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Court Grants Preliminary Injunction Against Dol; Department Declines To Defend Fiduciary Rule And Exemptions

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  • Posted on: Nov 29 2017

On November 3, 2017, Thrivent Financial for Lutherans (“Thrivent”) obtained a preliminary injunction that temporarily restrains the Department of Labor (the “Department” or the “DOL”) from enforcing an anti-arbitration provision in an exemption to the DOL’s fiduciary duty rule (the “Fiduciary Rule” or the “Rule”) against Thrivent. See Thrivent Financial for Lutherans v. Acosta, Case No. 16-cv-03289 (SRN/DTS) (D. Minn. Nov. 3, 2017). (Here.)

The decision was issued days after the DOL filed a rule with the Office of Management and Budget (“OMB”) for an 18-month delay of the Fiduciary Rule. (Here.) The anti-arbitration provision, which restricts financial advisers from requiring retirement investors to waive their right to class litigation, is part of the Rule’s best-interest-contract exemption (“BICE” or “BIC Exemption”).

An Overview of The Fiduciary Rule

Retirement investment advice is governed by different regulatory and supervisory regimes, including the federal securities laws, state insurance regulation, industry self-regulatory bodies, and the Employee Retirement Income Security Act of 1974 (“ERISA”). Among other requirements, ERISA prohibits investment advisers classified as “fiduciaries” from engaging in conduct that constitutes a conflict of interest. Under the ERISA statute, a fiduciary is defined as a person or entity that “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so. . ..” 29 U.S.C. § 1002(21)(A)(ii).

Pursuant to statute and executive order, the DOL has been granted interpretive, rulemaking, and exemption authority for the “fiduciary” definition and prohibited transaction provisions, both in ERISA and the parallel provisions of the Internal Revenue Code. On April 8, 2016, pursuant to this rule-making authority, the DOL expanded the definition of “fiduciary,” as well as the type of retirement advice, covered by the ERISA statute with the Fiduciary Rule.  Under the Rule, an advisor provides investment advice if s/he makes “recommendations” about “securities or other investment property,” including recommendations with respect to rollovers, transfers, or distributions from a plan or IRA. See 29 C.F.R. § 2510.03-21(a)(1). Fiduciaries that engage in prohibited transactions are subject to an excise tax equal to fifteen percent of the amount of the prohibited transaction. See I.R.C. § 4975(a). If the prohibited transaction is not corrected within the tax year, however, it is further subject to a tax “equal to 100 percent of the amount involved.” Id. § 4975(b).

To ameliorate the harshness of the Rule, the DOL promulgated a number of exemptions that permit qualifying entities to continue to receive certain forms of compensation (such as commissions), and engage in otherwise prohibited transactions, without incurring punitive taxes. One of those exemptions is the BIC Exemption. To qualify for the BIC Exemption, investment advisors and their firms must agree to a number of conditions that comport with fundamental fiduciary standards. With regard to IRA investors, the BIC Exemption mandates that these conditions be contained in a contract between the financial institution and the retirement investor. While the conditions permit these contracts to include individual arbitration agreements, the BIC 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.” As originally contemplated by the DOL, investment advisors and their firms wishing to avail themselves of the BIC Exemption must provide such contracts by January 1, 2018.

(This Blog has written about the Fiduciary Rule here and here.)

The DOL Seeks to Extend the Effective Date of the Rule and Certain Exemptions

The Fiduciary Rule was scheduled to become effective in 2017, with the first phase to be implemented on April 10, 2017. However, on March 10, 2017, the DOL filed a notice proposing to delay the start of the Rule from April 10, 2017, to June 9, 2017. (Here.) On May 22, 2017, Alexander Acosta, the Secretary of Labor, confirmed that the first phase of the Rule would go into effect on June 9, 2017, as scheduled. During the transition period from June 9, 2017, until January 1, 2018, fiduciaries relying on exemptions to the Rule, such as the BIC Exemption, are required to adhere to a “best interest” standard rather than the fiduciary duty standard found in the Rule.

On November 27, 2017, the DOL announced (here) an 18-month extension from January 1, 2018, to July 1, 2019, for the implementation of the next phase of the Rule and exemptions, and of the applicability of certain amendments to the principal transactions exemption. The extension concluded the process that the Department initiated on November 2, when it sent the proposed rule to the OMB for review.

