Government attorneys under the Obama administration successfully argued that the rule’s prohibition on class waivers did not conflict with the FAA last year in a Texas federal court. The judge in that case dismissed all eight claims brought by the Chamber of Commerce, the Securities Industry and Financial Markets Association, and other industry trade groups, ruling to uphold the fiduciary rule in its entirety.

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But that was before the election of President Trump and a memorandum instructing the Labor Department to undertake a new analysis of the rule. Labor Sec. Alexander Acosta has publically voiced concerns over the power the rule gives to the plaintiffs’ bar by restricting class-action waivers in the BIC Exemption.

In dropping its defense of the rule’s prohibition on the waivers, the Labor Department’s acting solicitor cited a 2011 Supreme Court decision that said restricting parties from agreeing to class-action waivers in arbitration agreements is “an impermissible obstacle” to Congress’ intent when it passed the FAA in 1925.

It also cited another reversal by the Labor Department on the question of class actions and arbitration agreements in National Labor Relations Board v. Murphy Oil USA, a case scheduled for review by the High Court.

According to the AARP and other consumer advocate groups, the questions before the Supreme Court in the NLRB case are “entirely irrelevant” to the treatment of class-action waivers in the fiduciary rule.

“Nothing in the Federal Arbitration Act prevents DOL from barring class-action waivers in contracts in order for industry participants to be exempt from otherwise prohibited transactions pursuant to the BICE,” claim attorneys for AARP.

In the NLRB case, the issue is whether arbitration agreements that include class-action waivers can be enforced under the National Labor Relations Act, a 1935 law that created workers’ right to collectively bargain.

At issue before the 5^th Circuit is whether the prohibition on class-action waivers in the BIC Exemption overrides the protections in the FAA, which allows for the settlement of disputes through arbitration even when agreements include class-action waivers.

The AARP says the class-action waiver restrictions in the BIC do not prohibit arbitration agreements under the FAA. Rather, it simply prohibits financial services firms that write class-action restrictions into contracts from using the BIC as an exemption for prohibited transactions.

Obama-era regulators designed the restriction on class waivers as the fiduciary rule’s primary enforcement mechanism. Prior to the rule, individual IRA owners’ breach of contract claims could be arbitrated, or heard in state courts. But contracts with IRA investors could prohibit class-action claims, making breach of contract allegations less expensive for financial institutions to defend.

The finalized fiduciary rule included a severability clause that said if courts were to strike down the restrictions on class-action waivers, the BIC Exemption would still survive.

The Chamber of Commerce and other plaintiffs will argue that a decision to invalidate the class-action restrictions in the BIC would require the entire rule to be vacated.

Attorneys for the Labor Department will argue that though restrictions on waivers should be removed, the rule’s severability clause allows the BIC Exemption to go forward.

Some legal experts say the fact that the Obama Administration wrote the severability clause into the fiduciary rule suggests regulators assumed the restrictions on class waivers would be susceptible to legal challenges.

The appellate hearing is scheduled for July 31.