CHAMBER OF COMMERCE PLAINTIFFS’ MOTION FOR AN INJUNCTION

PENDING APPEAL

Pursuant to Federal Rule of Civil Procedure 62(c), Plaintiffs the Chamber of Commerce

of the United States of America; the Financial Services Institute, Inc.; the Financial Services

Roundtable; the Greater Irving-Las Colinas Chamber of Commerce; the Humble Area Chamber

of Commerce d/b/a the Lake Houston Area Chamber of Commerce; the Insured Retirement

Institute; the Lubbock Chamber of Commerce; the Securities Industry and Financial Markets

Association; and the Texas Association of Business (collectively, “Plaintiffs”) respectfully

Case 3:16-cv-01476-M Document 144 Filed 03/10/17 of 6 PageID 10141

2

request that this Court enter an injunction staying the April 10, 2017 “applicability date” of the

Defendant Department of Labor’s “Fiduciary Rule,” see AR 1, pending appellate review of this

Court’s February 8, 2017 Memorandum and Order, ECF No. 137, and the Court’s February 9,

2017 Judgment, ECF No. 139.

The Court should grant Plaintiffs’ motion for the reasons stated in their accompanying

memorandum in support of the motion. Plaintiffs incorporate by reference the arguments made

in their memorandum supporting their motion for summary judgment, ECF No. 61, their reply

brief, ECF No. 109, and at oral argument.

Because of their urgent need for relief, Plaintiffs respectfully ask the Court to issue

a ruling on the motion by March 20, 2017.

A proposed order is attached to this filing, along with Plaintiffs’ memorandum in support

of this motion and an appendix thereto.


3

Respectfully submitted,

Dated: March 10, 2017 s/ Eugene Scalia

James C. Ho, Texas Bar No. 24052766 Russell H. Falconer, Texas Bar No. 24069695 GIBSON, DUNN & CRUTCHER LLP 2100 McKinney Avenue Suite 110 Dallas, TX 75291 Telephone: (214) 698-3264 Facsimile: (214) 571-2917 [email protected] [email protected]

Eugene Scalia* Jason J. Mendro* Paul Blankenstein* Gibson, Dunn & Crutcher LLP 1050 Connecticut Avenue, N.W. Washington, D.C. 20036 Telephone: (202) 955-8500 Facsimile: (202) 467-0539 [email protected] [email protected] [email protected] Counsel for Plaintiffs Chamber of Commerce of the United States of America, Financial Services Institute, Inc., Financial Services Roundtable, Greater Irving-Las Colinas Chamber of Commerce, Humble Area Chamber of Commerce DBA Lake Houston Area Chamber of Commerce, Insured Retirement Institute, Lubbock Chamber of Commerce, Securities Industry and Financial Markets Association, and Texas Association of Business * Admitted pro hac vice (continued on next page)


4

Steven P. Lehotsky* U.S. CHAMBER LITIGATION CENTER 1615 H Street, NW Washington, DC 20062 Telephone: (202) 463-5337 Facsimile: (202) 463-5346 [email protected]

Counsel for Plaintiff Chamber of Commerce of the United States of America

J. Lee Covington II* INSURED RETIREMENT INSTITUTE 1100 Vermont Avenue, N.W. Washington, DC 20005 Telephone: (202) 469-3000 Facsimile: (202) 469-3030 [email protected]

Counsel for Plaintiff Insured Retirement Institute

David T. Bellaire* Robin Traxler* FINANCIAL SERVICES INSTITUTE, INC. 607 14th Street, N.W. Suite 750 Washington, DC 20005 Telephone: (888) 373-1840 Facsimile: (770) 980-8481 [email protected] [email protected]

Counsel for Plaintiff Financial Services Institute, Inc.

Kevin Carroll* Ira D. Hammerman* SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 1101 New York Avenue, N.W. 8th Floor Washington, DC 20005 Telephone: (202) 962-7300 Facsimile: (202) 962-7305 [email protected] [email protected]

Counsel for Plaintiff Securities Industry and Financial Markets Association

Kevin Richard Foster* Felicia Smith* FINANCIAL SERVICES ROUNDTABLE 600 13th Street, N.W. Suite 400 Washington, DC 20005 Telephone: (202) 289-4322 Facsimile: (202) 589-2526 [email protected] [email protected] Counsel for Plaintiff Financial Services Roundtable * Admitted pro hac vice


CERTIFICATE OF CONFERENCE

The undersigned hereby certifies that on March 9, 2017, I conferred with counsel for

Defendants, Galen N. Thorp. Defendants’ counsel communicated that the government intends to

oppose, pending review of the motion. The undersigned further certifies that on March 9, 2017, I

conferred with counsel for Co-Plaintiffs, Joseph Guerra and Kelly Dunbar. Co-Plaintiffs’

counsel communicated that they concur in the relief requested.

s/ Jason J. Mendro


CERTIFICATE OF SERVICE

The undersigned hereby certifies that on March 10, 2017, the foregoing document was

electronically submitted with the clerk of the court for the United States District Court, Northern

District of Texas, using the electronic case file system of the court. I hereby certify that I have

served all counsel of record electronically or by another manner authorized by Federal Rule of

Civil Procedure 5(b)(2).

s/ Eugene Scalia




Plaintiffs,

v.


Defendants.


[PROPOSED] ORDER

Having carefully considered the Plaintiffs’ motion for a preliminary injunction staying

the “Fiduciary Rule” pending appeal, it is hereby:

ORDERED that Plaintiffs’ motion for a preliminary injunction staying the April 10, 2017

applicability date of the “Fiduciary Rule,” 81 Fed. Reg. 20,946 (Apr. 8, 2016), pending appeal is

GRANTED; and further

Case 3:16-cv-01476-M Document 144-1 Filed 03/10/17 Page 1 of 2 PageID 10147

2

ORDERED that the Fiduciary Rule’s applicability date and all obligations arising under

the Fiduciary Rule are PRELIMINARILY ENJOINED effective immediately and that

Defendants and all their officers, employees, and agents shall not implement, apply, or take any

action whatsoever under the Fiduciary Rule and its exemptions, anywhere within their

jurisdiction. This order shall expire 90 days after review by the U.S. Court of Appeals for the

Fifth Circuit and/or the United States Supreme Court has concluded.

Date: ____________ BARBARA M.G. LYNN Chief United States District Judge




Plaintiffs,

v.


Defendants.


CHAMBER OF COMMERCE PLAINTIFFS’ MEMORANDUM OF LAW IN

SUPPORT OF THEIR MOTION TO ENJOIN THE FIDUCIARY RULE PENDING APPEAL


TABLE OF CONTENTS

Page

i

I. Introduction ..................................................................................................................... 1

II. Argument ........................................................................................................................ 4

A. Plaintiffs Will Be Irreparably Injured Absent an Injunction ........................................... 5

B. An Injunction Pending Appeal Would Benefit the Department ................................... 12

C. The Public Interest Strongly Favors Granting an Injunction ........................................ 13

D. Plaintiffs Have Raised Serious Legal Questions ........................................................... 15

III. Conclusion .................................................................................................................... 16


TABLE OF AUTHORITIES

Page(s)

ii

Cases

Alexander v. Sandoval, 532 U.S. 275 (2001) .................................................................................................................16

Associated Builders & Contractors of Se. Tex. v. Rung, No. 1:16-cv-425 (E.D. Tex. Oct. 24, 2016) .............................................................................13

Fath v. Tex. Dep’t of Transp., No. 16-51281, 2016 WL 6574088 (5th Cir. Nov. 4, 2016) (per curiam) (unpublished) .............................................................................................................................4

Fla. Businessmen for Free Enter. v. City of Hollywood, 648 F.2d 956 (5th Cir. 1981) .....................................................................................................4

Nat’l Fed’n of Indep. Bus. v. Perez, No. 5:16-cv-66 (N.D. Tex. June 27, 2016) ..............................................................................13

Nevada v. U.S. Dep’t of Labor, No. 4:16-cv-731 (E.D. Tex. Nov. 22, 2016) ............................................................................13

Ruiz v. Estelle, 650 F.2d 555 (5th Cir. 1981) .........................................................................................5, 15, 16

Statutes

Employee Retirement Income Security Act ..............................................................................1, 15

Federal Arbitration Act ..................................................................................................................16

Internal Revenue Code ...................................................................................................................15

Other Authorities

Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice; Best Interest Contract Exemption (Prohibited Transaction Exemption 2016 01); Class Exemption for Principal Transactions iIn Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Prohibited Transaction Exemption 2016 02); Prohibited Transaction Exemptions 75 1, 77 4, 80 83, 83 1, 84 24 and 86 128, 82 Fed. Reg. 12,319, 12,320, 12,325 (Mar. 2, 2017) ..........................................................2, 3, 4, 12, 14

Department of Labor, Employee Benefits Security Administration, Temporary Enforcement Policy on Fiduciary Duty Rule, Bulletin No. 2017-01 (Mar. 10, 2017) ..........................................................................................................................................3


TABLE OF AUTHORITIES (continued)

Page(s)

iii

Exec. Order No. 12,866, Regulatory Planning and Review, 58 Fed. Reg. 51,735 (Sept. 30, 1993) ..........................................................................................................................6

Federal Rule of Civil Procedure 62(c) .............................................................................................1

Presidential Memorandum on Fiduciary Duty Rule (Feb. 3, 2017) ..........................................2, 11

Sam Batkins, Fiduciary Rule Has Already Taken Its Toll: $100 million In Costs, Fewer Options, American Action Forum (Feb. 22, 2017) .........................................................6


1

I. INTRODUCTION

Absent immediate relief, the Fiduciary Rule will bring about the most sweeping changes

to the retirement savings system since the adoption of the Employee Retirement Income Security

Act (“ERISA”)—even as the Fifth Circuit Court of Appeals examines whether the Rule is lawful

and the Department of Labor considers whether to revise or rescind it. The Rule would require a

wholesale reordering of the financial-services and insurance industries. The Department has

estimated that the cost to the industry of engaging in that reordering will be $5 billion in the first

year and could exceed $30 billion over ten years.1 Industry participants have already begun

incurring this expense, and the financial costs and operational burdens will proliferate as we draw

closer to April 10, 2017—the date on which the Department’s expansive new definition of

“fiduciary” will become applicable. Immediate, temporary relief is necessary to stay the

applicability date pending appeal, allowing the Fifth Circuit to consider the legality of the Rule

and also allowing the Department itself to complete the review of the Rule mandated by the

President, before many of its most costly and irreversible consequences take hold. Accordingly,

Plaintiffs respectfully ask the Court to exercise its authority under Federal Rule of Civil Procedure

62(c) to enter an injunction pending appeal that stays the applicability date of the Fiduciary Rule

until the appeal in this matter has concluded. Because of their urgent need for relief, Plaintiffs

respectfully ask the Court to issue a ruling on the motion by March 20, 2017.

With the Rule’s applicability date less than five weeks away, many industry participants

must now commit to fundamental choices about how they will attempt to comply with the Rule.

Those choices will trigger a cascade of consequences that will be substantial and in some cases

irreversible: financial costs, changes to business operations, disruptions to business relationships,

1 AR 6.


2

and upheaval in the relationships between retirement savers and service providers. And once those

compliance decisions have been made, sunk costs and the risk of customer confusion will make it

impracticable for many firms to revert to the status quo ante.

There is now an even greater likelihood that all of these costs and disruptions will be

incurred for naught. On February 3, 2017, the President directed the Department of Labor to

examine the Fiduciary Rule and reassess whether it “is likely to harm investors due to a reduction

[in] Americans’ access to certain retirement savings offerings,” result in “dislocations or

disruptions within the retirement services industry,” or cause “an increase in [] prices.”2 If the

Department answers any of those questions in the affirmative, it must publish a proposed rule

revising or rescinding the Rule.

Recognizing the impracticability of completing the review ordered by the President before

the Fiduciary Rule becomes applicable on April 10, the Department recently issued a Notice of

Proposed Rulemaking in which it proposes to extend the Rule’s applicability date by 60 days, to

June 9, 2017.3 The Notice explains that “absent an extension of the applicability date, if the

examination prompts the Department to propose rescinding or revising the rule, affected advisers,

retirement investors and other stakeholders might face two major changes in the regulatory

environment rather than one,” which “could unnecessarily disrupt the marketplace, producing

2 ECF 135-1, Presidential Memorandum on Fiduciary Duty Rule § 1(a) (Feb. 3, 2017)

(available here) (hereinafter, “Presidential Memo”).

3 Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice; Best Interest Contract Exemption (Prohibited Transaction Exemption 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Prohibited Transaction Exemption 2016-02); Prohibited Transaction Exemptions 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128, 82 Fed. Reg. 12,319, 12,320, 12,325 (Mar. 2, 2017) (“Proposed Postponement of Fiduciary Rule”) (available here).


3

frictional costs that are not offset by commensurate benefits.”4

The Department’s reasons for proposing to extend the applicability date are sound and lend

strong support to the relief Plaintiffs request here. Yet a stay of the Rule is needed even before

that proposed extension could take effect. The comment period for the rulemaking is 15 days and

does not close until March 17, 2017.5 The Department may be unable to finalize its rulemaking

before the beginning of April. In the meantime, industry participants will have no choice but to

continue to sink extensive resources into developing their compliance capabilities—and continue

to incur irreversible financial costs and operational disruptions. Moreover, a 60-day extension is

unlikely to be long enough for this litigation to run its course.6

The same concerns that moved the Department to propose its stay of the Rule warrant an

injunction of the Rule pending appeal in this case. Plaintiffs have presented a compelling case on

the merits and raised a number of serious legal challenges to the Fiduciary Rule. If the Court of

Appeals accepts one or more of those challenges, the result would be to strike down or substantially

limit the Rule’s scope. That relief will be incomplete if it comes after industry participants have

incurred substantial and irreparable financial costs, operational burdens, employment changes, and

disruptive transformations of their relationships with many retirement savers. As the Department

4 Id. at 12,320.

5 Id.

6 For this and other reasons, adequate relief is not provided by the “Temporary Enforcement Policy on Fiduciary Duty Rule” issued by the Department shortly before this motion was filed. Department of Labor, Employee Benefits Security Administration, Temporary Enforcement Policy on Fiduciary Duty Rule, Bulletin No. 2017-01 (Mar. 10, 2017) (available here). The Bulletin—whose issuance confirms the current uncertainty, confusion, and need for injunctive relief—is concerned principally with just one of the concerns identified in this motion (mailing timely disclosures to investors). Id. at 2-3. Further, the Bulletin addresses only the policy of the Labor Department, not the Treasury Department, which has enforcement authority over IRAs.