(Note: The Treasury Department said in a report released on October 27, 2017 (here) that it supported the effort to delay implementation of the Rule pending further review by the Department, the Securities and Exchange Commission, and the states.)

In the press release, the Department said that it needed additional time “to consider public comments submitted pursuant to the Department’s July Request for Information, and the criteria set forth in the Presidential Memorandum of Feb. 3, 2017, including whether possible changes and alternatives to exemptions would be appropriate in light of the current comment record and potential input from, and action by the Securities and Exchange Commission, state insurance commissioners and other regulators.” In the February 3 memorandum, the President directed the Department to prepare an updated analysis of the likely impact of the Fiduciary Rule on access to retirement information and financial advice. (Discussed by this Blog here.)

The Department has also announced that during the period June 9, 2017 to July 1, 2019, it would not pursue claims against fiduciaries working in good faith to comply with the Fiduciary Rule and exemptions, or treat those fiduciaries as being in violation of the Fiduciary Rule and exemptions. This decision, which was also contained in the rule sent to the OMB earlier in the month, was relevant to the Court’s decision in Thrivent.

Thrivent Financial for Lutherans v. Acosta

Thrivent is a not-for-profit, member-owned and governed fraternal benefit society incorporated in Wisconsin. Pursuant to Wisconsin law, Thrivent is required to provide insurance benefits to its members. To meet this requirement, Thrivent offers a broad range of insurance and financial products and services, including traditional life insurance, annuities, disability insurance, long-term care coverage, mutual funds, retirement planning, and money management services.  Several of the products Thrivent offers are proprietary in nature, such as fixed indexed and fixed rate annuities. These latter offerings can be acquired through an IRA, in contrast to traditional life insurance products.

Many of Thrivent’s members are individuals and families of modest means. Because most of these members trade infrequently and do not need ongoing financial advice, Thrivent’s financial representatives work under a “transaction-based” compensation model (i.e., they receive a commission for each transaction). According to Thrivent, this model is more appropriate for most of its members than a fee-based model, where the investor pays compensation periodically based upon a percentage of the assets under management, or as a flat rate, regardless of whether transactions occur.

Since 1999, Thrivent has required disputes with members over insurance products to be resolved through its Member Dispute Resolution Program (“MDRP”). The MDRP provides for a multi-tiered dispute resolution process, escalating (if necessary) to binding arbitration based on the rules of the American Arbitration Association. The MDRP mandates that all mediation or arbitration be individual in nature – representative or class claims, whether arbitral or judicial, are expressly barred.

On September 29, 2016, Thrivent filed an action against the Department, asserting that the BIC Exemption’s bar on class action waivers violates the Federal Arbitration Act (“FAA”) and is unenforceable because it exceeds the DOL’s statutory authority. Thrivent sought a declaration that the class action waiver bar is in violation of the Administrative Procedure Act (“APA”) and the FAA and an injunction to enjoin its enforcement. Both parties agreed to proceed with summary judgment.

(Note: the parties agreed that Thrivent’s commission-based compensation of its financial representatives and its sale of proprietary insurance products to IRA holders were “prohibited transactions” under the Fiduciary Rule.)

Initially, the DOL argued that the ban against class-action waivers did not violate the FAA, and that, pursuant to 28 U.S.C. § 1108(a), the DOL had the authority to condition exemptions on adherence to certain standards, including allowing class actions.  However, shortly after the submissions, but prior to the hearing on the motions, the DOL requested a stay of the proceedings due to the President’s February 3, 2017, memorandum to the Secretary of Labor, directing him to examine the Fiduciary Rule and to prepare an updated legal and financial analysis concerning certain aspects of the Rule. The DOL stated that as part of its review process, “Plaintiff may be afforded another opportunity to seek an administrative change to the [applicable portion of the Rule]. And the Department could act to revise or rescind the challenged provision.”

Shortly thereafter, on March 1, 2017, the DOL informed the Court that, among other things, the Department had proposed an extension of the April 10, 2017, applicability date for the Rule and exemptions, and initiated a 45-day comment period.

The Court declined to issue a stay at that time and heard argument on the summary judgment motions.

