Thrivent Financial for Lutherans became the sixth plaintiff to lob a complaint against the Department of Labor’s fiduciary rule when the insurer filed a suit in late September challenging the class-action waiver requirement under the rule’s best interest contract exemption, or BICE.
Thrivent’s case, filed in U.S. District Court for the District of Minnesota, takes issue with DOL’s adoption of the BICE to the extent that it requires Thrivent to abandon its longstanding commitment to alternative dispute resolution, and that DOL’s rule would also require its sales reps to become fiduciaries.
BICE, the complaint states, would, by its terms and in its effect, require Thrivent “either to cease conducting certain business that is beneficial to its members or to abandon its longstanding commitment to resolving member disputes amicably and through private, one-on-one mediation and arbitration.”
Thrivent argues that it differs from other commercial stock and mutual life insurance companies in that it’s a membership-owned and member-governed fraternal benefit society.
For more than 15 years, the complaint states, “Thrivent’s Articles of Incorporation and Bylaws have therefore required that disputes with members related to insurance products be resolved through a one-on-one alternative dispute resolution process that includes mediation and culminates in arbitration, if necessary.”
To avail itself of the BICE, however, Thrivent “would be forced to agree contractually with its customers that they could pursue a breach of contract action against Thrivent and that they could participate in judicial class actions against Thrivent,” the complaint states.
Thrivent argues that no provision exists within the Employee Retirement Income Security Act that indicates Congress’ intent to create a class-action remedy that must be exclusively pursued in a judicial forum.
“To the extent Congress has spoken to the issue, it has unequivocally stated in the Federal Arbitration Act that private arbitration agreements must be honored as a preferred means of resolving disputes,” the complaint states.
“As a result, in purporting to adopt the BIC Exemption, DOL has exceeded its authority” under the Administrative Procedures Act.
Under DOL’s rule, Thrivent’s sales reps, who regularly offer proprietary investment products for IRAs and rollovers from ERISA plans, would be redefined as fiduciaries under ERISA and the tax code, the complaint states.
“Thrivent’s longstanding practice of paying these representatives on a commission basis would—for the first time—be treated as a ‘prohibited transaction’ under ERISA.”
Thrivent argued if it were to continue to engage in such transactions, “it would be subject to steep and serious penalties under federal law. As a result, without an exemption, the new rule would almost completely eliminate Thrivent’s ability to offer financial products to its members in connection with their retirement planning through IRAs.”
But Micah Hauptman, financial services counsel at the Consumer Federation of America, argues that Thrivent’s complaint “is another case in which an industry participant is grasping at straws to evade accountability for its advice.”
Said Hauptman, “If Thrivent or any other industry participant wants to take advantage of the BICE so they can receive what would otherwise be prohibited compensation, they can’t include provisions that restrict their customers’ rights to band together when harmed. This is not the same as if the DOL prohibited such restrictions outright.”
Judge Randolph Moss, U.S. District judge for the District of Columbia, heard oral arguments on Aug. 25 in the first hearing in the case brought by the National Association for Fixed Annuities. He has yet to render a decision.
NAFA charges that DOL’s fiduciary rule pre-empts state law and that the rule improperly created a private right of action that could set up class-action lawsuits against insurance companies and agents.
The current distribution system for fixed indexed annuities would also have to be reworked under the rule, NAFA maintained, since DOL threw fixed indexed annuities under the BICE.
Erin Sweeney, of Counsel at Miller & Chevalier and a former DOL attorney, observes that since hearing oral arguments on Aug. 25, Moss has issued 14 decisions on topics ranging from prisoner claims, actions on foreclosure, back pay calculations, discrimination actions, insurance claims and breach of contract. ”Noticeably absent” from the list is a ruling on the preliminary injunction motion filed by NAFA, she said. “All briefing in the matter is complete and both parties filed supplemental notices addressing issues raised by review of the hearing transcript. The absence of a ruling is surprising, especially given Judge Moss’ previous history of ruling on preliminary injunction motions within 30 days after the preliminary injunction hearing.”
Indeed, in oral arguments on Sept. 23 in the second case before Judge Daniel Crabtree in the District of Kansas, attorneys for insurer Market Synergy argued Labor failed to prove the current state-based regulation of fixed-indexed annuities is broken, and that the judge should “hit the pause” button on including them in the rule. Crabtree also has not rendered a decision.
Next up will be Nov. 17 oral arguments from both the DOL and lawyers representing nine plaintiffs in the three lawsuits filed in Texas against DOL’s rule—which have been consolidated.
While rulings have yet to be rendered in the NAFA and Market Synergy cases, and with the fiduciary rule’s first compliance date hitting on April 10, 2017, “the courts have been made aware that this [fiduciary rule] is a real world kind of [regulation], and if we’re going to comply…we have to get going,” Allison Wielobob, counsel with Sutherland Asbill & Brennan, said on a recent ThinkAdvisor webcast to discuss the rule.
Despite the impending litigation against DOL’s fiduciary rule, “the responsible business decision [is to] not slow down efforts to comply with the rule,” Wielobob said.
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