Texas Federal Court Holds New DOL Regulations Do Not Violate the FAA
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The Northern District of Texas has ruled new Department of Labor (“DOL”) regulations that would require financial institutions to preserve an investor’s right to bring or participate in a class action do not violate the Federal Arbitration Act (“FAA”). In Chamber of Commerce of the United States of America, et al. v. U.S. Department of Labor, et al., No. 3:16-cv-01476 (N.D. Texas, February 8, 2017), a group of plaintiffs brought a lawsuit challenging new DOL regulations that are scheduled to become effective on April 10, 2017.
The new rules modify the regulation of conflicts of interest in the market for retirement investment advice, and consist of: 1) a new definition of “fiduciary” under ERISA and the Code; 2) an amendment to, and partial revocation of, PTE 84-24; and 3) the creation of the Best Interest Contract Exemption (“BICE”). The first rule revises the definition of “fiduciary” under ERISA and the Code, and eliminates the condition that investment advice must be provided “on a regular basis” to trigger fiduciary duties. The second rule amends PTE 84-24, which provides exemptive relief to fiduciaries who receive third party compensation for transactions involving an ERISA plan or individual retirement account (“IRA”). The DOL excluded those selling fixed indexed annuities (“FIAs”) as eligible for exemptions under amended PTE 84-24. The third rule, BICE, creates a new exemption for FIAs and variable annuities, and allows fiduciaries to receive commissions on the sale of such annuities only if they adhere to certain conditions, including signing a written contract with the consumer that contains enumerated provisions.
In addition:
Read original articleExemptive relief under BICE is not available if the written contract includes: 1) “provisions disclaiming or otherwise limiting liability of the Adviser or Financial Institution for a violation of the contract’s terms,” 2) a provision that “waives or qualifies [the] right to bring or participate in a class action or other representative action,” or 3) a liquidated damages provision. The contract may, however, include provisions that reasonably agree to arbitrate individual claims, knowingly waive punitive damages, and waive the right to rescission of recommended transactions. Such provisions are permitted “to the extent such a waiver is permissible under applicable state or federal law.”
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