4

itself has already acknowledged, there is no good reason why “advisers, investors and other

stakeholders” should be forced to bear “the risk and expenses of facing two major changes in the

regulatory environment.”7 There would be no hardship in the Court’s postponing the Rule for a

few more months until this litigation is resolved, leaving in place for those few months a regulatory

framework that the Department had deemed satisfactory for decades. And with the Department

itself seeking to extend the Rule’s applicability date while it considers whether to rescind or revise

the Rule, the public interest heavily favors an injunction so that the serious questions about the

Rule’s validity can be resolved without further wasteful, unwarranted, and unrecoverable costs

being incurred first. Under such circumstances, district courts in this Circuit routinely find that an

injunction is in the public interest. For all of these reasons, and as more fully explained below,

Plaintiffs respectfully ask the Court to enjoin the Rule while the appeal of this action is pending.8

II. ARGUMENT

The traditional four-part preliminary injunction test applies to a motion for an injunction

pending appeal, and all four prongs of that test support an injunction staying the Fiduciary Rule

here. An injunction pending appeal is warranted where (1) the movant is likely to succeed on the

merits on appeal, (2) the movant will be irreparably harmed by denial of the injunction, (3) the

opposing party will not be harmed by the injunction, and (4) the public interest favors an

injunction. See, e.g., Fla. Businessmen for Free Enter. v. City of Hollywood, 648 F.2d 956, 957

(5th Cir. 1981); see also Fath v. Tex. Dep’t of Transp., No. 16-51281, 2016 WL 6574088, at *1

(5th Cir. Nov. 4, 2016) (per curiam) (unpublished). This test is flexible. A “movant need not

7 Proposed Postponement of Fiduciary Rule, 82 Fed. Reg. at 12,320.

8 Plaintiffs conferred with Defendants in an attempt to reach agreement on temporary relief. However, the government has indicated that it intends to oppose this motion, pending review of the motion.


5

always show a ‘probability’ of success on the merits; instead, the movant need only present a

substantial case on the merits when a serious legal question is involved and show that the balance

of equities weighs heavily in favor of granting” relief. Ruiz v. Estelle, 650 F.2d 555, 565 (5th Cir.

1981) (opining upon the “stay procedure of Fed. R. Civ. P. 62(c) and Fed. R. App. P. 8(a)”). This

makes good sense, because “[i]f a movant were required in every case to establish that the appeal

would probably be successful, the Rule would not require as it does a prior presentation to the

district judge whose order is being appealed.” Id.

A. Plaintiffs Will Be Irreparably Injured Absent an Injunction

The Fiduciary Rule has already inflicted and will continue to inflict irreparable harm on

Plaintiffs’ members and the rest of the retirement-services industry. The Rule promises to initiate

the largest restructuring of the retirement services industry since the enactment of ERISA and the

advent of 401(k) plans and similar vehicles for retirement investments. Central elements of that

restructuring must be in place by April 10, 2017, when the Department’s vastly expanded

definition of “fiduciary” becomes applicable. Under the Department’s new definition, even

brokers and insurance agents engaging in ordinary sales activity will be treated as fiduciaries,

upending a status quo that has been in place for decades. The April 10, 2017 applicability date

also begins the countdown to the deadline by which providers who wish to rely on the Best Interest

Contract exemption must comply with the exemption’s requirements (that deadline is currently set

for January 1, 2018).

If this Court does not enjoin the Rule in advance of its applicability date industry

participants will suffer massive, unrecoverable costs and implement irreversible changes that could

prove entirely unnecessary. These impending costs, burdens, and risks are among the key reasons


6

why the parties previously moved jointly for expedited briefing.9 Specifically, firms in the

financial-services and insurance industries will incur massive financial costs, enormous

operational burdens, disruptive changes to business relationships, and upheaval in their

relationships with retirement savers. The insurance industry will be especially hard-hit.

To start, the expenses incurred as a result of ongoing and upcoming compliance efforts will

be gigantic. The Department itself estimated that the cost over 10 years will be between $10.0

billion and $31.5 billion.10 Those costs tend “to be front-loaded” because “start-up costs” are

“substantial.”11 The Department estimated that the Rule will cost $5.0 billion in the first year alone

and recognized that some of those costs “may be incurred in advance” of the Rule’s April 10

applicability date.12 Research by one organization “found reported compliance costs of at least

$106 million in 2016, likely representing up-front costs from just four companies.”13 An industry

expert who surveyed eight insurance carriers offering Fixed Indexed Annuities (“FIAs”) reports

that those carriers’ average compliance costs as of November 2016 were between $8 and $10

million.14 With every day that goes by without a stay of the Rule, those compliance costs continue

9 Joint Motion to Establish a Schedule for Summary Judgment Proceedings, ECF 44, ¶ 8 (June

24, 2016).

10 AR 6.

11 Id.

12 Id.

13 Sam Batkins, Fiduciary Rule Has Already Taken Its Toll: $100 million In Costs, Fewer Options, American Action Forum (Feb. 22, 2017) (available here). These mere first-step costs in and of themselves would make the Rule a “significant regulatory action” requiring the Department to engage in careful cost-benefit analysis. See Exec. Order No. 12,866, Regulatory Planning and Review §§ 3(f)(1), 6(a)(3)(C), 58 Fed. Reg. 51,735 (Sept. 30, 1993) (available here).

14 Exhibit 2, Affidavit of Jack Marrion, filed in Nat’l Ass’n for Fixed Annuities v. U.S. Dep’t of Labor, No. 1:16-cv-1035, ECF 49-1, ¶¶ 17, at App. 20 (D.D.C. Nov. 14, 2016) (hereinafter, “Marrion Affidavit”). Marrion is Director of Research for the National Association for Fixed


7

to mount. If the April 10 applicability date passes without an injunction, the rate at which industry

participants have incurred compliance costs—all of which will be unrecoverable losses—will only

have accelerated.15 The more those start-up costs accumulate, the more the Rule will become

priced into financial products and the industry as a whole, and the harder it will become for the

courts to provide meaningful relief to Plaintiffs’ members, the industry, and retirement savers (who

ultimately will suffer as a result).

Efforts to comply with the Rule will also create significant operational burdens. As

industry experts have explained, the Rule will “irreversibly” affect innumerable “business

practices” and “business relationships.”16 Many independent marketing organizations (“IMOs”)

that support independent insurance agents who sell FIAs already “are being forced to invest

heavily in infrastructure such as computer programming, licensing programs, new compliance

staff, and legal fees.”17 Many IMOs will “have to attempt, at great cost, to reconstruct [their] entire

business and operational model[s] and assume potentially massive new legal and financial

exposure which may not even be insurable.”18 Insurance carriers also will be forced to begin

changing their FIA product offerings to comply with the BIC exemption.19 By the time the Rule

Annuities.

15 Exhibit 1, Declaration of Lisa Bleier ¶ 7, at App. 5–6 (March 7, 2017) (hereinafter, “Bleier Declaration”). Bleier is Managing Director for Public Policy and Advocacy and Associate General Counsel for Plaintiff Securities Industry and Financial Markets Association.

16 Marrion Affidavit ¶ 4, at App. 16.

17 Id. ¶ 11, at App. 18.

18 Exhibit 3, Declaration of David Callanan, filed in Market Synergy Grp., Inc. v. U.S. Dep’t of Labor, No. 5:16-cv-4083, ECF 11-7, ¶ 23, at App. 30–31 (D. Kan. June 17, 2016). Callanan co-founded and works for Advisors Excel, which is a member of Plaintiff Insured Retirement Institute.

19 See Marrion Affidavit ¶ 16, at App. 19–20.


8

becomes applicable on April 10, 2017, the entire distribution system through which fixed annuities

are sold will be changed in ways that, in some instances, will be irreversible even if the Rule

ultimately is vacated.20

Similarly, firms that provide brokerage services, “are fast approaching the drop-dead point

when [they] have to make” a fundamental choice about how they will try to comply with the Rule:

either by attempting to shift all their customers to flat fee-based accounts, or by trying to implement

the Best Interest Contract (“BIC”) exemption and continue to service commission-based

accounts.21 Regardless of which path firms choose, they will be forced to bear the expense and

disruption of “restructuring their businesses.”22 Brokerage firms that have chosen to retain

commission-based accounts face a variety of immensely costly barriers to implementing the BIC

exemption. They have to identify products—such as many mutual funds—that they can no longer

offer on IRA platforms and rewrite contracts with the providers of those products.23 These

companies “will have to put in place complicated new compliance and surveillance programs” that

require the development of new software code and training on the new programs for all personnel

involved, including not just brokers and financial advisors, but also call center employees and

secretaries.24 Because it is “extremely difficult” to separate oversight of commission-based and

flat fee-based accounts, these new compliance and surveillance systems (and the resulting costs)

will cover all accounts.25 In other words, because of the impracticability of maintaining two

20 See Id. ¶ 4, at App. 16.

21 Bleier Declaration ¶¶ 8, 12, at App. 6, 7–8.

22 Id. ¶ 10, at App. 7.

23 Id. ¶¶ 16–17, at App. 9–10.

24 Id. ¶ 20, at App. 11.

25 Id. ¶ 21, at App. 12.


9

separate sets of practices and procedures for retirement and non-retirement accounts, the ultimate

consequences of the Rule will extend not just to retirement investment services but to all

investment services. Simply put, “[t]he coming changes to individual businesses and to the

financial-services industry as a whole will be extensive and, in many instances, irreversible.”26

In addition, allowing the Rule’s applicability date to pass without an injunction would

cause significant disruption to longstanding business relationships in both the insurance and the

financial-services industries. For example, some “annuity carriers will end existing relationships

with IMOs and independent agents and forge new business relationships with broker-dealers.”27

Independent insurance agents will be frozen out of these new relationships unless they obtain

previously unnecessary securities licenses.28 Likewise, brokerage firms that have announced they

will eliminate commission-based accounts face huge costs related to training personnel and

assisting brokers in becoming registered as financial advisors.29 Those firms also face a serious

risk that the restructuring the Rule compels might cause key personnel—skilled brokers who prefer

to work on commission—to leave and pursue employment elsewhere as a result of their firm’s

decision to move away from a commission-based model.30 Firms that are retaining commission-

based accounts will have to spend significant time and energy drafting new training manuals and

providing training to brokers, financial advisors, and other personnel such as call-center

employees.31

26 Id. ¶ 10, at App. 7.


28 Id. ¶ 31, at App. 22.

29 Bleier Declaration ¶¶ 10, 14, at App. 7–9.

30 Id. ¶ 14, at App. 8–9.

31 Id. ¶¶ 10, 20, at App. 7, 11.


10

The Rule will also inject upheaval, confusion, and frustration into relationships between

the industry and retirement savers. Brokerage firms that plan to eliminate commission-based

accounts will face “significant problems directing people to other flat fee-based accounts” because

their customers want to keep their accounts as they are.32 Firms that are retaining commission-

based accounts will have to send detailed, potentially confusing notifications to their customers

explaining why the Rule requires certain investment products to be removed from their accounts

and prohibits the customers from purchasing certain products or making certain changes to their

accounts.33 Once these changes have been communicated to customers, “they will be difficult to

retract or alter;” attempts to walk back or reverse these changes would cause customer confusion

and damage the relationship between customers and their brokers.34 Any customers who were lost

in the transition would be highly unlikely ever to bring their business back.35

In the insurance industry, the Rule will cause IMOs that rely heavily on sales of FIAs to

suffer significant revenue losses.36 This “decline in revenue will force many of those IMOs to go

out of business.”37 As a consequence, many independent insurance agents who sell FIAs will be

left without “a readily ascertainable and economically viable choice” for continuing their

32 Id. ¶ 13, at App. 8.

33 Id. ¶¶ 15–16, 18, at App. 9–11.

34 Id. ¶ 18, at App. 10–11.

35 Id.

36 Marrion Affidavit ¶¶ 22–23, at App. 21.

37 Id. ¶ 23, at App. 21; see also Exhibit 4-A, Declaration of Michael Tripses, filed in Market Synergy Grp., No. 5:16-cv-4083, ECF 11-5, ¶ 25, at App. 43–44 (D. Kan. June 17, 2016) (hereinafter, “Tripses 2016 Declaration”). Tripses is a principal of CreativeOne Marketing Corp. CreativeOne is a member of Plaintiff Insured Retirement Institute.


11

businesses.38 Indeed, as many as 20,000 independent insurance agents who currently sell FIAs

could be forced out of the fixed-annuity business.39 If the Rule is allowed to take effect, the result

will be to “reduc[e] the availability and value of guaranteed retirement income products for

millions of consumers.”40

An injunction postponing the Rule’s applicability date would prevent these imminent and

irreparable harms from occurring while the Rule’s ultimate fate is still very much uncertain. That

uncertainty stems not just from this litigation, but from President Trump’s recent directive to the

Department of Labor. That directive requires the Department to examine whether the Rule will

result in “a reduction of Americans’ access to” retirement savings options, “dislocations or

disruptions within the retirement services industry that may adversely affect investors or retirees,”

or “an increase in litigation” and “the prices that investors and retirees must pay to gain access to

retirement services.”41 If the Department “make[s] an affirmative determination as to any of

th[ose] considerations,” or if the Department finds that the Rule will impair Americans’ ability “to

make their own financial decisions,” “save for retirement,” or “withstand unexpected financial

emergencies,” the Department must publish a proposal to rescind or revise the Rule, as

appropriate.42 A decision by the Department to rescind the Rule would stanch the Rule’s ongoing

compliance costs, but unrecoverable costs will continue to mount until the Rule is rescinded by

the Department or stayed by this Court.

The Department has proposed to postpone the Rule’s April 10 applicability date, but that

38 Tripses 2016 Declaration ¶ 22, at App. 42–43.


40 Id., at App. 16.

41 Presidential Memo § 1(a).

42 Id. § 1(b).


12

postponement has not been finalized and, in any event, would only be for 60 days (to June 9, 2017).

The Department’s proposal includes a 15-day comment period, and there is substantial uncertainty

as to when, if ever, after the comment period closes the Department’s proposed extension of the

Rule’s applicability date will take effect. In the shadow of this uncertainty, firms will have no

choice but to continue incurring compliance costs and reordering their affairs—including their

customer and employee relationships—in the meantime. Even assuming the 60-day extension

takes effect, this litigation is certain to continue beyond June 9. Because there is no guarantee that

the Department would further postpone the Rule, industry participants would be forced to begin

incurring compliance costs again before the end of the 60-day stay.43 Many decisions and costs,

such as providing notices to customers and personnel about upcoming changes to customers’

accounts, can only be deferred for so long in the absence of a longer (and dependable) stay of the

Rule’s applicability date.44 Only a judicial stay of the Rule pending appeal will prevent the

unrecoverable costs that the Department itself predicted would occur at the time it adopted the

Rule. An injunction pending appeal also would prevent any “frictional costs” that would result

from allowing the Rule to go into effect, only to have it rescinded by DOL or set aside by the Court

of Appeals.45

B. An Injunction Pending Appeal Would Benefit the Department

The balance of hardships weighs heavily in favor of a temporary injunction. There is no

colorable argument that an injunction staying the Rule will harm the Department. The Rule

imposes radical and unprecedented changes to the retirement-services industry, whereas an

43 Bleier Declaration ¶ 9, at App. 6–7.

44 Id. ¶¶ 9, 12, at App. 6–8.

45 Proposed Postponement of Fiduciary Rule, 82 Fed. Reg. at 12,320.


13

injunction would merely maintain for a short period longer the status quo that has been in place

for decades. In the absence of an injunction staying the Rule, compliance efforts over the coming

weeks and months will impose huge financial costs and operational burdens on Plaintiffs and other

members of the financial-services industry. An injunction, by contrast, would cost the Department

nothing.

