[This blog post was originally published in the Securities Arbitration Commentator blog. Republished with permission of and thanks to SAC!]
Toward the end of last year, I authored a blog post, Consumer and Employment Arbitration: Six Things to look for in 2018. Below were my views on what was coming in 2018, and how these predictions have turned out as we hit the year’s end What are the results? As Larry David says, “Pretty, pretty, pretty, pretty good.”
Predictions made a Year Ago:
- President Trump Still Likes Arbitration
- The Anti-Arbitration Legislation is Still (Mostly) Dead
- SCOTUS’ Support for Arbitration Will Still Continue Unabated
- Still Expect Dodd-Frank to be Repealed and Replaced
- Say Goodbye to the Department of Labor’s Fiduciary Rule
- The President Eventually Will Win the War over CFPB’s Leadership
I covered predictions 1 to 3 in a recent blog post. Here’s Part II. Spoiler alert: I’m still doing “pretty, pretty, pretty, pretty good.”
- Still Expect Dodd-Frank to be Repealed and Replaced
What I wrote: On June 8th [2017] the House of Representatives by a 233–186 strictly party-line vote approved the reintroduced Financial CHOICE Act. Not a single Democrat voted “Yea” and only one Republican – Rep. Walter Jones (NC) – voted “Nay.” Among other things, the 602-page Act (H.R. 10) would repeal and replace Dodd-Frank, and would eliminate the authority granted to both the CFPB and SEC to limit or eliminate predispute arbitration agreements, or set conditions for their use. Also, the Act would rename the Consumer Financial Protection Bureau the Consumer Law Enforcement Agency and transform it into an executive agency with a Director terminable at will by the President. The Senate has yet to act.
What I predicted: Sooner or later, Dodd-Frank will in word or deed be repealed and replaced this year with a statute along the lines of the Financial CHOICE Act (“FCA”) (H.R. 10). While the new law will incorporate some features of Dodd-Frank, the current law’s authority for SEC and CFPB to possibly develop regulations banning, limiting, or conditioning predispute arbitration clause use will not make the cut, in my view.
What happened? Mixed bag at best. The Senate Banking Committee held hearings on the FCA, but the full Senate did not act. There was conjecture in some parts that the Republicans would try to pass the bill in lame duck session, but it never happened. I doubt the new Democratic House will approve a reintroduced FCA, so this one is kaput.
It seems the Republicans instead adopted a strategy of “repeal by a thousand papercuts,” by passing bills aimed at discrete parts of Dodd-Frank. For example, President Trump on May 24th signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) partially rolling back some aspects of Dodd-Frank. The new law is much less far reaching than the FCA.
Other bills were introduced, such as the Financial Product Safety Commission Act of 2018 (H.R. 5266), that would have amended Dodd-Frank to restructure the Consumer Financial Protection Bureau (“CFPB”) to an SEC-like five-member independent commission. No more than three Commissioners could be from the same political party and as the Bill’s title implies, the CFPB would be renamed the “Financial Product Safety Commission.” H.R. 5266 had bipartisan co-sponsorship, but went nowhere and will expire with the 115th Congress on January 3.
- Say Goodbye to the Department of Labor’s Fiduciary Rule
What I wrote: The Department of Labor in April 2016 approved a Fiduciary Standard Rule for those providing investment advice in connection with retirement accounts. The regulation allows for use of a Best Interests Contract (“BIC”) with investors containing a predispute arbitration agreement, but class action waivers are not permitted. President Trump on February 3rd [2017] ordered the Secretary of Labor to undertake a review of the Rule, that had been scheduled to go into effect in phases starting April 10. DOL announced on April 4th that it was delaying for 60 days the Rule’s implementation. Thus, the first phase of the Fiduciary Standard Rule went into effect starting June 9thand a second phase was to be implemented January 2018.
DOL later filed a proposal to delay until July 2019 the planned January 2018 implementation of Phase II of the Rule (“18-Month Extension of Transition Period and Delay of Applicability Dates; Best Interest Contract Exemption; Class Exemption for Principal Transactions; PTE 84-24”). The delay became official on November 29 when a Notice was published in the Federal Register.[1]
What I predicted: The review ordered by the President almost a year ago will conclude that the DOL’s Fiduciary Standards Rule is confusing, costly, and duplicative. It will recommend the Rule be scrapped in favor of a unified Rule to be promulgated by the SEC.
What happened? Ding, dong, the DOL Fiduciary Rule is dead, and the SEC is moving ahead with its own regulation. The review ordered by President Trump is still not complete, but other events caused the Rule’s demise. What happened?
