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Extension of Fiduciary Rule Transition Period Likely Official End of November

Thrivent wins injunction on anti-arbitration clause.

Update on the Fiduciary Rule Delay

On November 1, the White House Office of Management and Budget (OMB) received a much-anticipated notice from the US Department of Labor (DOL) named “18-Month Extension of Transition Period and Delay of Applicability Dates; Best Interest Contract Exemption; Class Exemption for Principal Transactions; PTE 84-24.” Although the details of the notice are not yet known (and we have seen some surprises in the past), the title suggests that the conditions of the named exemptions that are currently scheduled to become applicable on January 1, 2018, will be delayed by 18 months to July 1, 2019, as the DOL had originally proposed in August.

But, the delay is not official until the OMB approves it and the DOL publishes the notice in the Federal Register. In a recent court filing in the Thrivent litigation against the fiduciary rule (discussed below), the DOL indicated that this process typically takes about three weeks—in which case the delay will be final roughly on November 22—but the process may also be longer or shorter. As such, there may be continued uncertainty about whether and when the delay will be finalized, what the delay looks like, and what financial institutions should do now.

Here are some suggestions for next steps:

  • Contingency planningBased on the DOL’s statements and the ongoing reevaluation of the fiduciary rule, we are cautiously optimistic that the delay will be ultimately finalized. However, a number of the exemptions’ conditions, including the negative consent contracts and transaction and web disclosures, may require significant lead times to prepare and deliver to customers. As such, financial institutions may want to develop a plan for how they would comply with these conditions if the delay is not finalized when and as expected.

  • Consider seeking additional non-enforcement relief. The DOL’s and Internal Revenue Service’s current broad non-enforcement policy, issued in FAB 2017-02, ends on January 1, 2018 (though it may be extended in connection with the delay once it is finalized). Financial institutions may want to consider whether obtaining additional non-enforcement relief would be helpful to cover any potential “gap period” where the conditions of the exemptions become temporarily applicable because the delay is not finalized by January 1. This could be modeled after the relief the DOL provided in FAB 2017-01 with respect to the uncertainty surrounding the delay of the fiduciary rule’s original April 10, 2017 applicability date. If the DOL is willing to provide such relief, it may ease some pressure on financial institutions that are weighing the risks of whether to implement compliance with conditions that are likely to be delayed and help financial institutions in their contingency planning efforts.

Injunction for Thrivent Against Enforcement of Anti-Arbitration Provision

On November 3, the US District Court for the District of Minnesota issued a preliminary injunction enjoining the implementation and enforcement of the Best-Interest Contract (BIC) Exemption’s anti-arbitration condition against Thrivent Financial for Lutherans, the plaintiff in the case. The court issued the preliminary injunction despite the fact that the DOL had conceded in the case that the anti-arbitration provision violates the Federal Arbitration Act, finding that “[n]otwithstanding DOL’s current efforts to extend the BIC Exemption’s applicability date . . . the current state of regulatory limbo threatens Thrivent with [irreparable] harm.” The provision in question, now unenforceable against Thrivent, would prohibit financial institutions from contractually requiring customers to waive or qualify their rights to pursue class actions in courts. At the same time, the court stayed the litigation in light of the DOL’s ongoing reassessment of the BIC Exemption.

It is important to note that the injunction only applies to the DOL and Thrivent, and is only with respect to the anti-arbitration provision—not the fiduciary rule itself or other conditions of the BIC Exemption. Further, regardless of both the DOL’s now-stated position regarding the BIC Exemption anti-arbitration requirement being in violation of the Federal Arbitration Act and the court’s ruling in this case, the position of the Financial Industry Regulatory Authority (FINRA) has historically been that entities subject to its jurisdiction cannot include provisions in pre-dispute arbitration agreements that prevent customers from participating in class actions. See In re Dep’t of Enforcement v. Charles Schwab & Co, 2014 WL 1665738 (FINRA Bd. 2014). Therefore, there remains a question as to whether the elimination of this provision would have any practical impact on FINRA members acting in their capacity as broker-dealers.

We will continue to monitor further developments in this area and keep you informed.

Copyright © 2017 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

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About this Author

Daniel R. Kleinman Morgan Lewis Washington DC fiduciary law, Employee Retirement Income Security Act, ERISA attorney
Partner

Daniel R. Kleinman is a partner in Morgan Lewis's Investment Management and Securities Industry Practice and a member of the ERISA Fiduciary Services Group. Mr. Kleinman's practice focuses on the fiduciary responsibilities provisions (Title I) of the Employee Retirement Income Security Act and the related tax, corporate and securities laws in connection with the structuring and marketing of investment products (including private equity and hedge funds) and financial services to employee benefit plans. He also handles issues with respect to the regulation of broker-dealers and investment...

202-739-5143
Michael B. Richman, Morgan Lewis, Washiington DC, Employee Retirement Income Security Act lawyer,  ERISA Attorney
Partner

Michael B. Richman is of  Morgan Lewis's Employee Benefits and Executive Compensation Practice. In addition to employee benefits, Mr. Richman's practice includes the investment management and securities areas. His principal focus is on matters under the ERISA fiduciary responsibility rules. These have included fiduciary governance of ERISA plans, prohibited transaction issues in proposed transactions and transactions under government investigation, and preparing requests to the U.S. Department of Labor for prohibited transaction exemptions and advisory opinions. Mr. Richman has also worked on ERISA compliance for investment funds and investment managers and plan administrative matters.

Michael B. Richman counsels clients on the fiduciary responsibility rules under the Employee Retirement Income Security Act (ERISA), including the ERISA prohibited transaction rules. He advises plan sponsors on investment matters for defined benefit and defined contribution plans. He also counsels banks, investment adviser firms, and broker-dealer firms on ERISA compliance for ERISA plan separately-managed accounts, collective investment funds, private funds, and other arrangements. Additionally, he provides guidance to IRA custodians on permissible IRA investments and investment restrictions.

202-739-5036