In fact, the Department will likely benefit from an injunction staying the Rule. The

Department has proposed postponing the Rule’s applicability date so that the Department will have

enough time to conduct the thorough and careful reassessment of the Rule that the President has

directed. An injunction of the Rule pending appeal would advance the same goal without

prejudicing the Department’s own consideration of deferring the applicability date. A judicial stay

has the additional virtue of ensuring that the Department has the benefit of appellate review of the

Rule’s legality before the Department could become responsible for enforcing the Rule.

C. The Public Interest Strongly Favors Granting an Injunction

An injunction staying the Rule is in the public interest. The Supreme Court has recognized

the wisdom of preserving the status quo during the pendency of litigation challenging a potentially

industry-reshaping rule. See West Virginia v. EPA, 136 S. Ct. 1000 (2016) (order staying the

EPA’s clean power plan pending judicial review). A tide of authority from district courts within

this Circuit confirms that where, as here, there are serious questions about the validity or

continuing viability of a rule proposed by the Department of Labor, the public interest favors an

injunction so that those questions can be resolved without needless and costly disruption to the

status quo. See, e.g., Nevada v. U.S. Dep’t of Labor, No. 4:16-cv-731, ECF 60, at 17-18 (E.D.

Tex. Nov. 22, 2016) (preliminarily enjoining enforcement of DOL’s overtime rule); Associated

Builders & Contractors of Se. Tex. v. Rung, No. 1:16-cv-425, ECF 22, at 30 (E.D. Tex. Oct. 24,

2016) (preliminarily enjoining enforcement of DOL’s blacklisting rule); Nat’l Fed’n of Indep. Bus.


14

v. Perez, No. 5:16-cv-66, ECF 85, at 83 (N.D. Tex. June 27, 2016) (preliminarily enjoining

enforcement of DOL’s persuader rule).

Here, the Executive Branch is considering undoing or scaling back the Rule. In a formal

memorandum, the President has expressed serious concerns about the Rule’s severe costs and its

potential negative impact on investors and on the industry. In light of this explicitly declared

policy of the Executive Branch, the public interest would not be served by the Rule’s substantive

requirements becoming applicable on April 10. Just the opposite: It is in the public’s interest for

the Rule to be enjoined pending appeal so that the Department’s reexamination of the Rule can be

conducted in a thorough and meaningful way and with the benefit of appellate review of Plaintiffs’

legal challenges. A court-ordered postponement of the Rule’s applicability date will be efficient

for all involved. It will save the Department from an accelerated review process, and it will ensure

that “advisers, investors and other stakeholders would be spared the risk and expenses of facing

two major changes in the regulatory environment” if the Rule goes into force and is subsequently

rescinded or set aside.46

It is, moreover, difficult to understand how an injunction could not be in the public interest

when the Department itself has proposed to stay the Rule. In its proposal to postpone the Rule’s

applicability date, the Department speculated that deferring the Rule’s effectiveness might cause

“investor losses,” but it conceded that any “actual impact” on investors “is unknown” and that any

attempt to put a number on those losses is “uncertain and incomplete.”47 The Department did not

try to explain how a proposed postponement of the effectiveness of an agency rule—that is,

maintenance of the status quo before regulatory action—can be the cause of legally cognizable

46 Id.

47 Id.


15

harm. In contrast, the Rule itself predicts that it will cause $5 billion in costs in just the first year

following the applicability date.48 Postponing the Rule’s effective date will further benefit the

public by providing a respite from the uncertainty that plagues the Rule. The industry and

consumers alike do not know whether the Rule’s newly expanded definition of “fiduciary” will

become settled law on April 10, sometime thereafter, or not at all, or whether instead materially

different terms, requirements, prohibitions, and exemptions will ultimately be established. An

injunction of the Rule pending appeal cannot eliminate that uncertainty entirely, but it will provide

a more solid foundation on which the public and the industry may base their expectations.

D. Plaintiffs Have Raised Serious Legal Questions

Plaintiffs have demonstrated “that the balance of equities weighs heavily in favor of

granting” relief. Ruiz, 650 F.2d at 565. The imminent irreparable harm is enormous, there is no

harm to the Department, and the public interest decidedly favors an injunction. Plaintiffs, thus,

“need only present a substantial case on the merits when a serious legal question is involved.” Id.

There can be no doubt that Plaintiffs have presented a substantial case on the merits

involving a number of serious legal questions about the validity of the rule. Through the Rule and

its exemptions, the Department has arrogated to itself an enormous amount of new regulatory

authority that Congress did not intend it to have. The Rule unmoors the definition of “fiduciary”

from its established common law meaning and in contravention of ERISA’s plain text by

interpreting that term to include persons engaged in ordinary sales activity. The Rule oversteps

the Department’s authority to grant exemptions from fiduciary status because it uses that exemptive

authority to impose substantive and enforceable obligations on IRAs despite having no authority

under the Internal Revenue Code to impose such obligations. The Rule creates a private right of

48 AR 6.


16

action where Congress did not intend or authorize one in direct contravention of Alexander v.

Sandoval, 532 U.S. 275, 286 (2001). And with the conditions the Rule’s exemptions impose with

respect to class actions and individual arbitration agreements, the Rule runs afoul of the Federal

Arbitration Act.49

At the very least, Plaintiffs have “present[ed] a substantial case on the merits” involving

“a serious legal question.” Ruiz, 650 F.2d at 565. Given that “the balance of the equities weighs

heavily in favor of granting” relief, this factor weighs in favor of injunctive relief. See id. Simply,

given the Rule’s sweeping changes to a regulatory framework the Department considered

appropriate for decades—and given the Department’s own recognition that those changes should

be reconsidered—it makes all the sense in the world to wait a few months longer until Plaintiffs’

bona fide legal objections are resolved.

III. CONCLUSION

For all of these reasons, this Court should grant Plaintiffs’ motion and enter an injunction

staying enforcement of the Fiduciary Rule pending appeal.

49 The Rule’s legal deficiencies are many and varied. The issues listed above do not represent

all the arguments Plaintiffs have brought to bear against the Rule and intend to raise before the Court of Appeals. Plaintiffs do not waive any argument on the merits not explicitly enumerated in this motion.


17

Respectfully submitted,

Dated: March 10, 2017 s/ Eugene Scalia

James C. Ho, Texas Bar No. 24052766 Russell H. Falconer, Texas Bar No. 24069695 GIBSON, DUNN & CRUTCHER LLP 2100 McKinney Avenue Suite 110 Dallas, TX 75291 Telephone: (214) 698-3264 Facsimile: (214) 571-2917 [email protected] [email protected]

Eugene Scalia* Jason J. Mendro* Paul Blankenstein* Gibson, Dunn & Crutcher LLP 1050 Connecticut Avenue, N.W. Washington, D.C. 20036 Telephone: (202) 955-8500 Facsimile: (202) 467-0539 [email protected] [email protected] [email protected] Counsel for Plaintiffs Chamber of Commerce of the United States of America, Financial Services Institute, Inc., Financial Services Roundtable, Greater Irving-Las Colinas Chamber of Commerce, Humble Area Chamber of Commerce DBA Lake Houston Area Chamber of Commerce, Insured Retirement Institute, Lubbock Chamber of Commerce, Securities Industry and Financial Markets Association, and Texas Association of Business * Admitted pro hac vice (continued on next page)


18

Steven P. Lehotsky* U.S. CHAMBER LITIGATION CENTER 1615 H Street, NW Washington, DC 20062 Telephone: (202) 463-5337 Facsimile: (202) 463-5346 [email protected]

Counsel for Plaintiff Chamber of Commerce of the United States of America

J. Lee Covington II* INSURED RETIREMENT INSTITUTE 1100 Vermont Avenue, N.W. Washington, DC 20005 Telephone: (202) 469-3000 Facsimile: (202) 469-3030 [email protected]

Counsel for Plaintiff Insured Retirement Institute

David T. Bellaire* Robin Traxler* FINANCIAL SERVICES INSTITUTE, INC. 607 14th Street, N.W. Suite 750 Washington, DC 20005 Telephone: (888) 373-1840 Facsimile: (770) 980-8481 [email protected] [email protected]

Counsel for Plaintiff Financial Services Institute, Inc.

Kevin Carroll* Ira D. Hammerman* SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 1101 New York Avenue, N.W. 8th Floor Washington, DC 20005 Telephone: (202) 962-7300 Facsimile: (202) 962-7305 [email protected] [email protected]

Counsel for Plaintiff Securities Industry and Financial Markets Association

Kevin Richard Foster* Felicia Smith* FINANCIAL SERVICES ROUNDTABLE 600 13th Street, N.W. Suite 400 Washington, DC 20005 Telephone: (202) 289-4322 Facsimile: (202) 589-2526 [email protected] [email protected] Counsel for Plaintiff Financial Services Roundtable * Admitted pro hac vice


CERTIFICATE OF CONFERENCE

The undersigned hereby certifies that on March 9, 2017, I conferred with counsel for

Defendants, Galen N. Thorp. Defendants’ counsel communicated that the government intends to

oppose, pending review of the motion. The undersigned further certifies that on March 9, 2017, I

conferred with counsel for Co-Plaintiffs, Joseph Guerra and Kelly Dunbar. Co-Plaintiffs’ counsel

communicated that they concur in the relief requested.

s/ Jason J. Mendro


CERTIFICATE OF SERVICE

The undersigned hereby certifies that on March 10, 2017, the foregoing document was

electronically submitted with the clerk of the court for the United States District Court, Northern

District of Texas, using the electronic case file system of the court. I hereby certify that I have

served all counsel of record electronically or by another manner authorized by Federal Rule of

Civil Procedure 5(b)(2).

s/ Eugene Scalia




Plaintiffs,

v.


Defendants.


APPENDIX TO CHAMBER OF COMMERCE PLAINTIFFS’

MOTION FOR AN INJUNCTION PENDING APPEAL


i

Table of Contents

Page Exhibit 1, Declaration of Lisa Bleier ...................................................................................1 Exhibit 2, Affidavit of Jack Marrion ..................................................................................14 Exhibit 3, Declaration of David Callanan ..........................................................................24 Exhibit 4, Declaration of Michael Tripses .........................................................................32


Exhibit 1

1




Plaintiffs,

v.


Defendants.


DECLARATION OF LISA BLEIER

I, Lisa Bleier, declare as follows:

1. My name is Lisa Bleier. I am over the age of 18 and competent to make this declaration.

The statements in this declaration are true and within my personal knowledge.

2. I am the Managing Director for Public Policy and Advocacy and Associate General

Counsel at the Securities Industry and Financial Markets Association (“SIFMA”). I have spent

my entire professional career working on issues related to the retirement savings system. After

2


2

earning my Bachelor of Arts degree in Political Science and Communications from the

University of Michigan and my Juris Doctor degree from the University of Pittsburgh School of

Law, I began my career as a Legislative Assistant to a U.S. congresswoman, where I advised the

congresswoman on all issues that arose from the Education and the Workforce Committee which

included retirement, health care, and education issues. I then joined the American Society of

Pension Professional Actuaries as Government Affairs Manager. I held that position for 2 years,

during which I focused on ERISA issues. I joined the American Bankers Association (“ABA”)

in November 2000 as Vice President and Senior Counsel in the Center for Securities, Trusts &

Investments, focusing on ERISA matters, IRA issues, tax matters, and other related issues that

arose in bank trust departments. Over my 10 years at the ABA, I developed a proficiency in

issues relating to trusts and furthered advanced my ERISA expertise. As Vice President and

General Counsel, I spoke about ERISA and trust issues at many conferences around the country

and authored some articles on the issues of the day. I also submitted multiple comments letters

and other requests to the Department of Labor, IRS, and the Pension Benefit Guaranty

Corporation.

3. In early 2011, I left the ABA and began my current position as Managing Director for

Public Policy and Advocacy and Associate General Counsel at SIFMA. SIFMA represents

broker-dealers, banks, and asset managers. Altogether, SIFMA represents roughly 500 member

organizations. On behalf of our members, SIFMA advocates in support of effective and resilient

capital and financial markets through monitoring, research, education, legislative initiatives, and

occasional litigation. SIFMA maintains a dozen committees, including on federal government

relations, state government relations, and compliance and legal issues. Depending on the area

3


3

covered, these committees include business, legal, and compliance personnel from member

firms.

4. As part of my job duties, I communicate daily with SIFMA members about developments

in the national and state policy, legal, and compliance areas. I listen to members’ needs and

concerns and bring members together to assist them in working together to figure out solutions to

legislative and regulatory problems. I interact directly with the SIFMA committees, including

through weekly calls, on legislative, regulatory, and other public policy issues, and serve as a

conduit of information between them and government regulators, including the Department of

Labor (“Department”). On their behalf, I submit comment letters and other requests to the

government on matters impacting their business and their clients.

5. The Department’s Fiduciary Rule is of immense importance to SIFMA’s members. As

such, SIFMA has been heavily engaged in the rulemaking process since the Department first

proposed the Rule in 2010 and in the litigation challenging the Rule over the past year. The Rule

is a regular topic of critical concern at nearly all SIFMA committee meetings and in less formal

discussions among SIFMA staff and between SIFMA and its members.

6. From literally my first day on the job, I have been personally involved in guiding

SIFMA’s response to the Department’s Fiduciary Rule in various ways. I have assisted in

drafting comment letters as part of the rulemaking process. Most importantly, I have been in

near constant communication with SIFMA’s members, listening to their concerns about the Rule,

learning what they might have to do to come into compliance, and bringing stakeholders together

to share critical knowledge and insight. I have also been in communication with the Department

of Labor, and have reviewed carefully all of its statements regarding the Rule, in order to assist

4


4

members in their efforts to understand the Rule and identify the best means of compliance. As a

result of these efforts, during the six years I have been with SIFMA I have become intimately

familiar with the efforts SIFMA’s members are making to comply with the Rule and with the

costs, burdens, and challenges those compliance efforts have imposed.

7. April 10, 2017 is the Fiduciary Rule’s applicability date, the date on which the

Department of Labor’s new, expanded definition of the term “fiduciary” will become applicable.

On that day, many of the brokerage services that SIFMA’s members provide their customers will

become unlawful unless those members fundamentally reorder their businesses. Although the

Rule already has caused firms to incur significant costs in assessing how to comply and in

preparing to comply, on April 10 firms will have to put these preparations into effect and start

incurring enormous additional compliance costs. In promulgating the Rule, the Department itself

estimated that the Rule would cost between $10.0 and $31.5 billion over the first 10 years, of

which $5.0 billion would be incurred in the first year alone. On April 10, SIFMA’s members

must begin in earnest implementing the infrastructure and making the changes necessary to

comply with the terms of the Best Interest Contract (“BIC”) exemption (if they decide to

maintain commission-based accounts); the deadline for full BIC compliance is January 1, 2018.

SIFMA’s members and the financial industry as a whole will begin to see irreversible changes on

April 10—operations will be restructured, customer relationships will be fundamentally altered,

employees will be forced to obtain new licensures or find new employment altogether, staple

financial products will cease being sold, a variety of new contractual relationships will need to be

negotiated, new policies and training programs will need to be developed and implemented, and

new compliance and surveillance programs and structures (including new software code) will

5


5

need to be created. Unless the Rule’s applicability date is postponed, the Rule will require

SIFMA’s members to alter nearly every facet of their businesses.

