Thrivent Turns Away DOL’s ‘Gift Horse’ in Lawsuit
July 20, 2017 by Emile Hallez
Thrivent’s lawyers were not amused by a letter from the DOL that appeared to deliver the fund provider a win in the lawsuit the company is pursuing against the agency.
The plaintiff issued a response in court Monday, asking that a letter the Department of Labor sent to the judge overseeing the case, as well as a proposed order in Thrivent’s favor that the agency made, be stricken from the record. The judge agreed with Thrivent, issuing on Tuesday an order for the DOL to submit the contents of the letter as a formal motion by July 27.
Thrivent’s objection concerned a last-minute letter the DOL sent on Friday to U.S. District Court Judge Susan Nelson, whom the agency asked to provide a stay in the case. The letter represented what could be considered at least a partial victory for Thrivent: In it, the DOL explained that it does not plan to enforce a component of the Best Interest Contract Exemption that prohibits arbitration agreements. That provision would have prevented brokers using the BIC exemption from preempting class-action litigation.
Changes that the DOL appears to be considering to its Best Interest Contract Exemption, which is at the heart of Thrivent’s case, could have far-reaching effects for product manufacturers far beyond Thrivent, including those developing new share classes and other products in response to the fiduciary rule, one lawyer says.
In its letter in the Thrivent case, the DOL even issued a proposed order for summary judgment in the plaintiff’s favor, at least pertaining to that portion of the BIC exemption, provided the judge did not plan to approve a stay in the case.
But the DOL did not take the appropriate steps to propose an order in court, namely through a motion. Such a step would require the agency to confer ahead of time with Thrivent, the plaintiff noted in its response.
“Defendants waited until 5:03 pm EDT on Friday, July 14, 2017, before alerting Thrivent’s counsel by e-mail that they would ‘shortly file a letter advising the court of [their] proposal,’” Thrivent stated in its motion. “Notwithstanding this late communication on a Friday, Thrivent responded just 12 minutes later, at 5:15 pm EDT, noting that defendants’ proposed letter ‘sounds like a motion’ about which the parties should meet and confer.”
The DOL first asked the court in February for a stay in the case, given the uncertainty of the rule’s future. The agency is accepting public comments through Friday about whether the arbitration component of the rule, and various others, should become enforceable by Jan. 1, 2018, as currently scheduled. At the direction of President Donald Trump, the DOL is in the larger process of reexamining its fiduciary rule and the accompanying BIC exemption.
“They want to stay the proceedings for judicial economy and [to] not argue over something that could later be changed,” says Jason Roberts, CEO of the Pension Resource Institute.
But the DOL’s indication that it does not intend to enforce the arbitration component of the rule hints that a major revision to the BIC exemption is likely, given that the component of the rule is essential to its enforcement, particularly done by the plaintiffs bar, through class-action litigation, Roberts says.
“This really underscores that that new policy will be a change, as it relates to the class action waivers,” Roberts says. “How does the BICE get revised without the class action wavier? How will that accomplish the goals of the underlying regulation, which was to hold financial institutions accountable to the warranties, the representations in that full BICE agreement?”
Such a revision could affect the demand for special share classes of funds that have been developed in anticipation of the rule, products designed to either keep commissions for brokers level or to allow them to set their own compensation, Roberts notes.
“So much of the teeth of the BICE was predicated on having a breach of contract claim that could be filed in state court, as opposed to arbitration,” he says.
Despite what appears to be a win for Thrivent, the plaintiff took a logical step, he says. Forcing the DOL go through the correct civil procedure would help the fund company protect its interests in the future, as well as those of other fund providers, as the letter the agency sent to the judge could much more easily be challenged than a formal action, he says.
“They need to make sure that the gift horse was appropriately delivered,” he says. “They’re saying, ‘We want a bigger win than that, and whatever win we get, we want it on the books in a way that is not subject to procedural defect.'”
But the agency’s conflicting priorities in the lawsuits complicate how it can defend itself, says George Gerstein, counsel at Stradley Ronon.
The DOL “is in the unenviable position of both defending the Obama-era fiduciary rule while simultaneously reviewing, and likely revising, the rule in accordance with President Trump’s directive,” Gerstein says. “I think the class action issue under the Best Interest Contract Exemption remains in play, and the DOL’s pronouncements in the recent litigation confirms that.”
