Background
Thrivent Financial for Lutherans and its subsidiary sell variable annuities and variable life insurance contracts, requiring them to register as broker-dealers and comply with Financial Industry Regulatory Authority rules. Thrivent’s own dispute-resolution program culminates in mandatory individual arbitration outside FINRA’s forum, but FINRA Rules 2268, 12200, and 12204 restrict members’ ability to require non-FINRA arbitration and class-action waivers.
In 2021, Thrivent petitioned the Securities and Exchange Commission to abrogate or amend those rules, arguing that they conflicted with the Federal Arbitration Act. After several meetings and two mandamus petitions, the SEC denied the request in a three-paragraph letter. The agency cited its discretionary authority, limited resources, and the absence of FINRA arbitration reform from its regulatory agenda, without addressing Thrivent’s specific arguments.
The Court’s Holding
The D.C. Circuit granted Thrivent’s petition for review in part and remanded the matter to the SEC. Although judicial review of an agency’s refusal to initiate rulemaking is highly deferential, the court held that the SEC’s boilerplate explanation was arbitrary and capricious because it did not provide a discernible, petition-specific rationale. A generic statement that personnel and resources were devoted to other matters did not explain why Thrivent’s request lacked priority.
The court rejected Thrivent’s argument that the SEC was required to grant any rulemaking petition alleging that existing regulations are unlawful. Agencies retain broad discretion to establish regulatory priorities, but they must explain their decisions with reference to the petition’s substance and relevant considerations such as urgency, competing priorities, or resource demands.
The court also declined to vacate the FINRA rules or order the SEC to begin rulemaking. Challenges to the decades-old SEC orders approving those rules were outside the Exchange Act’s 60-day review period, and remand—not court-ordered rulemaking—was the appropriate remedy for the SEC’s inadequate explanation. The court therefore denied the remainder of Thrivent’s requested relief and did not decide whether the FINRA rules conflict with the Federal Arbitration Act.
Key Takeaways
- An agency may deny a rulemaking petition based on regulatory priorities and limited resources, but it must connect those considerations to the particular petition.
- Alleging that an existing rule is unlawful does not automatically entitle a petitioner to rulemaking or priority over other agency business.
- The decision does not resolve the legality of FINRA’s arbitration rules; it requires only that the SEC reconsider Thrivent’s petition and provide a reasoned explanation.
Why It Matters
The decision reinforces that even under highly deferential review, agencies cannot dispose of rulemaking petitions through explanations that could be copied into virtually any denial. Regulated entities are entitled to enough petition-specific reasoning for a reviewing court to understand and evaluate the agency’s exercise of discretion.
For broker-dealers and their customers, the ruling leaves FINRA’s arbitration requirements in place while returning the policy and statutory questions to the SEC. The agency may again deny Thrivent’s request, pursue rulemaking, or consider another response, but it must adequately explain its choice.