8. The prospect of having to comply with the Fiduciary Rule is forcing SIFMA’s members

to make a choice between fundamentally transforming their businesses in one of two ways: they

can retain commission-based brokerage accounts by availing themselves of the BIC exemption,

or they can attempt to abandon commission-based accounts entirely. This choice about method

of compliance implicates almost every aspect of affected members’ operations, and for most of

the affected members, either choice would require a radical and likely irreversible transformation

of their business practices and customer relationships. Both paths are extremely costly and,

needless to say, neither is attractive. Most members have struggled to identify how to weather

the storm and have yet to commit to one option or the other.

9. Further complicating the decision is the profound uncertainty as to whether the

Department will rescind or revise the Rule in light of President Trump’s recent directive and the

Department’s subsequent notice of proposed rulemaking to postpone the applicability date of the

Fiduciary Rule. The Fiduciary Rule itself is under re-evaluation, but the Rule’s applicability date

has not been extended. Even if the Department ultimately promulgates a final rule that

implements the 60-day extension it proposed, that short delay will not be enough to enable

members to avoid incurring compliance costs for long. The difficulty of complying with the

Fiduciary Rule is so great that even before the end of a 60-day stay, members would have to

expend extensive resources in an effort to have compliance capabilities in place by the time the

stay ended. Every day that passes without a clear postponement of the Rule’s coming

6


6

applicability date forces firms, many of whom are SIFMA members, to commit to restructuring

their businesses.

10. Regardless of which path firms take, SIFMA’s members face huge, irrecoverable costs

from restructuring their businesses, refashioning customer relationships, sometimes changing

their customer bases, overhauling their compensation structures, rewriting contracts, changing

the policies and procedures necessary to make an enormous shift in their business practices,

creating new compliance and surveillance programs, drafting new training manuals and other

documents, and training brokers, financial advisors, and other personnel such as call center

employees. The coming changes to individual businesses and to the financial-services industry

as a whole will be extensive and, in many instances, irreversible.

11. In making the decision whether to continue offering brokerage accounts at all, SIFMA

members are having difficulty determining what the Rule would require of them. The

Department’s relatively meager guidance—only two batches of FAQs have been released—has

not clarified many of the important and practical issues of what firms must do (and must not do)

to comply with the Fiduciary Rule. This uncertainty as to the specific contours of compliance

makes it very difficult for firms to compare the relative costs of entirely abandoning the

brokerage business on the one hand and complying with the BIC exemption on the other. This

uncertainty also complicates their efforts to describe the changes or possible changes to their

brokers, financial advisors, and other personnel, and explain either the current situation or future

plans to customers.

12. Firms are holding back from making this fundamental compliance decision in large part

because once they communicate their decision to customers about the future of customer

7


7

accounts, it will be extremely difficult to revert to the status quo. It would be very confusing for

customers and highly complicated and impractical for a company to commit to one path and then

attempt to reverse course. But we are fast approaching the drop-dead point by which firms must

make a decision. If that drop-dead date passes and a longer-term stay of the Rule is not in place,

SIFMA’s member firms will be forced to shoulder costs that are irrecoverable and irreparable.

Some of these costs have already been incurred. The vast majority are imminent.

13. A few companies have taken the radical step of overhauling their businesses by

abandoning brokerage accounts. These firms have had significant problems directing people to

other flat fee-based accounts. Commission-based accounts are extremely popular; an estimated

98% of IRA investors with less than $25,000 in their accounts choose a commission-based

account. Many customers prefer brokerage accounts for a variety of sound reasons, including

that it will be more costly for many customers (especially those with smaller accounts) to pay an

advisor fee than a brokerage fee on a commission basis. Firms are thus experiencing both inertia

and resistance to their attempts to move customers to flat-fee-based accounts. Firms who lose

their customers as a result of this transition process can have no assurance that they will ever get

them back, no matter how the Department ultimately addresses President Trump’s direction to

reconsider the Fiduciary Rule.

14. These companies also face significant costs for training personnel who previously

managed only brokerage accounts in the rules and procedures for running flat-fee-based

accounts—that is, in training their personnel to perform within a completely new business

model. Former brokers must also become licensed as financial advisors, which is a cumbersome

and time-consuming process, especially for those individuals who have been working as brokers

8


8

for many years. The brokers who are most successful on a commission-based model may choose

to leave their firms and seek employment at a firm that is retaining commission-based accounts.

The loss of these skilled personnel would be, for all practical purposes, irreversible.

15. Retaining brokerage accounts and complying with the BIC exemption poses different

challenges. To begin with, customers may find that they cannot continue to own certain asset

classes that they currently hold in their accounts. The Rule allows some grandfathering of past

practices, but there are many important remaining questions about the grandfathering exception

that have yet to be answered, such as whether an account that is set up to make automatic

purchases with new monies can be grandfathered or whether the fact that it involves new monies

pulls it out of the safe harbor.

16. Even more troubling, individuals might be prohibited from purchasing a wide array of

popular investment assets for their IRAs. It is a common practice in the mutual fund industry for

funds to negotiate different payments to different firms for the privilege of listing the fund family

on the firms’ platforms. As a result of this process of firm-by-firm negotiation, customer-facing

firms receive different compensation for selling the same financial product. This variance in

compensation exposes brokers to the risk that the fee will be considered unreasonable and a

violation of the BIC exemption. From my daily communications with members and efforts to

assist them with determining their compliance obligations, I am aware of many firms that have

been unable to find a method of adjusting these compensation practices that applies exclusively

to accounts that are covered by the Department’s Rule. As a result, some companies are

considering removing those funds from their IRA platforms entirely, which would be a detriment

to customers who chose those funds and would like to keep them. In addition, removing such

9


9

funds from IRA platforms is not as simple as pressing a button. Some firms must incur the

unrecoverable costs of negotiating new contracts with mutual fund companies; others will not

even have a say in the matter and must take or leave these new contracts. See ¶ 17 below. All

firms must communicate the decision, why it was made, and its ramifications to both their

customers and personnel. See ¶ 18 below.

17. In order to adjust to the new rules about compensation, mutual fund companies have

begun changing the share classes for some products. This is not a simple adjustment; the

Securities and Exchange Commission regulates share classes. In addition to changing the terms

of the products themselves, mutual fund companies must enter into new agreements and

contracts with firms, such as SIFMA’s members, that offer the products to customers.

Negotiating and finalizing these contracts is requiring a significant expenditure of personnel

resources. Only the largest firms, moreover, actually can negotiate the payment received for

selling the product. Other brokers will not have a voice at the negotiating table and must take

whatever the fund company has determined they will pay for distribution, education, and other

assistance with regard to marketing their products to the brokers’ customers. Once finalized,

these agreements will remain in force regardless of whether the Rule is later postponed, revised,

or set aside.

18. Firms that will remove funds from their platforms are required to give their customers

advance notice that certain fund options in their IRA offerings are being eliminated. Customers

need to be informed that changes will have to be made to their accounts or that certain changes

cannot be made to their accounts. In addition, firms will need to explain the removal and the

reasons for it to their brokers and financial advisors so that they can in turn explain the change to

10


10

their individual customers. The letters and other communications necessary for removing funds

from firms’ platforms will have to be sent very soon, depending on each firm’s contracts with its

customers unless the Rule is rescinded or its applicability date is extended. Once those

communications have occurred, they will be difficult to retract or alter. Specifically, reversing a

communicated decision to remove certain funds would confuse customers further and likely

create tension between customers and their brokers. Some customers likely would choose to

take their business elsewhere, and it is very unlikely that those who did would bring their

business back in the event were rescinded, revised, or struck down.

19. Some firms may decide to shift customers from one type of commission-based account to

another in order to comply with the BIC exemption. This important decision, once

communicated to customers, commits the firm to providing that new type of brokerage account.

Firms will not push their customers into transitioning to new accounts only to revert them back

into the accounts they had before. Once announced, this transition is irreversible.

20. Firms that retain brokerage accounts will have to put in place complicated new

compliance and surveillance programs. These programs, which firms have already begun to

develop, are costly. Those costs, moreover, are sunk and irreparable. These compliance and

surveillance systems are literally new—engineers have to write complicated new software

programs to adjust to the new regime. Moreover, all personnel involved in compliance—brokers

and financial advisors, call center employees, secretaries, executives, legal staff, and others—

must be trained on the new systems and procedures. Once incurred, these costs are

irrecoverable.

11


11

21. These newly designed compliance and surveillance programs will not be limited to

commission-based accounts. Rather, these new systems will cover all accounts, including flat-

fee-based accounts. It is extremely difficult to put in place a compliance and surveillance

program that only applies to commission-based accounts, because many personnel work on all

different types of accounts. Companies thus are designing and beginning to put in place

compliance regimes that hit all accounts. In effect, the Rule requires a wholesale restructuring of

the compliance and surveillance programs for many of SIFMA’s members.

22. The Fiduciary Rule will revolutionize not only retirement services, but all investment

services. It simply is not practicable for many firms to have different rules and obligations for

investments made in service of a customer’s retirement objectives, on the one hand, and his or

her other financial objectives, on the other. Retirement services cannot be entirely segregated

from the rest of the financial services industry; IRA owners invest in stocks and funds, after all.

As a result, the expansive changes that the Fiduciary Rule requires with respect retirement

savings will sweep a wave of transformation through all aspects of the entire investment services

industry. These effects will be irreversible, and the costs of such a transformation will be

unrecoverable.

12


13


Exhibit 2

14


1

IN THE UNITED STATES DISTRICT COURTFOR THE DISTRICT OF COLUMBIA

The National Association for Fixed Annuities,

Plaintiff,

vs.

Thomas E. Perez, et al.,

Defendants.

Civil Action No. 1:16-cv-1035 (RDM)

SECOND AFFIDAVIT OF JACK MARRION

I, Jack Marrion, declare as follows:

1. I am over the age of 18 and have personal knowledge of the facts contained in this

affidavit. If called to do so, I am competent to testify as to the matters contained herein.

I. BACKGROUND

2. As set forth in the first affidavit I submitted in this matter, which is incorporated

herein by reference, I serve as the Director of Research for the National Association for Fixed

Annuities (“NAFA”). I have held that position since July 2011.

3. Since I submitted my first affidavit dated May 26, 2016, I have closely followed

the efforts of the fixed annuity industry, including NAFA’s members, to comply with the DOL’s

“fiduciary” rule (the “Rule”) by the April 10, 2017 applicability date, and I have been in regular

contact with insurance carriers, independent marketing organizations (“IMOs”), and insurance

agents about their respective efforts to comply with the Rule before it becomes applicable.

Case 1:16-cv-01035-RDM Document 49-1 Filed 11/14/16 Page 2 of 10

15


2

4. By the time the Rule becomes applicable on April 10, 2017, the entire distribution

system through which fixed annuities are sold will be irreversibly changed. It is clear that the

entire fixed annuity distribution model is undergoing an irreversible transformation caused

directly by the Rule and the fixed annuity industry’s attempt to come into compliance with the

Rule by the applicability date. These changes have already begun and will accelerate between

now and the applicability date as the fixed annuity industry races to comply with the Rule.

These changes are causing many industry participants to change their business practices, change

business relationships, expend considerable time and resources, and forcing some industry

participants to contemplate leaving the business altogether, thereby threatening the livelihoods of

IMO employees and independent agents, and ultimately reducing the availability and value of

guaranteed retirement income products for millions of consumers.

II. INSURANCE CARRIERS

5. Prior to adoption of the Rule and the BIC exemption, nearly all insurance carriers

selling fixed indexed annuities (“FIAs”) did so through IMOs and independent agents. By April

10, 2017, the applicability date of the Rule, this will no longer be the case in the IRA market.

The distribution system for the industry in the IRA market will be transformed completely to

accommodate the Rule in ways that will be both costly and irreparable.

6. In my first affidavit, I stated that compliance requirements imposed on insurance

carriers under the BIC exemption will be impossible to perform with respect to independent

agents, because independent agents almost always sell annuities for more than one carrier, and

thus individual insurance carriers cannot reasonably provide the kind of warranties required of

them under the Rule. Since my first affidavit, insurance carriers have begun moving away from

the independent agent distribution model that has prevailed in this industry for decades, and that

process will accelerate in the weeks and months ahead.


16


3

7. Insurance carriers are at a fork in the road and being forced to make difficult

decisions on how they will reshape their distribution systems to comply with the Rule. These

decisions are far-reaching. Each carrier must devise its own strategy for redesigning its

distribution system and implementing that strategy as best as possible prior to April 10, 2017,

including deciding on the right general approach to distributing its products, dismantling existing

business relationships, creating new business relationships, developing appropriate contracts,

developing appropriate contracting and licensure requirements, and establishing appropriate

compensation. This entails tremendous cost and resources and in many cases cannot be achieved

in full by April 10, 2017.

8. It appears some insurance carriers selling FIAs will choose to serve as the

“Financial Institution” under the BIC exemption. However, others will not, based largely on

risks associated with becoming a Financial Institution and entering into BICs. For those that

choose to become Financial Institutions, special relationships must be forged with IMOs and

agents to sell products in a manner that complies with onerous supervision requirements under

the BIC exemption. Because of the heightened supervision requirements, these insurance

carriers are limiting the number of IMOs and agents with whom they create such relationships.

As a result, the independence of IMOs and independent agents is lost, as carriers are forced to

work more closely with fewer agents offering fewer products.

9. Some insurance carriers that will not serve as Financial Institutions have indicated

that they will sell FIAs only through securities registered broker-dealers. Consequently, these

insurers will migrate away from IMOs and independent agents and to broker-dealers. As a

result, annuity carriers will end existing relationships with IMOs and independent agents and

forge new business relationships with broker-dealers.


17


4

10. Other insurance carriers that will not serve as Financial Institutions may sell FIAs

through IMOs that receive approval from the DOL to serve as Financial Institutions under the

BIC exemption (if any are eventually approved). I understand that 18 IMOs have applied to the

DOL for approval to serve as Financial Institutions. None of those IMO applications has been

ruled on by the DOL, and the DOL has given no timetable for making any decisions on the IMO

applications to be Financial Institutions. Nor has the DOL provided any clear guidance as to

how IMOs can become Financial Institutions.

11. The DOL’s failure to provide guidance and to act on the pending IMO

applications to be Financial Institutions introduces a significant degree of uncertainty,

complexity, cost, and delay to the compliance process for carriers as the April 10, 2017

applicability date draws near. In fact, carrier decisions about IMOs are being materially hindered

and in some cases paralyzed by the DOL’s failure to rule on the exemptions. Beyond that, most

IMOs seeking Financial Institution status are being forced to invest heavily in infrastructure such

as computer programming, licensing programs, new compliance staff, and legal fees, all without

any assurance their applications to become FIAs will be approved. This is all brought about by

the DOL delay in ruling on Financial Institution applications, which has compressed the

timeframe for carriers and IMOs to make critical decisions, thereby putting both insurance

carriers and IMOs in a difficult position so close to the April 10, 2017 applicability date.

12. Regardless of their approach to compliance with the Rule, insurance carriers will

distribute their annuity products largely through quasi-captive agents (i.e., captive agents who

sell for only one company or IMO or, alternatively, agents who are forced to sell fixed annuity

products through only broker-dealers or other financial institutions).