- In Chamber of Commerce of the United States v. Department of Labor,885 F.3d 360 (5th Cir. Mar. 15, 2018), a split Court vacated in its entirety the Department’s Fiduciary Standard Rule. Then, the Fifth Circuit on May 2 unanimously denied motions by California, New York, and Oregon and AARP to intervene and seek en banc review. Thereafter, the three States on May 16th filed a Motion for Reconsideration or in the alternative permission to petition for en bancOn May 22nd the Panel ruled 2-1 to deny both requests. The DOL’s time to Petition for Certiorari expired June 13th, and on June 21st the Fifth Circuit issued the Mandate, providing: “It is ordered and adjudged that the judgment of the District Court is reversed, and vacate the Fiduciary Rule in toto.” The Rule is officially dead.
Also, the SEC is indeed moving ahead with its own Rule, as authorized by Dodd-Frank section 913(g)(1). Specifically, the SEC published on May 9th three proposals to establish a uniform fiduciary standard: Regulation Best Interests, Vol. 83, No. 90, Page 21574 (17 CFR Part 240); Standard of Conduct for Investment Advisers, Vol. 83, No. 90, Page 21203 (17 CFR Part 275); and Form CRS Relationship Summary and Form ADV, Vol. 83, No. 90, Page 21416 (17 CFR Parts 240, 249, 275 and 279). Federal Register Publication triggered a 90-day public comment period that expired August 7, 2018.
The SEC’s Investor Advisory Committee (“IAC”) met by conference call on November 7th. The sole Agenda item for the 35-minute meeting was: “Discussion of the SEC’s Proposed Regulation Best Interest and Form CRS Relationship Summary (which may include a Recommendation of the Investor as Purchaser Subcommittee).” The IAC voted 16-3 with one recusal to adopt the recommendationssubmitted by a majority of the Investor as Purchaser Subcommittee “to strengthen and clarify” the proposed rules. Next is consideration by the SEC staff, along with the public comments received and the Committee’s recommendations. The SEC received over 6,000 comments (3,000 of which were unique) on Reg-BI and related materials.
- The President Eventually will Win the War over CFPB’s Leadership
What I wrote: Before he could be fired by the President, CFPB Director Richard Cordray announced via a November 15th email to staff that he would be departing the Bureau by the end of the month.[2]This immediately led to conjecture that the President would name as Acting Director the current head of Office of Management and Budget, Mick Mulvaney. Later, Mr. Cordray suddenly announced on November 24 that he was leaving at the end of the day. However, before he left Mr. Cordray named as Acting Director staffer Leandra English. President Trump later that same day issued a Statement making official Mr. Mulvaney’s designation as Acting Director, touching off an ugly power struggle over who was in charge of the agency. How ugly? Some highlights are offered below, but for chapter and verse, see my blog post, Richard, Here’s Another Nice Mess You’ve Gotten Us Into!
What I predicted: Sooner or letter, one way or the other, the President will prevail. Either he will win the legal challenges – which I predict he will – or he will simply nominate a new Director whom the Senate will confirm.
What happened? Both, pretty much. The President on June 18thnominated Kathy Kraninger to a five-year term as Director. Ms. Kraninger was Associate Director for General Government at the OMB, a position she’s held since March 2017 according to her LinkedIn bio. Just weeks after President Trump nominated Ms. Kraninger, Ms. English dropped her suit challenging Mr. Mulvaney’s appointment as the Bureau’s Acting Director. At the same time, she announced her resignation. Judge Timothy J. Kelly declined to issue an injunction and on January 10th ruled against Ms. English on the merits in English v. Trump and Mulvaney, No. 1:17-cv-02534 (D.D.C.). The decision was appealed to the D.C. Circuit and argued April 12. Why did Ms. English resign her post and give up the appeal? Her July 6th announcementcites “the recent nomination of a new Director.” My take? The passage of time and the facts on the ground made persisting a Quixotic effort. And, the Senate on December 6th approved the Ms. Kraninger’s nomination for a five-year term as Director of the Consumer Financial Protection Bureau (“CFPB”). The vote was a tight 50-49 split along party lines.
Bottom line: The CFPB leadership war is over and as predicted the President won.
Conclusion
Mostly straight “A” grades except for Dodd-Frank being repealed and replaced. As I’ve written in past years, the arbitration world is constantly changing, and will evolve yet again in 2019. Doubtless there are some things that will happen this year that I just didn’t see coming (such as DOL’s Fiduciary Rule being killed by the courts and Justice Kennedy retiring). In the meantime, see you in the future!
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*George H. Friedman, Chairman of the Board of Directors of Arbitration Resolution Services, Inc. and an ADR consultant, retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors and is a Contributing Legal Editor of the Securities Arbitration Commentator. He is also a member of the AAA’s national roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional. His proud Mother, Gloria Friedman, undoubtedly has taped this blog post to the fridge.
[1] 82 FR 56545 (Vol. 82, No. 228, P. 56545, November 29, 2017).
[2] Mr. Cordray announced December 2017 that he was running for Ohio Governor. He lost.
