Skip to main content

Why Plaintiffs Firms Will Love DOL’s New Fiduciary Rules


The U.S. Department of Labor’s fiduciary rules give more power to retirement savers, experts said, providing investors and their attorneys an important new tool to bring claims when they suspect their broker-dealer doesn’t have their best interests at heart.

“As night follows the day, there will be more litigation,” Skadden Arps Slate Meagher & Flom LLP partner Seth Schwartz said of the new rules, which require financial professionals advising retirement accounts to act in their client’s interest when recommending investment products.

Experts said that the regulation’s requirement that brokers enter a contract with clients affirming they will uphold the client’s best interest — or disclose when they can’t — has provided a new and definite avenue for investors to bring claims over bad advice.

“That enforceable contract provides a hook for litigation,” said Barbara Roper, the director of investor protection at the Consumer Federation of America.

Roper added that the so-called best interest contract exemption, which allows brokers to continue to collect commissions from sales as long as they acknowledge their fiduciary duty to clients and disclose conflicts of interest, will eliminate ambiguity over whether fiduciary standards apply to brokers that give advice to retirement accounts.

Schwartz said that the contract rule was developed in order to provide investors with a legal basis to bring a claim if brokers and broker-dealer firms breach their fiduciary duty commitments, facilitating claims that weren’t previously available under the Employee Retirement Income Security Act.

“There is no mechanism under ERISA for that type of claim,” he said.

Some firms that sell securities to individual retirement accounts or pension plans will become fiduciaries under ERISA under the new rules, Paul Borden of Morrison & Foerster LLP said, opening up another avenue for litigation.

“Becoming a fiduciary under ERISA will expose them to the fiduciary breach and self-dealing prohibited transaction provisions of ERISA,” Borden said.

The rules also impose a higher standard than previous requirements that investors promote only products that are suitable to an investor, expanding the kinds of claims that investors can bring to begin with.

Jerome Schlichter of plaintiffs firm Schlichter Bogard & Denton LLP offered as an example a case where a 90-year-old investor was put into a variable annuity with a 7 percent commission by her broker.

“One could say that’s not suitable for a 90-year-old investor, but it certainly is not in that investor’s best interest to be tying up her money in an annuity at that age,” Schlichter said. “So that kind of investor would have the ability to show very easily that it’s not in their best interest.”

The new standard could also provide a boon to plaintiff’s attorneys in cases they’re already bringing.

“The primary claim brought against broker-dealers in FINRA arbitration is violation of fiduciary duty, even though they don’t legally have a fiduciary duty,” Roper said.

A 2015 report from the Public Investors Arbitration Bar Association found that many brokers advertise that they act in customers’ best interests but deny that they have any fiduciary duty behind the closed doors of arbitration fights.

In that kind of case, Roper said, the new rules will make it easier for investors to prevail by eliminating the need to prove that a broker-dealer had a fiduciary duty or claimed that it was acting with the investor’s best interests.

Roper cautioned that she doubted the rule would produce “an explosion of class action litigation,” saying fiduciary duty claims are typically highly fact-specific and don’t lend themselves readily to class certification. She added that smaller brokerage firms also don’t typically have enough customers to make up a class.

But she said that the rules do open up the possibility of class action litigation against large firms that “systematically violate the rule in a demonstrable fashion” across a retirement plan or IRA platform.

Schwartz said that, while class claims under the rule would likely echo similar claims brought by classes of investors against investment advisers, the industry can expect to field class claims in the future.

“As long as I’ve been doing this, basically every conceivable practice engaged in by a broker-dealer has come under attack,” he said. “So someday we will see a proposed class action for violation of this rule.”

Some plaintiffs attorneys disputed that the DOL’s rules would dramatically increase litigation against brokers or broker-dealers, calling industry fears overblown.

The rules codify responsibilities that firms “should have been following everywhere” and emphasized that many investors are already bringing claims that their interests were not placed ahead of their broker’s interests.

Schlichter also said that brokers won’t necessarily face increased litigation, provided they follow the rule. But he acknowledged that advisers who don’t act in the best interests of investors will “certainly be exposed” to more claims.

“That again is going to be a sea change from what many brokers are currently doing, which is providing conflicted advice that is in the best interests of the broker and not in the best interests of the investor,” Schlichter said.

But Schwartz said one need only turn to investment advisers covered by ERISA or under other fiduciary duty regulations to see that the obligation results in increased litigation.

It’s unlikely the rule will result in an immediate wave of litigation, given that it will gradually roll out over the next two years, he said, but litigation will pick up as brokers, investors and their attorneys become familiar with the regulation.

“I would expect this to be a fertile area for litigation,” he said.