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5

13. Allowing agents to sell FIAs from sources outside of the Financial Institution’s

supervisory control would leave the Financial Institution unable to warrant in a BIC that the

agent’s recommendation was in the “best interest” of the consumer and was made without regard

for the agent’s own financial interests. Because of this lack of control, it is unlikely that the

Financial Institution would permit outside sales by agents. DOL assurances that carriers need

only supervise sales of their own products does not address how carriers can warrant that a

product recommendation is being made without regard for the agent’s own financial interest

relative to other products of other carriers sold by that agent. In addition, Financial Institutions

will only be able to give agents access to products offered by the insurance carriers that rely on

them to serve as Financial Institutions. Thus, Financial Institutions will affiliate with fewer

agents and distribute fewer annuity products through those agents.

14. Historically, independent agents have been able to affiliate with many insurance

carriers and IMOs to sell a wide range of different FIAs. As of April 10, 2017, however, for

purposes of selling IRA products, the agents who remain in the industry will be able to affiliate

only with a limited number of Financial Institutions (or possibly only one carrier or IMO) and to

offer FIAs from only a handful of insurance carriers, at most.

15. Insurance carriers that continue to offer FIAs have begun to implement these

drastic changes to their existing FIA distribution systems and will continue to implement these

changes in the few remaining months leading up to the April 10, 2017 applicability date.

16. In my first affidavit, I further stated that insurance carriers have to change their

FIA product offerings in the IRA marketplace to comply with the BIC exemption. Those

changed FIA products will need to be re-filed with state insurance departments for regulatory

approval. That process can take 12 to 18 months. The number of fixed annuities filed with state


19


6

insurance departments is sharply lower since April 2016 (when the Rule was published in final

form) than in the months prior. Continued uncertainty over how, and even whether, IMOs can

act as Financial Institutions is causing insurance carriers to delay refiling fixed annuity products,

because they do not know how those products will be distributed.

17. Annuity carriers have incurred and will continue to incur great expense as they

attempt to comply with the Rule. I surveyed eight carriers offering FIAs. Their average cost to

comply with the Rule thus far totals roughly $8-10 million, as well as thousands of personnel

hours. None of the other annuity carriers I surveyed were able to estimate future compliance

costs due to the ongoing lack of clarification of how IMOs will be treated under the BIC

exemption, but those costs continue to mount for each of the carriers, and are expected to grow

exponentially as the applicability date draws closer.

18. Ameriprise Financial reported last month that its total spending in connection

with the DOL rule was $19 million.1 CNO Financial Group estimated they would spend between

$8 million and $10 million in 2017 to comply.2 While Ameriprise and CNO offer products other

than FIAs, these reports illustrate the enormous and ongoing compliance costs facing insurance

carriers as they struggle to comply with the Rule.

III. INDEPENDENT MARKETING ORGANIZATIONS

19. In my first affidavit, I stated that there are over 100 IMOs selling fixed annuities.

Two-thirds of FIA sales are conducted through IMOs, and IMOs account for over $35 billion of

annual FIA sales annually. Under the BIC exemption, IMOs are not specified as being Financial

Institutions eligible to receive commissions.

1 http://www.investmentnews.com/article/20161025/FREE/161029935/ameriprise-spends-another-7-million-in-q3-to-get-ready-for-the-dol2 https://insurancenewsnet.com/innarticle/cno-financial-dol-rule-to-cost-us-8m-10m-in-2017


20


7

20. Based on research I conducted in November 2016, it appears that over 90% of the

existing IMOs that sell FIAs cannot presently serve as a Financial Institution. In particular, only

10 of the approximately 100 IMOs that sell FIAs might be in a position to qualify as a Financial

Institution without an exemption from the DOL, because those 10 IMOs already own a

securities-registered broker-dealer or investment advisor. Those 10 IMOs would, however, need

their agents to obtain securities registrations, which may not be possible for many agents and

adds expense for both the IMOs and the agents who are able to register.

21. As stated, 18 IMOs have applied to the DOL for an exemption to serve as a

Financial Institution. It has now been months since the first IMO applied to be a Financial

Institution in May 2016. Not one of the 18 IMO applications has been acted on by the DOL.

Nor has the DOL published any clear guidance on how an IMO can qualify as a Financial

Institution, or even whether an IMO can qualify as a Financial Institution.

22. The typical IMO I spoke with estimates it will lose 25% of its current revenue –

even if it is able to qualify as a Financial Institution – because of changes to agent recruiting,

training, and retention necessitated by the Rule.

23. Those IMOs unable to qualify as a Financial Institution estimate that their annual

revenue will drop by 50% to 60%, since they will be limited to selling non-qualified fixed

annuities (i.e., sales excluding IRAs) in the independent agent market. Such a decline in revenue

will force many of those IMOs to go out of business.

24. In its Regulatory Impact Analysis (on page 259 in Figure 6-2), the DOL estimated

the initial cost of compliance for small and medium sized “Other Service Providers” (the only

category that would include IMOs) is between $5,420 and $11,840. The typical IMO I spoke

with said it is spending $500,000 to attempt to meet DOL requirements.


21


8

25. In my first affidavit, I predicted that Errors and Omissions (“E&O”) insurance

premiums would increase sharply as a result of the Rule. In its Regulatory Impact Analysis

(page 240), the DOL estimated that E&O insurance premiums would increase by 10%.

However, I understand that IMOs that may serve as Financial Institutions are being quoted

premium increases of 100% to 300%, assuming insurance is even available.

26. As to those IMOs that felt they could stay in business, all but two that I spoke

with said they were planning staff layoffs beginning in January 2017 because of the expense of

trying to comply with the Rule and the expected reduction in revenue.

27. Thus, in 2017, many IMOs will go out of business, and there will be massive

layoffs at other IMOs that are able to remain open.

IV. INDEPENDENT AGENTS

28. In my first affidavit, I estimated that at least 80,000 agents sell FIAs. I continue

to believe that many of these agents – perhaps as many as 25% – will leave the fixed annuity

business.

29. In addition, independent agents offering a wide range of fixed annuity products

from many different insurance carriers will cease to exist in the IRA market.

30. Agents who attempt to remain in the fixed annuity business face extremely

limited choices because of the Rule. These agents may either (1) cease offering FIAs to IRAs if

they want to remain independent (and therefore suffer a significant decline in their earnings) or

(2) become quasi-captive agents offering a far more limited set of products to their customers.

31. I understand that many insurance-only agents have taken or plan to take the Series

65 exam to become Investment Advisor Representatives (“IARs”) for the sole reason that those

agents wish to continue selling FIAs after April 10, 2017. It typically costs thousands of dollars

for agents to prepare for and take this exam, not to mention the investment of time.


22


32. A large number of agents have told me they will simply retire rather than incur

the expense of becoming lARs.

V. APRIL 2017 APPLICABILITY DATE

33. The April 10, 2017 applicability date is now less than five months away. Despite

the looming applicability date, the DOL has yet to inform insurance carriers, IMOs, and agents

how to comply with its new regulations. The DOL will not make clear how the BIC exemption

will function in the FIA industry, and it has not made clear whether any IMO can qualify as a

Financial Institution. Tens of thousands of hours have been and are being spent to understand

what the DOL requires. Even if the DOL were to clarify these issues tomorrow in an actionable

manner, there is not enough time left to create the needed compliance infrastructure and

procedures prior to the Rule's April 10, 2017 applicability date.

34. Overall, the DOL's April 10, 2017 deadline remains unworkable, and I do not

believe that NAFA members will be able to achieve compliance by then.

35. Nevertheless, efforts to comply are ongoing, and the fixed annuity distribution

system is in the process of irreparable and dramatic change and disruption, at great expense to all

industry participants. So far as I can tell from the rulemaking record, none of these changes to

the distribution model were considered or addressed by the DOL in the rulemaking process.

Pursuant to 28 U.S.C. §1746,1 declare under penalty of perjury that the foregoing is true

and correct.

Executed on: November 2016


23


Exhibit 3

24


25


26


27


28


29


30


31


Exhibit 4

32


33


34


35


Exhibit A

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS

MARKET SYNERGY GROUP, INC.,

Plaintiff,

v.

UNITED STATES DEPARTMENT OF LABOR, THOMAS E. PEREZ, in his official capacity as Secretary of the United States Department of Labor, and PHYLLIS C. BORZI, in her official capacity as Assistant Secretary of the United States Department of Labor,

Defendants.

Civil Action No. 5:16-cv-04083

DECLARATION OF MICHAEL TRIPSES

I, Michael Tripses, hereby declare as follows:

1. I am over the age of eighteen and have personal knowledge ofthe matters stated in

this declaration. If called to do so, I am competent to testify as to the matters contained herein.

2. I have been involved in insurance marketing and related businesses since 1977, as

an officer and chief actuary of various insurance companies and Creative One Marketing

Corporation or its predecessor ("CreativeOne"). I and my actuarial department at American Life

and Casualty Insurance Company designed one of the first fixed indexed annuities in 1995.

Subsequently, as chief actuary at CreativeOne, I and my staff consulted with insurance company

clients in the design and implementation of dozens of fixed annuities of all types. I traveled on

behalf of the company presenting scores of insurance continuing education seminars to

independent agents for the purpose of assisting them in understanding and being better able to

inform their clients about the indexed annuity concept. I have written dozens of articles about and

Case 5:16-cv-04083-DDC-KGS Document 11-5 Filed 06/17/16 Page 2 of 10

37


spoken and presented before other industry groups on annuities and other insurance topics. I am

twice former chairman of the National Association for Fixed Annuities, leading the only trade

organization dedicated to promoting awareness and understanding of fixed armuities exclusively.

3. Currently, I am the principal owner and Chairman of the Board of CM2 Holding

Company, Inc., holding company for CreativeOne of which I am president. I have been employed

by CreativeOne since 1996.

4. Creative One is an independent insurance marketing organization ("IMO") located

in Leawood, Kansas. CreativeOne has 143 employees.

5. As its principal business, CreativeOne provides product education, marketing

assistance, and administrative support to independent insurance agents for their sales of fixed

annuities and other insurance products. Creative One also recruits independent agents, provides

licensing support, and acts as a third-party intermediary between the independent agents and the

insurance companies whose products the agents are appointed to sell.

6. CreativeOne is an equity owner of Market Synergy Group.

7. On May 31,2016, CreativeOne had 2,941 independent agents which generated

revenue for CreativeOne in the preceding 12 months by selling fixed indexed armuities and other

types of fixed armuities. These independent agents are licensed with one or more state insurance

departments to sell insurance products, including fixed indexed armuities and other types of fixed

armuities. These agents are not employees of CreativeOne; they are independent contractors of

the insurance companies whose products the agents are authorized to sell, as is CreativeOne.

8. We refer to agents who do not have securities licenses as "insurance-only" agents.

9. Fixed annuities sold by insurance-only agents are considered to be a type of life

insurance product and are regulated exclusively by state insurance departments. A characteristic

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of all fixed annuities, including fixed indexed annuities, is that contract owners do not bear any

downside investment risk. Rather, they benefit from principal protection, guaranteed lifetime

income options, and other contractual guarantees and benefits that are backed by the assets and

reserves of the insurance company issuing the policy.

10. Sales of securities are subject to an entirely different regnlatory regime than non-

securities insurance, as well as different licensing requirements on both the federal and state level.

This is in part because securities-licensed broker-dealer representatives can sell investment

products such as variable annuities and mutual funds in which, unlike fixed annuities, the investor

bears all downside risk and, in theory, could even lose his entire principal investment.

II. As insurance professionals, and small businessmen and women, independent agents

do not make a salary. They rely primarily if not exclusively on sales commissions paid by

insurance companies for their livelihoods. CreativeOne is also compensated directly by the

insurance company for its recruiting, marketing support and other services based on a percentage

of agent sales volume.

12. Creative One offers regular product-related and other training to agents, and these

agents also receive training offered through the state insurance departments, the insurance

companies whose products they are authorized to sell, and other trade and industry groups with

which they may be associated. However, the agents are - as they are called -- independent. They

run their own businesses. We are contracted and remunerated by insurance companies to support

them. Independent agents decide how to develop and manage their client relationships, and they

decide what financial products are appropriate to recommend to their clients.

13. Independent agents supported by CreativeOne sell to, advise and service customers

of all ages, but given the characteristic features of annuities, generally fall into the range of 50 to

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74. They range across all incomes. Sales involve qualified and non-qualified funds, the former

representing 64.3% of annuity sales that CreativeOne services.

14. Many of the retirement planning needs of the independent agents' clients have been

met, at least in part, with the purchase of fixed indexed annuities. They are versatile products that

provide the upside potential associated with the selected reference index (with any gains locked

into the contract value each year or interest crediting period), complete downside guaranteed

protection, and fixed rate acconut options. Indeed, our records indicate that approximately 92.8%

of CreativeOne's annuity premium sales last year have been from the sale of fixed indexed

annuities, with 66.4% being purchased with tax-qualified funds, predominantly Individual

Retirement Accounts ("IRAs").

15. The ability of insurance-only agents we service to sell fixed indexed annuities in

the IRA market is therefore critical to the continued success of CreativeOne's business and the

success of all other similarly situated insurance marketing businesses. Based on the industry data

of which I am aware, the independent agent and IMO channel is the largest distribution channel

for fixed indexed annuities, accounting for approximately 60% of total fixed indexed annuity sales

in the last quarter of 20 I 5.

16. Another benefit of the independent channel is that it provides access to financial

and retirement planning services to an underserved segment of the population: namely, hard

working, middle-income Americans who do not meet the asset thresholds of many securities

broker-dealers and investment advisory firms.

17. I was therefore extremely troubled to learn that, without any notice, the U.S.

Department of Labor recently issued a drastic rule change regarding sales of fixed indexed

annuities in IRA acconuts. Basically, the Labor Department has decided, without any apparent

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basis, to treat fixed indexed annuities as if they are securities, even though it is my understanding

that the U.S. Securities and Exchange Commission, the actual federal securities regulator, does not

and cannot do that under current law.

18. As part of this government initiative as I understand it, the Labor Department has

shifted fixed indexed annuities into a new exemptive rule essentially designed for securities sales

at broker-dealers (who already have a federally and self-regulated supervisory apparatus set up to

sell securities and exercise control over agent activities), even though fixed indexed annuities, as

insurance products, have none of the risks inherent in securities and are regulated as insurance

exclusively by the states. From our perspective, this federal goverrunent initiative overlaps,

conflicts with, and confiscates state insurance authority.

19. I have read the formidable regulation. As Solomon proposed, the Labor

Department requires a dividing of the fixed annuity insurance baby; fixed indexed annuities to

BICE, leaving fixed declared rate annuities in newly-amended 84-24. Their reasoning does not

hold up to scrutiny, and the Department's decision to divide fixed annuities into disparate

exemptive regimes is a non-sequitur without support. There are two basic types of fixed annuities:

fixed declared rate annuities and fixed indexed annuities. The products are nearly identical

versions of the same fixed annuity product. For example, both versions have guaranteed protection

of principal, guaranteed payout rates, and are subject to state standard nonforfeiture laws. Policy

owners bear no investment risk with either version. The only tangible difference is the manner in

which annual interest credits are determined, at the election of the policy owner.

20. The largest effect of the abrupt government rule change is the impact on the

distribution function of IMOs and the tens of thousands of independent agents who we, as an

industry, support. The new rule requires that the sales activities of agents selling fixed indexed

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annuities be directly supervised and regulated only by certain types of financial institutions:

namely, registered broker-dealers, registered investment advisers, banks, or insurance companies.

