Enforcement of DOL’s New Best Interest Contract Exemption’s Anti-Arbitration Condition is Enjoined

Financial Services Regulatory   |   Labor & Employment   |   Life, Annuity, and Retirement Solutions   |   Securities Litigation and Enforcement   |   March 31, 2018
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A number of lawsuits have been brought challenging aspects of the United States Department of Labor’s "fiduciary rule," which expanded the definition of "fiduciary" of an employee benefit plan or individual retirement account as a result of giving investment advice for compensation to retirement investors. To provide relief from portions of the fiduciary rule, the Department promulgated several regulatory exemptions that would permit qualifying entities to receive certain forms of compensation and engage in otherwise prohibited transactions. One such exemption is the "Best Interest Contract Exemption." To qualify for that Exemption, affected financial institutions and professionals must agree to a number of conditions. These conditions must be contained in a contract between the financial institution and the retirement investor. While these contracts may include individual arbitration agreements, the Exemption is unavailable for contracts that waive or qualify the investor’s right to bring or participate in a class action or other representative action in court.

Most recently, via a March 2018 ruling, the United States Court of Appeal for the Fifth Circuit vacated the Department’s entire rulemaking package, including the Best Interest Contract Exemption. In a separate lawsuit in the United States District Court for the District of Minnesota, however, Thrivent Financial for Lutherans, had challenged the Exemption’s anti-arbitration condition. Thrivent has long required that disputes with its members related to its insurance products be resolved through its "Member Dispute Resolution Program." The Program provides for a multi-tiered dispute resolution process, escalating eventually (if necessary) to binding arbitration. All arbitration must be individual in nature; representative or class claims, arbitral or judicial, are barred. Thrivent contended that its commitment to individual arbitration was important to its membership because it reflects Thrivent’s "Christian Common Bond." Asserting that it could not currently comply with the Exemption’s requirements, Thrivent brought a suit under the Administrative Procedure Act. Thrivent argued that the Exemption’s requirement contravenes the Federal Arbitration Act, which reflects a federal policy favoring arbitral dispute resolution.

The Minnesota court granted Thrivent’s motion for preliminary injunction in a November 2017 order. The Department conceded that the Exemption’s anti-arbitration condition violates the Federal Arbitration Act. Further, Thrivent sufficiently demonstrated the threat of irreparable harm. Notwithstanding the Department’s efforts to extend the Exemption’s applicability date, regulated entities like Thrivent would likely incur undue expense to comply with conditions or requirements that the Department ultimately determines to revise or repeal. Given the Department’s reassessment of the Exemption, the court also stayed the action indefinitely pending the outcome of the ongoing regulatory process. The court, however, denied the parties’ cross-motions for summary judgment – the Department had withdrawn its own motion and Thrivent’s motion was denied without prejudice to its later refiling, if needed. Of course, it remains to be seen where this litigation might head given the Fifth Circuit’s vacatur of the entire rulemaking package.

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