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DOL can’t enforce fiduciary rule exception’s arbitration bar

By Lisa Milam-Perez, J.D.

A nonprofit financial services society challenging the arbitration restrictions in the DOL fiduciary rule’s Best Interest Contract (BIC) Exemption was entitled to a preliminary injunction barring the federal government from enforcing the provision. Notwithstanding the DOL’s change of heart on the fiduciary rule itself, and its stated intention not to enforce the restrictions in question, the dispute was not moot, and the current “state of regulatory limbo” raised the prospect of irreparable harm for the plaintiff absent a preliminary injunction, a federal court in Minnesota held. The court also granted the DOL’s request for a stay in the case, though. While the plaintiff would have preferred a summary judgment ruling on the merits and permanent injunctive relief, it conceded to the stay, so long as the preliminary injunction was in place (Thrivent Financial for Lutherans v. Acosta, November 3, 2017, Nelson, S.).

Fiduciary rule challenge. Thrivent is a nonprofit, 2.5 million-member benefit society that it says is “bound by the common bond of Christianity.” Thrivent provides insurance benefits to its members, including fixed indexed and fixed rate annuities, which can be acquired through an IRA, in contrast to traditional life insurance products. Thrivent’s retirement investment advice is governed by ERISA, which prohibits investment advisers classified as “fiduciaries” from engaging in actions that would constitute a conflict of interest.

Under the 2016 DOL fiduciary rule, which expanded the definition of “fiduciary” and the type of retirement advice covered by the rule’s protections, Thrivent’s commission structure and its sale of proprietary insurance products would be rendered prohibited transactions. However, the DOL promulgated the “BIC Exemption” to permit certain qualifying entities, like Thrivent, to continue to receive commissions and engage in prohibited transactions without incurring taxes. But there was a catch: The exemption is not available for contracts that waive or qualify the investor’s right “to bring or participate in a class action or other representative action in court in a dispute with the Adviser or Financial Institution.”

Thrivent requires that members resolve any disputes related to insurance products through its Member Dispute Resolution Program (MDRP), which mandates that all mediation or arbitration be individual in nature, and expressly bars representative or class claims of any sort, whether arbitral or judicial. According to Thrivent, its “commitment to individual arbitration is ‘important to the membership because it reflects Thrivent’s Christian Common Bond, helps preserve members’ fraternal relationships, and avoids protracted and adversarial litigation that could undermine Thrivent’s core mission.’” Consequently, it is unwilling to change the terms of its MDRP policy, and the arbitration restriction in the BIC Exemption would prevent it from continuing to offer its insurance products to members without facing penalties.

Thrivent filed suit under the Administrative Procedure Act and the Federal Arbitration Act, alleging that the BIC Exemption’s bar on class waivers violates the FAA and is unenforceable. A number of amici weighed in here to the contrary, and opposing Thrivent’s motion for declaratory relief and a permanent injunction prohibiting the federal government from implementing or enforcing the BIC Exemption against it.

DOL reconsiders fiduciary rule. Initially, the DOL challenged Thrivent’s contention that class waivers violated the FAA, and its assertion that the agency lacked authority to condition exemptions to the fiduciary rule on allowing class actions. However, President Trump in February directed the Secretary of Labor to reconsider the fiduciary rule with an eye to revising or rescinding it, including the provision challenged here. In July, the DOL withdrew its cross-motion for summary judgment in the case and its opposition to Thrivent’s competing summary judgment motion, noting that the agency no longer intended to defend the arbitration provision of the BIC Exemption. The DOL sought a stay, given that it was reassessing the exemption and the fiduciary rule as a whole.

Still a live dispute. On November 1, the DOL submitted a proposed notice of final amendments to the OMB, including a revision to the agency’s proposal to delay the applicability date of the BIC Exemption for 18 months. Also, the DOL now concedes that the arbitration restriction in the BIC Exemption contravenes the FAA, and says it will not enforce that provision against Thrivent; in fact, it is currently in the middle of coordinating a non-enforcement policy with the IRS. However, this did not convince the court the case was moot. As Thrivent argued, if the applicability date is not delayed as proposed, a retirement investor could assert an ERISA enforcement claim against it. Also, even if the DOL’s assurances of non-enforcement carried legal force, Thrivent was still at risk of non-compliance. Therefore, an ongoing controversy continues to exist.

Irreparable harm. Thrivent asserts it now faces the unsavory choice of either complying with the anti-arbitration condition and abandoning its MDRP policy or facing the risks of noncompliance, including significant excise taxes and private class action lawsuits. It argues that this “intrusion upon its business practices” could harm its reputation and customer goodwill. Further, even though the DOL is currently not enforcing the anti-arbitration condition, Thrivent presently faces the continued uncertainty and costs of compliance, including the expense of providing notice of the BIC terms to its members, amending its MDRP bylaws, filing those amendments with the state insurance commissioner, and publishing the changes in the forthcoming issue of its monthly magazine.

Thrivent sufficiently demonstrated the threat of irreparable harm, both now and in the future, the court held. “While monetary loss alone does not warrant injunctive relief, the current state of regulatory limbo threatens Thrivent with harm that cannot be remedied monetarily,” it wrote. “In addition to the expenditure of time and money that these changes necessitate, undertaking such changes may irreparably disadvantage Thrivent against its competitors and with respect to its members.” Thus, the court rejected the DOL’s argument that, given its changed position on the fiduciary rule, Thrivent’s alleged harms were neither certain nor imminent.

Relief granted. Moreover, because the DOL has since conceded that the anti-arbitration condition of the BIC Exemption violates the FAA, Thrivent is likely to succeed on the merits of its challenge to the provision. Also, the balance of harms and public interest weigh in favor of injunctive relief barring enforcement of the concededly invalid rule. The court therefore preliminarily enjoined enforcement; while the injunction is in place, Thrivent cannot be deemed out of compliance with the BIC Exemption by virtue of its MDRP policy. In addition, the court granted the DOL’s motion for a stay of the litigation while the agency’s administrative process unfolds, and perhaps ultimately resolves the instant dispute.