IMOs have never been financial institutions, and we are not set up to assume that type of

supervisory responsibility even if the Labor Department might allow us to, which is doubtful.

Moreover, our insurance-only agents are not licensed to work through those registered entities, so

they have nowhere to go either, unless they make significant changes to their own careers, or one

of those designated financial institutions decides to accept the financial institution responsibility

for them.

21. Because the new exemptive rule imposes direct fiduciary and contractual

responsibility on the supervising entity, we have legitimate concerns as to whether the majority of

the insurance companies that we do business with will take on this new cost and legal exposure

and have already heard from some who have decided not to. And even if there ultimately are

insurance companies who do, our understanding is that many of those companies likely will either

eliminate IMOs altogether by moving to a captive sales force, or greatly restrict the number of

IMOs with whom they do business. The compliance risk would seemingly be too great for a single

insurance company to attempt to oversee the sales and enter into "best interest" contracts for

independent agent sales when the agents are appointed to sell various products of multiple

insurance companies. Several insurance companies CreativeOne does business with have even

indicated that the way the Department's Fiduciary Rule is written, they would not be allowed to

compensate an IMO at all or without drastic changes to our current method of remuneration.

22. From our perspective, the entire independent insurance agent-based fixed indexed

annuity distribution channel is at imminent risk. With the operative effective date approaching,

other institutions in the industry are making business decisions and starting to invest substantial

6


42


resources in their implementation plans to deal with the massive operational, supervisory, and

product delivery changes needed to comply with the Labor Department's new rules. But neither

IMOs nor, more importantly, the tens of thousands of independent insurance-only agents they

support have a readily ascertainable and economically viable choice - given the arbitrary and

unsupportable decision the Labor Department has made by reversing itself at the last moment

without warning or comment period and excluding fixed indexed annuities from the existing

exemption.

23. It is abundantly clear that in formulating the new rule relating to fixed indexed

annuities, the Labor Department did not account for the impact on our and independent agents'

businesses, or, for that matter, the true impact on retirement savers and other consumers. The new

rules simply do not make a place for us. As a result, consumer access to many beneficial annuity

products with essential retirement savings and income features - as well as the related, no-fee

financial planning services and education offered by independent agents - will be curtailed in

many communities.

24. As a result of all this uncertainty, agents are frightened - both for themselves and

their families. Many thousands of independent agents are at risk of losing their current careers and

livelihoods and being forced into making costly career changes just to survive. Many turn to us for

answers, which we are bereft of given the Department's thoughtless rule.

25. As the primary support organizations of these independent financial professionals,

IMOs and their employees are in a similar precarious position. With the new rules going into

effect in April of next year, CreativeOne and others like it would have to attempt, at great cost, to

reconstruct their entire business and operational models and assume potentially massive new legal

and financial exposure which may not even be insurable. We have attempted to assess the cost of

7


43


compliance but are confounded by the rule's vagueness as to fiduciary duty, best and sole interest

of the client, and reasonableness of compensation. It lacks any safe harbors to aid all of us in

distribution of this valuable product. Given that some readings of the rule indicate IMOs may not

be paid at all, lacking status as a fiduciary or a financial institution under the Best Interest Contract

Exemption, our risk is potentially existential. Fixed non-indexed annuities represent a very small

proportion of our sales. It would not justifY our mission and certainly not counterbalance the

unlimited liability accompanying the new private right of class-action lawsuits based on the

Department's definition-anemic Rule. We could be forced to sell off what remains of our business,

close our doors and put 143 people out of work. The valuation of my and my fellow partners'

business would be a sliver of what it was pre-DOL rule. In any case, I foresee no scenario that

does not result in significantly reduced revenue, increased cost per agent and sale and dozens of

layoffs in the near term, even under the best scenario following the rule's implementation.

26. To add insult to injury, even if a restructuring were feasible, IMOs and the

independent agents they support will still be at risk of not being able to stay in business because

there is no guarantee that the IMOs would be approved as the supervising entity by the Labor

Department, because there is no basis to estimate how long such an entirely new regulatory review

process would even take (whether or not it ultimately was successful), and because of the many

ambiguities in the new rules themselves relating to permissible compensation and other matters.

27. In light of myriad factors, including likely restructuring and ongoing compliance

costs, unquantifiable legal risks, and uncertainties as to how other industry participants will

respond, I have determined that it is not realistic, from a financial or operational standpoint, to

realign our organization in a manner that would allow us to continue to support the marketing of

8


44


fixed indexed annuities, maintain our historical level of business productivity, and be compliant

with the Labor Department's new regulatory regime by April 2017, if ever.

28. Even were we to find a way to be compensated for our services with respect to

qualified fixed indexed annuities and we were able to comply with all fiduciary, reasonable

compensation, and disclosure requirements in this compressed time frame, we have heard

indications that some financial institutions will apply the Best Interest Contract Exemption to non

qualified funds and all types of annuities so as to not have two different compliance regimes. That

could result in further decimation of the independent insurance agent channel as even non-qualified

insurance business potentially moves to other channels requiring a securities license such as

broker-dealers and registered investment advisers.

29. In sum, as a result of what I firmly believe to be an improper and ill-advised

exercise of the Labor Department's purported regulatory power, we are faced with an existential

threat to our business and the livelihoods of the many independent financial professionals with

whom we have longstanding relationships and who themselves operate as productive small

business owners and entrepreneurs. The Department seems to have ignored or been ignorant of

the ramifications of moving a non-security distributed primarily via an IMO system into the Best

Interest Contract Exemption. The ramifications in my opinion will be disruptive and dire for all

parties from insurance company down the distribution chain through clients.

I declare under penalty of perjury that the foregoing is true and correct.

Executed on June 14,2016.

9


45


Exhibit B

46


annuities • life • securities

Submitted by e-mail: [email protected]; [email protected] Submitted by Fedex

February 21,2017

Office of Exemption Determinations Employee Benefits Security Administration- Attention D-11926 U.S. Department of Labor 200 Constitution Avenue NW, Suite 400 Washington, DC 20210

RE: ZRIN 1210-ZA26 - Proposed Best Interest Contract Exemption for Insurance Intermediaries

Dear Acting Secretary Hugler:

I am the President of Creative One Marketing Corporation ("CreativeOne"), a national life insurance and annuity brokerage organization, which is commonly known as an independent marketing organization ("IMO"). CreativeOne supports the idea that insurance intermediaries should be allowed to keep supporting the tens of thousands of independent insurance agents who sell life insurance products, especially fixed indexed annuities. However, in our review of the Proposed Best Interest Contract Exemption for Insurance Intermediaries ("Proposed Exemption"), we are very troubled by many of the overly onerous requirements and confusing standards that make compliance with the exemption impossible. We adamantly believe that without any further analysis and meaningful changes to the Proposed Exemption, a great majority of 80,000 independent agents selling fixed annuities will be forced to irreversibly exit this consumer-critical market. 1bis will cause massive upheaval for the agent, distributor, insurance carrier, and most importantly, consumers of these valuable, guaranteed retirement income insurance products.

We understand that the Prohibited Transaction Exemption ("PTE") 2016-01, the Best Interest Contract Exemption ("BICE"), and the Proposed Exemption was developed and written under a previous administration and previous regulatory regime. That being said, we feel it is extremely important to comment on the areas of the Proposed Exemption where it failed to consider the practical impact to the fixed annuity industry and irrationally imposed conditions in comparison to other compliance requirements through BICE. We maintain that the Administration should undertake a more thorough analysis in crafting a fair and reasonable rule that recognizes the uniqueness and nuances of the fixed annuity marketplace. The

1

i 1 LtGO Tomahawk Cl-eek Pkv~.1y. Lez:1vvcod, i<S 662ll P 913.814.0510 I 800.992.2642 • F 913.814.0512

www .creativeone.com

47


Proposed Exemption is inconsistent with the new Administration's stated policies of: (i) increasing, not reducing, Retirement Investors' access to certain retirement savings offerings, retirement product structures, retirement savings information, and related financial advice; (ii) minimizing, not causing, dislocations or disruptions within the retirement services industry that may adversely affect Retirement Investors; and (iii) lowering, not raising, the prices that Retirement Investors must pay to gain access to retirement services.

This comment will focus on three key areas. First, we believe that Department of Labor (the "Department") misunderstands the function and purpose of the IMO and the fixed armuity product. As such, we will focus exactly on what we do and the value that independent distribution has for consumers. Second, we will address the overly burdensome requirements that IMOs will face to comply and the impossible window of remaining time to implement yet-to-be finalized standards. Third, this comment will make the case that the I% premium requirement for capital or insurance is unbalanced and inequitable due to the associated risk involved in the IMO space compared with other similarly situated "Financial Institution" firms in the retirement and securities space such as broker-dealers or registered investment advisors.

Ultimately, our recommendation is for the Department to delay the implementation of the rule to review the necessity of the rule and to craft requirements that account for the uniqueness of the industry, rather than rely on arbitrary, unsupported, and unreasonable conclusions. We believe the fixed armuity industry and consumers would substantially benefit from a more comprehensive study of the Proposed Exemption and also a delay of the applicability dates under the BICE and this Proposed Exemption. The fixed annuity industry currently and will continue to operate under a robust regime of state insurance regulatory safeguards that has consistently proven to offer strong consumer protection. No consumer harm has been demonstrated by the DOL or others within the fixed armuity industry, so delaying the BICE and this Proposed Exemption will not cause any harm.

I. A strong, sound, and competitive independent distribution channel for fixed annuities is exceptionally beneficial to consumers-the Proposed Exemption will devastate the current distribution model

a. The uniqueness of IMO annuity distribution model is beneficial to consumers

Both the preamble and the language of the Proposed Exemption make it clear that the Department does not fully understand the nuts and bolts of the IMO independent distribution charmel. Nowhere in the preamble did the Department indicate that they did any investigation or analysis into the distinctiveness of the model, but instead focused almost exclusively on securities distribution models via registered advisory firms, banks or broker-dealers. Therefore, we believe it is important to explain to the Department who we

2

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are, what we do, aod the value we aod other IMOs provide to Americao retirees aod small businesses around the country. We believe a thorough aod careful consideration of the fixed annuity market is required in order to reach any conclusions about the workability of the BICE or this Proposed Exemption.

Since 1985, CreativeOne has worked with insurance carriers aod independent agents to assist in the sale of fixed annuities aod other insuraoce products. We are contracted with over 20 insuraoce carriers. Last year, CreativeOne served as the marketing orgaoization for approximately 3,500 agents selling fixed indexed annuities or other type of fixed annuities. These independent agents operate their own small business. While CreativeOne supports aod services billions of dollars in premium from independent agents, CreativeOne remains a dedicated small business located in the heart of America. We are committed to helping these 3,500 small agents/insuraoce agency businesses understaod aod provide annuity products to those in need of safe accumulation aod guaranteed income plans in their retirement years.

To fulfill this commitment, CreativeOne acts as ao outsourced service provider for the insuraoce compaoies to the independent insuraoce agent. CreativeOne provides product education, marketing assistaoce, aod administrative support to independent agents for their sales of fixed annuities aod other insurance products. CreativeOne also recruits independent agents, provides licensing support, aod performs various other traditional insuraoce carrier functions akin to a third-party intermediary between the independent agents aod the insuraoce companies whose products the agents are appointed to sell. We employ 126 employees to accomplish these broad raoge of tasks. CreativeOne is compensated directly by the insuraoce company for its recruiting, marketing support, aod other services based on a percentage of agent sales volume. It is important to note that CreativeOne, like virtually every other IMO, has no relationship with the end-consumer who purchases annuities. Rather, the IMO business model provide a vital and cost-efficient role for insuraoce carriers aod independent agents to operate. This independent distribution of fixed annuities, utilizing independent distributors such as IMO, creates substaotial economic aod operational efficiencies for the carriers, which in turn provides consumers with more competitive guarantees and crediting factors to their contracts. A great majority of fixed annuity products provided by insuraoce agents rely on the services provided by outsourced distributors (IMOs). We estimate that among the top 10 carriers who maoufacture fixed indexed annuities, 75-80% of sales are through the IMO distribution channel.

It appears from the Proposed Exemption that the Department assumes that IMOs like CreativeOne perform tasks aod operate as if they mirrored broker-dealers. This is simply incorrect. Specifically, CreativeOne does not interact directly with aoy consumer, but merely serve as the intermediary between the agent aod the carrier, performing critical service and support functions for both. Correspondingly, CreativeOne, along with other IMOs, have never been organized to operate as a "supervisor" of independent agents, who

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often conduct sales through multiple IMOs and carriers. IMOs are not structured operationally or legally as complaint resolution bodies and do not serve the role as complaint supervisor or disciplinarian. In fact, state insurance law provides for a mechanism and carrier requirements to handle all consumer complaints. And, to our knowledge, every carrier-independent agent producer contract describes the relationship between those parties in a principal-agent relationship, consistent with 100 years of statebased insurance statutory and case law. In the current distribution model, IMOs are not designed to be the supervisors of independent agents for the carriers.

The independent insurance agents CreativeOne works with are just thatindependent. These agents are not employees of CreativeOne. They are independent contractors of the insurance companies whose products the agents are authorized to sell, as is CreativeOne. In fact, independent agents in contracting with a number of different insurance companies, may use a number of different IMOs. In general, there is not even a contractual relationship between the agent and the IMO; an agent is free to select an IMO suitable for his or her needs, then the insurance company designates the agent to the IMO. Independent agents decide how to develop and manage their client relationships, and they decide what financial products are appropriate to recommend to their clients. CreativeOne is contracted and remunerated by insurance carriers. Almost every independent agent is paid directly by insurance carrier, not by CreativeOne. IMOs do not have agent agreements with such independent agents since there is no principal-agent relationship nor duties to one another.

Each independent agent we work with is himself or herself a small business, either as a sole proprietorship or an LLC. Each of these businesses usually have between 1-5 employees. As insurance professionals, and small businessmen and women, independent agents do not make a salary. They rely primarily, if not exclusively, on sales commissions paid by insurance companies for their livelihoods and the livelihoods of their employees.

We refer to agents who do not have securities licenses as "insurance-only" agents. These independent agents are licensed with one or more state insurance departments to sell insurance products, including fixed indexed annuities and other types of fixed annuities. Fixed annuities sold by insurance-only agents are considered to be a type of life insurance product and are regulated extensively by state insurance departments. A characteristic of all fixed annuities, including fixed indexed annuities, is that contract owners do not bear any downside investment risk. Rather, they benefit from principal protection, guaranteed lifetime income options, and other contractual guarantees and benefits that are backed by the assets and reserves of the insurance carrier issuing the policy. All fixed annuities, unlike variable annuities, are covered by state guaranty funds which, in the case of a carrier insolvency, provides a valuable additional protection of contractual guarantees under the fixed annuity.

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Sales of securities are subject to an entirely different regulatory regime, as well as difference licensing requirements on both the federal and state level. This is in part because securities-licensed broker-dealer representatives can sell investment products such as variable annuities and mutual funds in which, unlike fixed annuities, the investor bears all downside investment risk, and in theory, could even lose his or her entire principal investment.

