Employment Law Daily DOL will defend fiduciary rule, but not ban on class arbitration waivers
Monday, July 10, 2017

DOL will defend fiduciary rule, but not ban on class arbitration waivers

By Pamela Wolf, J.D.

The Trump Administration’s Labor Department, headed by Alexander Acosta, is backing off only one part of the controversial “fiduciary rule” under scrutiny in the Fifth Circuit Court of Appeals—a prohibition against contract clauses that would waive an investor’s right to participate in class litigation. Given the change in administration and what increasingly appears o be a more business-friendly environment, there has been much speculation about whether the “new” Labor Department would stand behind the Obama-era regulation and its requirement that retirement advisors conform to certain measures aimed at eliminating conflicts of interest between advisors and their clients.

Controversial rule. The final rule was published in the Federal Register on April 8, 2016; it became effective June 7, 2016. The rulemaking included a new Best Interest Contract Exemption (BICE) and amendments to the prohibited-transaction provisions under ERISA and the Internal Revenue Code. The rule was initially slated to be applicable as of April 10, 2017. Under the DOL’s May 22 announcement of a temporary enforcement policy, on June 9 investment advice providers to retirement savers became “fiduciaries,” and the “impartial conduct standards” became requirements of the principle transaction exemptions (PTEs) of the final rule. Other exemption conditions originally scheduled to become applicable on April 10 were to be delayed to January 1, 2018, while the DOL continues to conduct an ongoing examination of the rule as required under a presidential directive.

Appeal of Texas court ruling. In Chamber of Commerce of the United States of America v. Hugler, a federal court in Texas refused to delay implementation of the fiduciary rule for retirement account advisers pending an attempt by the U.S. Chamber of Commerce and others to resurrect their previously unsuccessful legal challenges to the rule. Noting that the DOL had indicated it might delay the rule’s applicability date and would postpone enforcement, and also finding a low likelihood of success on the merits, the court denied the plaintiffs’ motion for an emergency injunction pending appeal.

The plaintiffs had turned to the Fifth Circuit on February 9 to appeal the district court’s decision denying the injunction. They filed their opening brief on May 2. The case is scheduled for oral argument July 31.

According to the appellee’s brief filed by the DOL, the appeal presents the issue of whether the department’s revised interpretation of statutory language defining individuals as fiduciaries “to the extent” they “render[] investment advice for a fee or other compensation, direct or indirect” was a reasonable. The appeal also focuses on whether the BICE is a lawful exercise of DOL’s exemption authority or impermissibly creates a cause of action; whether one of the exemption’s conditions is precluded by the Federal Arbitration Act; and whether the DOL’s decision to require prohibited transactions involving certain annuities to satisfy the exemption was arbitrary or capricious. The plaintiffs also raise First Amendment challenges.

DOL changes course on arbitration issue. The DOL’s brief supports the district court’s rejection of the plaintiffs’ arguments with one exception pertaining to the arbitration waiver: “The government no longer defends that condition in light of the Acting Solicitor General’s construction of the Federal Arbitration Act in a case pending before the Supreme Court, but that condition is severable from the remainder of the fiduciary rule, as the rule itself makes clear,” the brief states.

Under the BICE, to qualify for relief from the prohibited-transaction provisions in ERISA and the Code, contracts between fiduciaries to IRAs and investors cannot waive the investors’ right to participate in class litigation, the DOL noted. “Fiduciaries are therefore deprived of the benefits of the exemption insofar as they enter into arbitration agreements that prevent investors from participating in class-action litigation,” the department wrote.

The plaintiffs contend that this anti-arbitration condition runs afoul of the Federal Arbitration Act. The DOL apparently agreed, stating, “In light of the position adopted by the Acting Solicitor General in NLRB v. Murphy Oil USA, Inc.,” which is currently pending in the Supreme Court, “the government is no longer defending this specific condition. But given DOL’s finding that it would have issued the exemption even without its arbitration-specific provisions … and given the fact that the exemption is otherwise a lawful exercise of DOL’s exemption authority … invalidation of the anti-arbitration condition does not justify invalidation of the [BICE] or of the fiduciary rule as a whole.”

On June 16, the Department of Justice’s Office of the Solicitor General left the National Labor Relations Board on its own in its writ of certiorari challenging class action waivers in employment arbitration agreements. Not only is the NLRB on its own, but the Solicitor General is taking an opposing position in the amicus curiae brief it filed in the case.

In NLRB v. Murphy Oil USA, Inc. (No. 16-307), along with two other cases, Epic Systems Corporation v. Lewis (No. 16-285) and Ernst and Young LLP v. Morris (No. 16-300), the Justices will resolve the question of whether arbitration agreements that bar employees from pursuing work-related claims on a collective or class basis in any forum violate the National Labor Relations Act.

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