Skip to main content

Investor Plaintiff Lawyers Expect More Victories With DOL Rule

Financial Advisor

Investor plaintiffs’ lawyers say the Department of Labor’s fiduciary rule will give them some extra leverage in winning damages from arbitration panels—but they don’t expect a huge windfall.

The DOL rule gives investors the right to file arbitrations or class-action claims for violations of the rule, giving rise to industry concerns about increased liability.

Sure enough, plaintiffs’ lawyers think the rule will help win damages.

“If you have a lawyer on [an arbitration panel], the rule will make a difference,” said Scot Bernstein, a plaintiffs’ lawyer in Folsom, Calif. “They understand how big a step up in obligation [fiduciary duty] is. … That’s something that gets hammered home at law schools.”

“Even jaded Finra arbitrators, if they see a broker is under a fiduciary duty, that has an impact,” agreed Andrew Stoltmann, a Chicago-based investor lawyer.

What’s more, a fiduciary standard imposes an ongoing duty to monitor an investment, something brokerage firms claim they don’t have to do, said Seth Lipner, a plaintiffs’ attorney in Garden City, N.Y.

“That’s a big change in the legal playing field,” Lipner said.

The rule could also help plaintiffs in claiming damages, Lipner added, by allowing a “well-managed” account benchmark instead of an out-of-pocket loss claim, as is often done now.

Still, the DOL’s higher standard of care for IRA owners is not a “game changer” for the industry, countered Ryan Bakhtiari, a Beverly Hills, Calif., plaintiffs’ lawyer.

“There are plenty of states, California among them, that have always had strong fiduciary duties. [So] if it were a game changer, we would have seen Merrill Lynch and all the big firms pull up roots in California and go home,” Bakhtiari said.

For arbitration panels, “it comes down to if they think the broker or firm did something wrong” rather than whether the industry defendants violated a technical point of law, said Robert Banks, an investor lawyer in Portland.

In addition to individual arbitrations, the DOL is counting on class-action claims as an enforcement tool. To that end, the rule prevents firms from precluding class claims in court via their arbitration agreements. (Finra does not allow class actions in its arbitration forum.)

But whether investors will be able to bring class-action claims is unclear.

A number of trade organizations are challenging the DOL rule, including its ban on using the so-called class-action waivers in arbitration agreements. The trade groups, which include the Securities Industry and Financial Markets Association and the Financial Services Institute, can cite at least one Supreme Court decision in their favor.

Whether government agencies can ban class-action waivers is “a much contested question,” said Edward Sherman, a professor at Tulane University School of Law and an expert on class actions.

Both the National Labor Relations Board and the Consumer Financial Protection Bureau are in “hot contests with various courts” over their efforts to ban the waivers, Sherman said.

The DOL can now be added to that list, possibly leaving enforcement of its fiduciary rule up to investors who file individual arbitration claims.

While fiduciary duty provides a stronger legal case, arbitration attorneys don’t see a gold rush—especially if the rule helps clean up suspect activity.

Lipner, for one, thinks the industry will cut back on proprietary and high-fee products as a result of the DOL rule.

“That’s where a lot of problems come from,” he said.