Independent agents supported by CreativeOne sell to, assist, and service customers of all ages, but given the characteristic features of fixed annuities, generally customers fall into the range of 50 to 74. Fixed annuity customers' annual income and net worth varies, but typically have a net worth ranging from $250,000 - $750,000. Approximately twothirds of all fixed indexed annuity sales include a guaranteed lifetime benefit rider, which offers predictable and certain guaranteed income the customer cannot outlive will maintaining flexibility and liquidity under the contract. Sales involved qualified and nonqualified funds, the former representing 64.5% of annuity sales that CreativeOne services.

The retirement income and savings needs of the independent agents' clients can be met, at least in part, with the purchase of fixed indexed annuities. They are versatile products that provide upside potential associated with the selected reference index (with any gains locked into the contract value each year or interest crediting period), complete downside investment risk protection as well as state mandated minimum guaranteed contract values, and traditional fixed interest rate account options. Indeed, our records indicated that approximately 93% of annuity premium sales by agents with work with CreativeOne have been from the sale of fixed indexed annuities, with 66% being purchased with tax-qualified funds, predominately Individual Retirement Accounts ("IRAs").

Maintaining an independent distribution channel to retirees in need of guaranteed retirement products is critically important to consumers. Independent agents are free to contract with any number of different insurance carriers. Our average agent contracts with between 4-5 insurance carriers based on the needs of their customer base, the competitiveness of the products, and other factors such as carrier rating, quality of service, renewal rates, and rider benefits. This independence allows agents to choose from a variety of carriers and products to solve the wide variety of needs of their clients.

For example, an independent agent may have two clients: one aged 55 and the other aged 7 5. The independent agent and client would have the ability to consider products from a variety of carriers based on the individual needs and circumstances of the client. For example, the needs of the client aged 55 may include a product that would allow for better accumulation where immediate income may not be necessary. Conversely, the agent and client could also locate a much different annuity product for the 75 year old client who may be less concerned with accumulation and more concerned with immediate income and long term care benefits. Not all insurance carriers will carry products for every possible client's individual need. The independent agent has the benefit of being able to give the consumer

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the best choice of available products. Insurance only agents are subject matter experts specializing in the aspects of this conservative safe insurance product. Many securities licensed salespeople may not have the subject matter expertise, because insurance may only be a small focus with a heavier concentration in sales of securities. The independent distribution channel also provides access to retirement income planning strategies for an underserved segment of the population: namely, hard-working, middle-income Americans who do not meet the asset thresholds of many securities broker-dealers and investment advisory firms.

b. The Proposed Exemption will devastate small businesses and consumers

It is with great urgency and concern that we wish to advise the Department that the Proposed Exemption would devastate the independent distribution of annuities channel. Unfortunately, the BICE offered no outlet for the tens of thousands of independent agents selling fixed indexed annuities today, and now this Proposed Exemption offers no solution either. The impacts would be felt at all levels: from the carrier to the IMO to the independent agent to the consumer. This Proposed Exemption puts the accessibility of guaranteed retirement products to middle-income Americans at severe risk.

There are significant costs associated with the rule even before the Proposed Exemption requirements enter the equation. Carriers, IMOs, and independent agents will have to spend a significant portion of their revenues on compliance and additional supervisory resources to comply. Once you add in the requirements reserved only for "insurance intermediaries" in the Proposed Exemption, the entire arrangement becomes absolutely unworkable. We estimate that we have spent over a million dollars at our IMO so far preparing to be compliant by the applicability date, even though we do not know if the Proposed Exemption will be finalized or what conditions will be required. These costs do not include the additional insurance or capital costs necessary to comply with the Proposed Exemption and do not include additional capital and human resources that are yet to come. We face 48 days until CreativeOne must have compliance pathway to meet the April I 0 deadline but we still don't know what steps to implement. The Transition Period steps in the Proposed Exemption do not provide any meaningful transition help either, and as written, require compliance qualifications based on operations and requirements that occurred in the past such as the three-year minimum sales requirement. Creating a regulatory exemption relief rule with retroactive application of requirements may very well be illegal under ex post facto law. Regardless, this unsettled regulatory quagmire and the uncertain outcome of the four federal lawsuits challenging the Fiduciary Rule has and will continue to cause massive disruption for insurance agents and clients. IMOs face a Sisyphean task without knowing where we are supposed to be pushing the boulder.

These costs will be felt far and wide. At the carrier level, we have already seen commission rates drop among some carriers 1-2% in preparation of the annuity market

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taking a downturn and higher cost of operations and costs associated with compliance with the fiduciary rule. This small number has a large impact across the industry. A cut in commission rates at this level could impact an independent agent's income by as much as 25% per year, putting independent agents on the ropes and trying to decide whether to shut down their business, undergo layoffs, or keep going in this arduous regulatory landscape.

We have also begun to see carriers discontinuing significant annuity products in anticipation of the applicability of the Fiduciary Rule, further limiting consumer choice of different annuities. Carriers will reduce the number of products in order to avoid what could appear to be conflicts within their own portfolios and conflicts on an IMO shelf versus other companies' products. There will be an irresistible urge to standardize and incentive to collude among carriers. Even these results will not resolve the presumed problem of significant commission differences leading to class action lawyer led allegations of conflicted advice. To give just one example, most contracts pay lower commissions at upper ages due to actuarial mortality effects and the annuity guarantees. However, the ages at which these breaks occur vary widely due to carrier risk acceptance and actuarial approaches yielding multiple percentage points of commission difference. Even if that could be surmounted by every company miraculously pricing the same, the result would not be positive for a competitive market for consumers. Other examples are by state approval differences, rider differences, and renewal differences.

Consumers and small businesses will also be squeezed out of the market. Assuming some workable IMO Exemption were granted, as the cost of compliance increases, it will cost the IMO, as the supervising "financial institution", a fixed cost to maintain and support each and every independent agent. For each independent agent, the IMO will have to maintain the requisite amount of insurance and create compliance and supervisory capability to cover each agent and their sales. It has become clear that IMOs will not be able to support all of their agents with such increases and new role of supervisor. Many lower producing independent agents will be squeezed out of the market as their IMO will not be able to support their administrative costs. An agent with small production at one IMO, but more significant production at another IMO may be rejected by the former. This will result in single IMO agents, making independent distribution, less independent-a negative impact on consumers.

And while the DOL may have surmised that insurance carriers would serve as a supervising "financial institution" under the BICE, as of the date of this filing, no carrier has publicly announced it will sign a best interest contract with consumers. We are not surprised, since independent agents sell for multiple carriers and do not operate as gatekeeper supervisors like a broker-dealer. Fixed annuity carriers operate more like a variable annuity or mutual fund company- they manufacture financial products but do not serve as employer or supervisor. As a result, these independent agents will have nowhere to go and will be forced to end their business. With such a drastic decrease in revenue and increase in compliance costs for independent agents, we estimate as many as 60-70% could exit the

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insurance marketplace as a whole. Many independent agents sell both fixed annuities and other insurance lines, such as life insurance, however many do not specialize in P &C, long term care, or disability insurance. It is completely impractical for independent agents to simply change their business model and client service proposition to sell other insurance lines. Most CreativeOne independent agents focus on selling fixed annuities and operate their small business to specialize in such retirement products for consumers. Eliminating access to fixed indexed annuities for tens of thousands of independent agents will result in agents losing their small business livelihood and their customers losing their trusted insurance salesperson.

The consumer will also face significant harm. As noted above, a consumer's local "mom-and-pop" insurance agent could possibly go out of business. The consumer could try to find another authorized insurance agent licensed and appointed to support their annuity, but this is highly unlikely. Many registered reps of broker-dealers do not have contracts to sell fixed indexed annuities, preferring to sell variable annuities. End even if a registered rep could obtain a license and appointment with the insurance carrier to service an indexed annuity customer, most customers would likely face the firm's minimum investable assets threshold that many broker-dealers impose to work with them-a level that many middle-income Americans won't reach. Registered investment advisors will similarly decline to support these annuity customers because most do not maintain high minimum investable asset thresholds and won't be able to charge a fee on the annuity purchased. Most RIA firms charge 1-1.5% for the average annuity customer ($250,000-$750,000 net worth), and simply do not want to serve Main Street customers because they make more money working with millionaires. Some RIA and BD firms have stated in their own industry conferences that the fee model does not work for a significant portion of the consumer base who are not millionaires. And a last theoretical BICE-approved "financial institution" are banks, yet to our knowledge no bank has agreed to serve as a "financial institution" for independent agents. Customers might also theoretically seek out a different independent agent properly appointed with their insurance carrier, but finding an authorized agent would prove impossibly cumbersome and expensive for the customer. Further, even if they located an authorized independent agent to service their annuity account, most agents would impose their own minimum investable asset thresholds and decline to serve those customers. The BICE rule and the Proposed Exemption will price out a great majority of middle-income Americans. Good retirement strategies and products will be reserved only for the rich.

II. The $1.5 billion premium requirement-a perspective of an IMO who qualifies

As other commenters are likely to point out, of the hundreds ofiMOs in the current marketplace, we believe as few as five to eight IMOs could potentially meet the onerous historical annuity sales requirements, including CreativeOne. While IMOs with annuity sales under $1.5 billion could theoretically partner or affiliate with those IMOs with

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demonstrated $1.5 billion in annuity sales, such scenario is unrealistic as described below and hundreds ofiMOs will simply go out of business. We estimate that approximately 300 IMOs do not meet the $1.5 billion requirement and that as much as 250 will not be able to recreate their business model. With each of these 250 IMOs employing an estimated I 0 to I 00 employees, it is entirely possible that as many as 25,000 employees will lose their job as a result of this rule's unintended impact on small business and individuals. Similarly, fixed annuity insurance carriers will be forced to lay off many employees with decreased or discontinued sales of fixed annuities. Many industry experts have predicted 2017 sales of fixed indexed annuities to decrease by 30-35% as a direct result of the BICE requirement for fixed indexed annuities1. As a result of less sales, insurance carriers will be forced to lay off many employees who support their fixed annuity lines. While detailed estimates are difficult, we believe that just a I 0% reduction in the workforce among the top I 0 fixed annuity carriers (which represent 2/3rds of all sales) will cause the elimination of 1,000 jobs. We believe that the BICE rule and the unworkable Proposed Exemption will have the direct and irreversible impact of eliminating what could very well be 25,000 jobs for individuals working at anIMO and 1,000 jobs for those working at the top I 0 fixed annuity carriers. Given the devastating harm to the many employees of this industry, and the cascading negative impact to current and future annuity customers, we request the Department delay the applicability of the BICE rule to better assess the actual costs being borne and actual benefits likely to result with better information.

The Department suggested in the preamble to the Proposed Exemption that smaller IMOs could perhaps be "subcontracted" under a larger IMO to perform compliance work and serve as a qualifying "financial institution". But the reality of that business proposition is untenable for a larger IMO that might be able to qualify as a "financial institution". Larger IMOs are already undergoing massive business model change in a quick sand regulatory world and have little interest in contracting with smaller IMOs for that IMO's compliance work. We are direct competitors of all other IMOs, so helping a competitor IMO makes no business sense. As mentioned above, IMOs do not operate as supervisors controlling the interactions independent agents have with their clients. Further, the nature of the relationship between IMOs and independent agents does not include direct oversight of their day-to-day activities. IMOs, unlike broker-dealers or RIAs, are not required to, and indeed do not operate as, compliance supervisors.

1 "Fixed indexed annuity sales are projected to decline 30% to 35% next year due to a new Labor Department rule raising investment advice in retirement accounts, according to Limra, signaling the disruptive power the regulation will have on insurance companies and product distributors, " See Greg Lacurci, Indexed annuity sales projected to plummet 300/o becauseofDOLfiduciaryrule, Investment News (August 2, 2016), at http://www.investmentnews.com/article/ 20 160802/FREE/160809980/indexed-annuity -sales-projected-to-plummet-3 0-because-ofdol

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A more likely scenario is that the handful of large qualifYing IMOs will simply recruit the larger producing agents of the small IMPs and there will be consolidation resulting in the complete demise of hundreds of small IMOs. While as one of the qualifYing large IMOs, this would appear to be a competitive advantage, on principal we, we view it as bad for the industry and retirees across America. Mass contraction, consolidation, and liquidation are not good for a competitive market and harms consumers.

An executive from a leading fixed annuity carriers publicly commented on an earnings call in February 2017 about how the Proposed Exemption forces out of business almost all IMOs, and the anticompetitive "monopoly" it will create:

It's certainly affecting the smaller firms, in that they can'tthey don't have the infrastructure to be a financial institution, and when you look at the IMO exception, it's very, very few IMOs that will even qualifY for the IMO exemption. So the way I look at it is that these smaller firms you know have to make a decision, either get out of the FIA business or consolidate with the larger IMOs out there that do have the infrastructure and that has a capability to be an FI. It's unfortunate in that the DOL rule is almost turning the FIA business into a monopoly because there's going to be fewer and fewer IMOs if the rule goes through that have the ability to be financial institution than currently exist today. We're going from hundreds ofiMOs down to maybe, I don't know, 5 to 10 that could be an FI.2

Also, another executive harkened that prediction, publicly commenting that "sales of FIAs by independent agents may come under pressure later this year if the DOL fiduciary rule is not delayed or overturned through litigation. While the DOL's recently proposed Best Interest Contract Exemption for Insurance Intermediaries (the IMO Exemption) could facilitate continued sales of FIAs subject to the fiduciary rule by independent insurance agents, we believe the proposed requirements may arbitrarily and unnecessarily prevent some highly qualified insurance intermediaries from obtaining Financial Institution status and even if the proposed exemption is finalized prior to April 2017, the eligible insurance intermediaries may not have sufficient time to meet the proposed requirements." 3

2 Transcript, Seeking Alpha, American Equity Investment Life Holding Company Fourth Quarter 2016 Financial Inc. Earnings Call (Feb. 9, 2017), at http://tinyurl.com/jae2xll.

'Press Release, American Equity Investment Life Holding Company, American Equity Reports Fourth Quarter and Full Year 2016 Results (Feb. 8, 2017), at http://tinyurl.com/gsogncx.

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III. Timing of the Proposed Exemption unfeasible and unfair to IMOs

Since the Fiduciary Rule was published on April 8, 2016, the IMO industry has been in a hurricane of uncertainty that has not subsided. After the rule was published, IMOs voiced their opposition because the 1,023 page rule did not once mention the term "independent marketing organization" -effectively writing the industry out of existence. After applications for IMO exemptions began to pile in starting in May of2016, many in the industry expected the Department to act swiftly to provide regulatory certainty for the industry. Lawsuits were also filed challenging the rule, further confounding IMOs, independent agents, carriers and annuity customers. Industry trade journalists have opined that the IMO industry might have a compliance track but then again might not, continuing our confusing and unpredictable pathway to adapt. 4

Even the Department of Labor's attorney in a September 21, 2016 federal court hearing challenging the Fiduciary Rule indicated that IMOs would have clearer regulatory compliance guidance in the form of a to-be-issued IMO Exemption:

MR. THORP: So the Department concluded that it would not categorically include these market intermediaries as financial institutions because it wasn't sure that they were all capable of providing the supervisory role that was needed for a financial institution under the exemption. But they gave an opportunity for basically the industry to make the showing. And you have I 0 of the applications attempting to do so, and the Department expects to rule on those applications well in advance of the April upcoming deadline. If granted, each of those, the applicants, if they meet the terms, can serve as the financial institution and a lot of plaintiffs concerns about what the insurers would be willing to do directly is ameliorated and sort of leaves the market structure largely as it is now. So plaintiffs are asking the court to basically speculate that that's not available when it's a path that's clearly available to proceed under the regulation. So it is a path that could potentially be workable.