In July 2017, the DOL filed a notice of withdrawal of its cross-motion for summary judgment and its opposition to Thrivent’s summary judgment motion, explaining that “the Department no longer defends the one regulatory provision challenged in this action—the application of [BIC] Exemption § II(f)(2) to arbitration agreements [ ].” Also, the DOL renewed its request for a stay, arguing that because the challenged provision was not yet applicable to Thrivent, and the DOL was reassessing both the exemption and broader rulemaking, a stay would promote judicial economy and likewise conserve the parties’ resources.

Thrivent opposed the motion for a stay, arguing that neither the possibility of future regulatory changes nor the DOL’s change of legal position, supported a stay. Moreover, Thrivent asserted that while the DOJ failed to assert any hardship that it would suffer absent a stay, Thrivent would suffer irreparable harm if the Court granted the stay.

Shortly thereafter, Thrivent filed its motion for a preliminary injunction. Thrivent asked the Court to enjoin the Department, as well as all other federal agencies, from implementing or enforcing the BIC Exemption against Thrivent.

The Court’s Ruling

The Court granted Thrivent’s motion, finding that Thrivent satisfied the requirements necessary to obtain a preliminary injunction against the Department: (1) it was likely to succeed on the merits; (2) it would incur irreparable harm in the absence of injunctive relief; (3) the balance between the irreparable harm and the harm of injunctive relief weighed in Thrivent’s favor; and (4) injunctive relief was in the public interest.

Irreparable Harm

The Court found that Thrivent sufficiently demonstrated the threat of irreparable harm, “both now and in the future.” Noting the “DOL’s current efforts to extend the BIC Exemption’s applicability date,” the Court found that “the current state of regulatory limbo threatens Thrivent with harm that cannot be remedied monetarily.” The Court found that to comply with the applicability date of the anti-arbitration condition, Thrivent had to change its business model. Such changes, held the Court, “may irreparably disadvantage Thrivent against its competitors and with respect to its members.”

As to future harm, the Court found that the “likely harm to Thrivent’s reputation and goodwill,” “also exists in the future.” Thrivent argued that it could not comply with the BIC Exemption (which would allow it to continue paying commissions) because allowing class action litigation – a specific condition of the exemption – would undermine its core Christian values and damage its reputation and goodwill.

The Court also found that Thrivent demonstrated the likelihood of future harm with respect to compliance with state regulations, as well as the impact on business operations, due to the uncertainty surrounding the viability of the BIC Exemption.

Likelihood of Success

The Court found that Thrivent was likely to succeed on the merits because the DOL had conceded that the anti-arbitration condition in the BIC Exemption violated the FAA.

Balance of Harms and Public Interest

The Court found that these factors also weighed in Thrivent’s favor because the DOL would not suffer any harm, and the public interest would be served if the DOL was enjoined from enforcing an invalid rule.

The Court Issues a Stay

Given the DOL’s reassessment of the applicability of the BIC Exemption, the Court found that the Department “sufficiently demonstrated the need for a stay.” Granting the stay, said the Court, would “allow the administrative process to fully develop, possibly resolving th[e] dispute, and thereby promoting judicial economy.” And, in light the injunctive relief awarded, the Court noted that “Thrivent would not be prejudiced by the entry of a stay.”


The combination of the DOL’s rule extending implementation of the Fiduciary Rule and the exemptions, the DOL’s concession that the BIC Exemption cannot be reconciled with the FAA, and Judge Nelson’s grant of a preliminary injunction in favor of Thrivent makes it exceedingly unlikely that full implementation of the Rule or the BICE will occur.  Indeed, Micah Hauptman, financial services counsel at the Consumer Federation of America, stated: “In our view, this is not a delay. It’s an effective repeal of the rule.” If the DOL does not implement the next phase of the Rule and exemptions, then the transition versions of the Rule and exemptions will continue to apply unless other rules are proposed and adopted.

Under the transition rules, investment advisers and their firms are required to provide investment advice that is in the best interests of their retirement investors (i.e., provide investment advice with skill, care, and prudence, without regard to the financial interests of the advisor, and consistent with the objectives, needs and financial circumstances of the client); charge reasonable compensation; and refrain from making false and misleading statements about investments, compensation, and conflicts of interest. The DOL has cautioned financial advisers and their firms that, notwithstanding the delay and uncertainty surrounding the Rule and exemptions, the Department expects them to “to adopt such policies and procedures as they reasonably conclude are necessary to ensure” compliance with the foregoing standards.

This Blog will continue to monitor the implementation of the Fiduciary Rule and related exemptions and provide updates when they become available.

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