DOL Rule Date Ensured, Class-action Lawsuits Take Spotlight
Secretary of Labor Secretary Alexander Acosta’s acknowledgment that he has no legal basis to prevent the fiduciary rule from taking effect on June 9 has focused proponents and opponents of the rule on how it will be enforced.
The securities industry’s major concern is that as of January 1, 2018 when the rule’s best-interest contract (BIC) exemption takes effect for retirement accounts, customers will be able to participate in class-action lawsuits charging violations of the rule’s prudence and loyalty standards that go into effect next month.
The cost of such lawsuits has been a major concern of industry trade groups and of companies like Bank of America which is largely prohibiting Merrill Lynch brokers from using the exemption to offer commission-based retirement accounts. It also appears to still be in Secretary Acosta’s sightlines.
“Certainly, it is important to ensure that savers and retirees receive prudent investment advice, but doing so in a way that limits choice and benefits lawyers is not what this administration envisions,” he wrote in the “Wall Street Journal” op-ed piece on Tuesday.
The Labor Department will continue to review the rule to ensure it abides by President Trump’s executive order to ensure that regulations do not have harmful consequences, Acosta wrote.
“I’ll take this as a win but we’re not going to stop fighting,” said Marnie Lambert, a lawyer in Columbus, Ohio, who is president of the Public Investors Arbitration Bar Association, which represents plaintiffs’ lawyers. “The next six months will show a lot of fighting both ways, with people doubling down on why changes don’t need to be made or do need to be made.”
The first phase of the rule taking effect next month requires advisors to abide by customer loyalty and prudence standards, meaning that “advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm.”
That raises the possibility that a broker who sells a product that is suitable to a customer’s goals and risk tolerance but that has a higher commission could be accused of violating the standard.
A “Frequently Asked Questions” update on the rule that the DOL released Monday night in parallel with Acosta’s essay noted that while brokerage firms can write their best-interest contracts permitting commissions to require an IRA investor to pursue individual claims through arbitration, they “must preserve the investors’ ability to bring class action claims in court.”
Securities industry officials vowed to continue fighting for change despite losing their attempt to delay the fiduciary rule’s implementation date.
“We hope that upon the Department’s completion of its wholesale rule review, they will conclude, as we believe the evidence clearly shows, that dramatic and fundamental changes are appropriate and necessary,” wrote Kenneth E. Bentsen, Jr., head of the Securities Industry and Financial Markets Association, who has long battled against the class-action enforcement mechanism.
Dale Brown, head of the independent broker-dealer trade group, the Financial Services Institute, said in a statement that the decision not to further extend the DOL fiduciary rule’s applicability date “will push the cost of retirement advice and planning services out of the reach of Main Street investors” and promised to “work with Secretary Acosta and Congress and through the legal system to bring clarity to our members.”
The rule’s still-standing enforcement mechanism remains in the focus of consumer groups.
“Retirement savers need an enforceable fiduciary standard and a Department of Labor that is prepared to hold firms accountable for compliance,” Americans for Financial Reform, a coalition of more than 200 consumer, labor civil rights and business groups, said in a statement that italicized its enforcement focus.
The stocks of publicly traded independent and regional brokerage firms were initially battered by Secretary Acosta’s decision to let the rule implementation proceed. LPL Financial and Stifel Financial both traded down by more than 3% when the market opened on Tuesday, while Raymond James Financial lost more than 2%. Shares rebounded somewhat, but LPL and Stifel were still down by more than 2% in early afternoon trading while Raymond James was down about .50% while the broader market was in positive territory.