THE COURT: Before you leave that last point-- I'm sorry- what's the turnaround time on ruling on these applications for examination? MR. THORP: It varies, Your Honor, because the exemption process is in an application, and usually there's a back and

4 See Kevin W. Mechtley, DOL 101: The fiduciary rule's impact on 1MOs (July 12, 2016), Life Health Pro, at http://www.lifehealthpro.cornJ2016/07/l2/dol-!01-thefiduciary-rules-impact -on-imos?t= life-sales-strategies

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forth between the applicant and the Department before a proposal is put out for notice. And then the final proceeds from there. The Department expects that process to conclude well before. THE COURT: The effective date? MR. THORP: The April deadline. (emphasis added. )5

Unfortunately, no guidance came until January 18, 2017 when the DOL released its proposed class exemption for insurance intermediaries, just 92 days before the April 10, 2017 deadline. We also take exception with the Department's statement that it considered the role of the insurance intermediary when it released the final BICE rule. Nowhere in the preamble or in the regulatory impact analysis to support the BICE can we identify any consideration of the IMO distribution model, despite that IMOs handle $37 billion of all fixed indexed annuity sales. Post-hoc rationalizations cannot replace the omitted analysis of 62% of the $60 billion fixed indexed annuity space. Nonetheless, IMOs alike all face even further legal and compliance uncertainty since we do not know what a final form of anIMO Exemption might entail. This leaves IMOs in the lurch while the April! 0 deadline looms with unrelenting impact.

The Proposed Exemption was released on the very last full day of the previous Administration, 286 days since the Fiduciary Rule was published. This Proposed Rule was published-less than 3 months from the applicability date of the Fiduciary Rule. In the short 30 days since this Proposed Exemption was published President Trump issued an executive memorandum directing the Department to review the rule. The Department also sent a proposed rule to the Office of Management and Budget set the groundwork to delay the rule. We applaud efforts to initiate a delay and further study of the real-world effects of the BICE and the Proposed Exemption.

IMOs do not know how to plan for the future because their path has been incredibly unstable and unclear and now seems cut off. With this changing landscape, IMOs are tasked with trying to solve the day-to-day business issues surrounding the rule including: Should we hire additional compliance staff? Should we invest in expensive technological solutions that are not even fully developed, yet? Should we lay off employees to prepare for the predicted downturn in industry sales and compensation? Should we cut back salaries? Should we remain in business? The uncertainty regarding the regulatory climate in the IMO arena have led to an uncertainty in answering these questions.

Furthermore, after this comment period ends, and assuming the Department makes a reasonable effort to hold hearings and put in the necessary amount of time to diligently consider all of the submitted comments, the earliest realistic date the Department could

5 Hearing Transcript on Motion for .Preliminary Injunction, Market Synergy Group, Inc. v. United States Department of Labor, No. 5:16-CV-04083, September 21, 2016

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publish a revised final IMO Exemption rule is early to mid-March. The Department could realistically be asking IMOs to comply in less than 30 days with requirements they would be seeing for the first time. The Department certainly understands the level of effort it would take to make the necessary changes due to the complexities of this industry-it took 286 days to write this Proposed Rule. By comparison, the Department provided all other industries impacted by the Fiduciary Rule a full year to comply, which still many in the other financial services industries has indicated is too short. The Financial Services Roundtable has supported a delay of the Fiduciary Rule for two years thereby allowing more time for the Administration to consider a less bureaucratic "best interests" standard6

While not deliberate, this rule deeply disadvantages IMOs compared to other competing Financial Institutions. The regulatory outlook for broker-dealers, RIAs, and banks has been clear since April8 oflast year. They have had ample time to make necessary adjustments to their business models, contract with their affiliates, and train their employees to ensure full compliance under the Fiduciary Rule. IMOs are still dangling in the wind. It will be impossible for IMOs to completely restructure themselves either by partnering or affiliating with other IMOs, finding appropriate insurance coverage that does not yet exist, or adapting to a compliance regime of a qualifying IMO, if they could find one to partner with.

The Department may claim that it is not picking winners and losers, it is certainly only allowing IMOs to start playing the game with two outs left in the ninth inning. The only equitable solution to save the independent distribution channel is to delay the rule to provide much needed stability to the industry and time to comply.

IV. The 1% insurance/capital requirement creates a risk-obligation imbalance

The Proposed Exemption's insurance and capital requirement demonstrates a lack of understanding and examination of the industry to effectively craft a workable solution. Under the proposed exemption, for an IMO to qualify as a financial institution, the IMO must maintain aggregate amount of at least I% of premium sales consisting of a combination of cash or cash equivalents or liability insurance. The purpose of this requirement was to seemingly satisfy potential unlimited liability under ERISA as a result of the IMO's failure to meet the terms of the exemption. However, the Department's lack of awareness of key differences between independent and captive distribution models as well as insurance versus securities industry are glaring in several significant areas including the availability of liability insurance, the risk associated with annuities as compared to other investment and insurance products, and how this Proposed Exemption compares to other similar regulatory requirements for other investment and insurance organizations.

When the Proposed Exemption was released, our first call was to the insurance specialist we work with for providing our errors and omissions coverage and directors and

6 Press Statement, FSR Statement on Rep. Wilson Fiduciary Rule Bill (January 6, 2017), at http:/ /fsroundtable. org/fsr-statement -on-rep-wilson-fiduciary-rule-bill/

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officers coverage. He specializesin the IMO industry and has very specific knowledge about our needs. He found the insurance requirement shocking. It was evident to him that the rule was not crafted with any grace or knowledge of the industry. After conferring with other insurance providers, he concluded that no product meeting the Proposed Exemption exists on the market. He concluded that our only likely option would be to reach out to Lloyd's of London for the creation of a specialty policy, but the premiums Lloyd's would require would be astronomical. Certainly, the Department did not intend the requirement to be so onerous as to require Lloyd's of London to create a policy for 5-8 IMOs to purchase under this rule.

Furthermore, the Proposed Exemptions 1% of premium for capital/insurance shows a fundamental misunderstanding of the entire industry when compared to other similarly situated firms like broker-dealers. Under this Proposed Exemption, IMOs must maintain insurance, cash, or cash equivalent of 1% of premium. For example, anIMO that meets the minimum premium threshold of $1.5 billion in premiums would have to maintain capital or an insurance policy amounting to $15 million to satisfY potential liability under the rule. In comparison, a broker-dealer is typically only required to maintain capital of between $5,000 and $250,000 depending on the firm7• This disparity in capital requirement is extremely egregious especially when considering the risk involved.

Broker-Dealers can sell incredibly risky products to clients such as non-traded realestate investment trusts (REITs). Clients who purchase these products are in serious jeopardy of losing their principal. These products have no guarantee, no liquidity, allow for little to no control, and exhibit a lack of transparency. In contrast, a client purchasing a fixed indexed annuity from an insurance carrier will have a minimum guaranteed contract value and guaranteed income, no risk of losing their premium, with all guarantees backed by the insurance carrier as well as the appropriate state guaranty fund. Additionally, in order to purchase an annuity, the client is given exhaustive disclosure before the annuity is purchased to provide a clarity of understanding of return and timing and clear knowledge of all cost and fees associated. And, at time of annuity policy delivery, the customer has the right to receive a full refund under the "free look" provision, which typically lasts for 10 to 30 days.

It is our understanding that Registered Investment Advisors must maintain even less capital than Broker-Dealers by comparison. According to the National Association of Securities Administrators Association model rule, registered investment advisors need only maintain $10,000 to $35,000 of net worth (not reserved capital). 8 RIA firms, like BrokerDealers, sell investment products and advisory services that can result in investment losses to the consumer. In contrast, fixed annuity customers are guaranteed to never have losses due to market declines and have guarantees backed by highly regulated insurance carriers

7 See SEC Financial Responsibility Rules, Appendix 11, at https://www.sec.gov/about/offices/oia/oia _market/key _rules.pdf 8 See NASAA Minimum Financial Requirements For Investment Advisers Model Rule 202 ( d)-1 at http:/ lwww. nasaa. org/wp-content/uploads/20 11/07 /!A -Model-Rule-MinimumFinancial-Requirements.pdf

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whose financials are analyzed rated and accessible by ratings companies such as S&P and Moody.

Despite the fact that the Broker-Dealers and RIAs preside over much riskier product sales, this Proposed Exemption will impose a capital/insurance requirement that dwarfs any similar requirement for a broker-dealer or registered investment advisor. Additionally, the Proposed Exemption missed a critical step in its evaluation and provision construction by not comparing the capital/insurance requirement to IMO revenue, instead just relying on premium. IMOs, like independent agents, never possess funds from customers, rather all premiums are paid directly to insurance carriers. Premium volume is not a fair indicator of the financial wherewithal of an IMO or its potential ability to maintain a compliance structure for independent agents. Based on the similar capital (or theoretical insurance) requirements, we estimate that larger IMOs who meet the $1.5 billion threshold will have to maintain $1 of reserved capital for every $2 in armual gross revenue to meet this requirement. Conversely, we similarly estimate that the largest broker dealers, who can sell risky and non-guaranteed products like non-traded REITs, has to maintain in reserve $1 in capital for every $17,000 of armual gross revenue. And for RIA firms needing to only maintain just $35,000, the largest firm by AUM size would only need to maintain $1 in net worth for every $2.8 million in AUM. This outcome is inequitable, unfair, and certainly demonstrates a lack of study into what would be similarly situated firms in the industry. Allowing the requirement to continue would be equivalent to picking winners and losers within the retirement investment space and destructive to the free enterprise system our country and its regulatory bodies have sought to protect.

This result demonstrates a clear lack of understanding by the previous administration, not only of the products themselves, but also of armuities compared to other products, like securities. The 1% of premium level is unreasonable and arbitrary. The comments did not mention how much of premium relates to revenue. Setting the level at I% of premium would nearly reach a level where a significant portion of all revenue would have to be dedicated to the capital requirement or insurance policy.

V. Information contained within the Department's "Supporting Statement for Paperwork Reduction Act of 1995" contains many inaccuraciesdemonstrating the need for additional time for further review

We also wish to comment on the Supporting Statement for Paperwork reduction Act of 1995 Submissions the Department of Labor provided to the Office of Management and Budget dated January 9, 2017 as part of the Information Collection Review process for this Proposed Exemption.9 We have grave concerns that this Supporting Statement woefully underestimates the costs to implement the exemption, the practical impact to the industry, and the impossible time to execute the compliance steps before April I 0, 2017. This document illustrates that the Department failed to conduct a thorough analysis of the fixed armuity marketplace, and the impact to IMOs and independent agents.

9 See IMO Exemption Supporting Statement 1-9-17-c/ean.docx, OMB Control Number 121 0-NEW. at https://www.reginfo.gov/public/do/PRA ViewDocument?ref nbr-20 1701-1210-005.

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A workable exemption allowing independent insurance agents to continue selling fixed indexed annuities is imperative to avoid the impending disaster that will ensue without an exemption. As mentioned earlier, no insurance carrier has publicly stated that they will sign a best interest contract for independent agents. As a result, some IMOs had filed for individual PTEs which appears to have been converted by the Department into a proposed class-wide exemption for IMOs to serve as an approved Financial Institution for independent agents. We agree that a workable exemption must be fashioned for independent agents, which represent 62% of the $61 billion 10 in fixed indexed annuity sales in 2016. However, the Proposed Exemption and Supporting Statement demonstrate the Department should undertake a more exhaustive review and open consideration from stakeholders to properly create a workable exemption for agents.

There seems to be a fundamental misunderstanding by the Department of what role an IMO serves in the marketplace. As further described above, IMOs do not have any contact or relationship with annuity customers, rather we serve the critical role of offering intermediary services for the insurance carriers and the independent agents. As such, IMOs are "fiduciaries" under the BICE since IMOs do not render advice to consumers. Further, the payment of remuneration for such intermediary services by the insurance carriers is no different than a variable annuity company paying its internal wholesaler distribution team or a third-party administrator for advertising or processing new business. IMOs do not operate as agent compliance organizations, yet are the lifeblood of indexed annuity business for cost -efficiency and independence reasons.

In addition, we take exception with the conclusory statement from the Supporting Statement stating "the exemption would allow IMOs, independent insurance agents, and insurance companies to receive compensation and other consideration in conjunction with the purchase of fixed annuities that, in the absence of an exemption, would not be permitted under ERISA and the Code." 11 This statement is simply inaccurate since insurance carriers and IMOs are able to earn compensation and other consideration under the BICE and without the BICE without violating ERISA or the Code. Insurance carriers and IMOs who do not agree to serve as "fiduciaries" under the BICE are still free to earn compensation since they do not satisfy the conditions regulating their compensation.

If IMOs were forced to convert into a supervisory compliance organization to satisfY some of the Department's concerns of independent agents, then a much more thorough analysis and dialogue than the limited feedback from the cited 19 IMOs is justified. These 19 IMOs only represent an estimated 6% of the IMO marketplace of 300 IMOs and the short 30-day window for comments is unduly short. As of the last date of the comment period for this Proposed Exemption, only 15 comments were submitted, according to the DOL's website12

• This pales in comparison to the over 3,000 comments

10 See LIMRA Secure Retirement Institute U.S. Individual Annuity Sales Survey (2016, 4th Quarter). 11 See IMO Exemption Supporting Statement 1-9-17-clean.docx. OMB Control Number 121 0-NEW. at https:/ /www.reginfo.gov/pub1ic/do/PRA ViewDocument?ref nbr-20170 1-1210-005. page 2. 12 See https://www.regu1ations.gov/docket?D-EBSA-2016-0026.

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the Department received with the BICE rule. A hasty rule with little input from stakeholders will lead to an unworkable exemption for independent agents. As a result, the Department should immediately consider a delay of the applicability date of the BICE and this Proposed Exemption.

* * * * *

We understand that these requirements enumerated within the Proposed Exemption are not without purpose. We believe in the general concept of a "best interest" standard, but unfortunately, the BICE rule and the Proposed Exemption are written in such an unworkable and burdensome manner as to put the entire fixed annuity industry at risk. We believe there are alternative methods to accomplish the goals of a "best interest" standard without devastating small businesses and consumers. The Department should delay the applicability date and work with our industry, which knows best what potential effects will be, to conduct an adequate review of the entire rule and the Proposed Exemption in order devise to a practical solution that protects consumers and preserves the viability of this desperately needed guaranteed retirement income industry. Such a delay is fully warranted based on the demonstrated dislocation for the industry and harm that will occur to the consumer. Robust regulatory consumer protections will continue to be applied and enforced during the Administration's review,justifying a thoughtful reconsideration of the Proposed Exemption and the Fiduciary Rule in its entirety. The fixed annuity industry and the fixed annuity customers deserve more time to engage in meaningful dialogue with policyholders and other stakeholders to avoid a cataclysmic impact.

Thank you in advance for considering these comments. If you have any questions or if we can be of assistance, please feel free to contact me.

Sincerely,

President & Partner CreativeOne Marketing Corporation

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